Alston & Bird Consumer Finance Blog

Mortgage Loans

“RESPA Section 8 – the CFPB and President Should Act Now to Restore the Rule of Law”

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The Heritage Foundation recently published “RESPA Section 8 – the CFPB and President Should Act Now to Restore the Rule of Law” by Alston & Bird’s Brian Johnson.  While no substitute for reading the full article, below is a brief summary and key takeaways of the article, as discussed on the Heritage Foundation’s website:

 Summary

For decades, companies providing real estate settlement services relied on well-established rules and guidance from the U.S. Department of Housing and Urban Development to establish business arrangements in accordance with the Real Estate Settlement Procedures Act (RESPA). But when Congress created the Consumer Financial Protection Bureau (CFPB) and made it responsible for RESPA, the new agency used enforcement actions rather than rules to announce new RESPA legal standards and then hold companies retroactively liable for violating them. This was just one manifestation of the “regulation by enforcement” doctrine espoused by the CFPB’s first Director, Richard Cordray.

In its 2016 PHH Corp. v. CFPB decision, the DC Circuit Court of Appeals thoroughly repudiated the CFPB’s approach, finding that the agency flouted RESPA and violated due process. However, nearly four years later, much work remains to be done in order to repair the damage inflicted by the CFPB. The CFPB Director and the President can each take concrete actions now to restore the rule of law at the CFPB.

Key Takeaways
  • The CFPB’s aggressive departure from settled law and long-standing agency guidance in RESPA enforcement actions violated due process and upended the rule of law
  • The DC Circuit Court of Appeals repudiated the CFPB misinterpretation of RESPA, but more must be done to restore the rule of law at the CFPB
  • The CFPB Director and the President can take concrete steps to repair the damage done, such as issuing interpretative rules to clarify the legitimate meaning of RESPA Section 8 and terminating guidance and supervisory or enforcement actions premised upon its prior misinterpretation of law

 

 

Delaware Governor Issues Order Modifying Restrictions on Residential Foreclosures and Evictions

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A&B Abstract:

On June 30, 2020, Delaware Governor, John Carney, issued a Twenty-Third Modification (the “Order”) to the Declaration of a State of Emergency (the “State of Emergency”), initially issued on March 12, 2020. The Order became fully effective July 1, 2020. The Order addresses a number of issues that impact residential mortgage loan servicers, including restrictions on residential foreclosure and evictions and certain fees or charges, which modifies guidance issued under the Sixth Modification of the State of Emergency (the “Sixth Modification”), which we previously discussed.

Restrictions on Late Fees and Excess Interest for Missed Payments

Under the Sixth Modification, with respect to any missed payment on a residential mortgage occurring during the State of Emergency, no late fee or excess interest could be charged or accrued on the account for such residential mortgage during the State of Emergency. Under the Order, these provisions have been removed in their entirety.

Foreclosure Restrictions

The Order continues to impose restrictions on a mortgage servicer’s ability to initiate or complete a foreclosure action or sale, however, the Order replaces Paragraph C of the Sixth Modification and makes certain other significant changes thereto.

Notably, the Order lifts the stay of deadlines in any action pursuant to paragraphs C.2, C.3, and C.4 of the Sixth Modification.  Paragraph C.2 of the Sixth Modification had extended all deadlines in residential mortgage foreclosure actions, including those related to the Automatic Residential Mortgage Foreclosure Mediation Program established pursuant to § 5062C of Title 10 of the Delaware Code.  Paragraph C.3 prohibited residential properties subject to a residential mortgage foreclosure action, for which a judgment of foreclosure was issued prior to the State of Emergency, from proceeding to a sheriff’s sale until 31 days after the State of Emergency.  Paragraph C.4 prohibited any residential property that was the subject of a residential mortgage foreclosure action, and which was sold at sheriff’s sale, from being subject to an action of ejectment or write of possession until 31 days following the termination of the State of Emergency. The Order lifts these restrictions, unless a court determines that a longer period is needed in the interest of justice.

With the lift of the stay of deadlines, the Order allows a party to act to remove individuals from residential properties, subject to a residential mortgage foreclosure action, where a judgment of foreclosure was issued prior to the declaration of the State of Emergency. However, individuals still cannot act to, and sheriffs, constables, and their agents, cannot remove individuals from their homes unless a judgment of foreclosure was obtained before March 13, 2020. All other provisions of Chapter 49 of Title 10 of the Delaware Code remain in effect in accordance with their terms.

Restrictions on Evictions

Similarly, with respect to evictions, the Order replaces paragraph B of the Sixth Modification and makes significant additional changes thereto.

The Order now provides that actions for summary possession may be filed with respect to any residential unit located within Delaware, but must be stayed to permit the Justice of the Peace Court to determine whether the parties would benefit from court supervised dispute resolution. Previously, no party could bring an action for summary possession for any residential rental unit located in Delaware. Actions that were brought before the State of Emergency, for which no final judgment had been entered, are further stayed.

Sheriffs, constables, and their agents continue to be prohibited from removing individuals from residential properties during the time the Order is in effect, unless a court determines on its own motion, or upon the motion of the parties, that it is necessary in the interest of justice. Additionally, the Order continues to prohibit the charging late fees or interest with respect to any past due balance for any residential unit during the State of Emergency.

Takeaway

The Order makes significant changes to the Sixth Modification to the Declaration of the State of Emergency, which significantly impacts mortgage servicing in Delaware. Servicers should carefully review the Order to fully determine their rights and obligations with respect to Delaware borrowers.

State Courts Require Strict Compliance with Foreclosure Procedures

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A&B ABstract: In response to the economic fallout of the COVID-19 pandemic, state executives and legislatures have seriously restricted residential foreclosures and evictions.  These restrictions have included requiring forbearance for private mortgage loans and placing moratoria on foreclosures.

While these restrictions generally apply to residential mortgages lapsed in the wake of the global pandemic, they do not protect consumers who were facing foreclosure prior to the crisis.  To pick up the slack in this area, various state judiciaries are tightening the reigns on mortgage servicers, demanding servicers’ strict compliance with the notice provisions of mortgage agreements and state foreclosure procedures.  Courts have even gone so far as to void foreclosure actions where the breach notices sent to consumers were technically deficient but substantively sound.

Alabama Court of Civil Appeals Decision

In June 2020, the Alabama Court of Civil Appeals voided a foreclosure sale because of a servicer’s failure to strictly comply with the notice provision in the mortgage agreement.  In Barnes v. U.S. Bank N.A., as Trustee for NRZ Pass-Through Trust V, No. CV-17-901127, the mortgage agreement required any notice of default to inform the borrower of “the right to bring a court action to assert the non-existence of a default or any other defense of Borrower to acceleration and sale” of the mortgaged property.

The servicer’s notice, however, employed equivocal language concerning the borrower’s rights, informing the borrower only that they “may have the right” to challenge the default.  As a result, the court found the foreclosure sale was void, cementing the law in Alabama that a defect in the form of a default notice vitiates the legality of an ensuing foreclosure.

Rhode Island Supreme Court Decision:

Similarly in June 2020, in a matter of first impression, the Rhode Island Supreme Court vacated a foreclosure because the notice of default did not strictly comply with the requirements set forth in the mortgage agreement.  In Woel v. Christiana Trust, as Trustee for Stanwhich Mortgage Loan Trust Series 2017-17, et al., No. 2018-347-Appeal (PM 16-921), the mortgage agreement contained a nonuniform covenant developed for Rhode Island mortgages.  According to the covenant, in the event of a default, the mortgagee must provide a notice of default informing the borrower of “the right to reinstate after acceleration.”

The borrower defaulted and received a notice of default informing the borrower that they had “the right to cure the default after acceleration,” not the specific right to reinstate.  Based on this minor discrepancy in language, the Rhode Island Court concluded that there had not been strict compliance with the covenant’s notice requirements, rendering the foreclosure a nullity.

New York Appellate Division Decision:

Finally, in July 2020, the Second Department of the New York Appellate Division reversed a judgment of foreclosure and sale because the notice the borrowers received did not strictly comply with New York’s Real Property Actions and Proceeds Law (“RPAPL”).  The version of RPAPL at issue required notices to provide a list of five housing counseling agencies serving the region where the borrowers reside.  The notice to the borrower, however, included three agencies serving the region and two agencies serving different regions.

Even though there was no evidence that any of the three compliant agencies denied the borrowers service, the Appellate Division held that under a strict compliance standard, a technical deficiency in the notice was dispositive, regardless of its substantive effect.

Takeaway:

These decisions are not necessarily groundbreaking, as courts have generally required strict compliance in the foreclosure context.  However, the above decisions indicate a growing willingness among the judiciary to prevent foreclosure on even the narrowest technical grounds.  As such, servicers should ensure that any notice of default sent to a borrower strictly complies with the terms of the mortgage agreement and state foreclosure proceedings because in a post-COVID-19 world, any technical deficiency will likely be fatal to a servicer’s efforts.

Fannie Mae Updates COVID-19 FAQ’s Related to Servicing

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A&B ABstract: On June 30, Fannie Mae updated its “COVID-19 Frequently Asked Questions” as part of an ongoing effort to provide guidance to lenders and servicers in connection with the ongoing COVID-19 national emergency.

The updates address retention workout options and incentive fees, among other topics.

Foreclosure Suspension

Fannie Mae has updated Question 3 to reflect the extension of the foreclosure moratorium through August 31, 2020, in accordance with Lender Letter 2020-02, as well as the COVID-19 payment deferral retention workout option (recently announced in Lender Letter 2020-07).  The payment deferral option would permit a forbearance of up to 12 months.

Payment Deferral

Fannie Mae has added new Question 30 to discuss the requirements for the new COVID-19 payment deferral option, including the application of additional principal payments.

The question clarifies that a servicer  must apply curtailment to the interest-bearing unpaid principal balance (UPB) if the curtailment is less than the interest-bearing UPB.  If a principal curtailment is greater than or equal to the interest-bearing UPB, the servicer must apply the curtailment to the non-interest-bearing balance, if any; and then to the interest-bearing UPB.

Claims

 Fannie Mae has added new Question 30 to clarify that a servicer can submit request for expense reimbursement through a 571 claim as soon as an expense is incurred. Although Fannie Mae does not limit the number of supplemental claims, it recommends that servicers consult the Servicing Guide E-5-01, Requesting Reimbursement for Expenses prior to submitting any request for expense reimbursement.

Incentive Fees

Addressing incentive fees, Fannie Mae has added new Questions 39 and 40.

 Question 39 addresses the eligibility of a servicer to receive incentive fees if it receives a mortgage loan from a transferor servicer.  Because incentive fees are tied to the mortgage loan (rather than the servicer), if the transferor servicer has met the cumulative cap for receiving such fees, the transferee is not eligible to receive any additional incentive fees.

Question 40 makes clear that the cap on incentive fees does not apply in connection with a servicer’s completion of a Fannie Mae Extend Modification for Disaster Relief or a Fannie Mae Cap and Extend Modification for Disaster Relief.

Takeaway

These updates to the FAQs reflect Fannie Mae’s ongoing efforts to provide needed clarification and guidance to servicers in light of the ongoing COVID-19 pandemic.  Servicers should continue to monitor Fannie Mae guidance for further updates.

New York Laws Require Forbearance for Private Mortgage Loans During COVID Emergency

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A&B ABstract

On June 17, 2020, New York Governor Andrew Cuomo signed into law two measures, effective immediately, providing for mortgage forbearances for privately backed residential mortgage loans during the COVID-19 emergency. Senate Bill 8243 (2020 N. Y. Laws 112) amends the N. Y. Banking Law by adding new Section 9-x, “Mortgage Forbearance.”  Senate Bill 8428 (2020 N. Y. Laws 126) relates to state disaster emergency and, among other provisions, amends Section 9-x as added by Senate Bill 8243. These measures apply during the covered period, beginning on March 7, 2020 and ending when no Executive Order issued in response to the COVID-19 pandemic relating to restricting public or private businesses or required postponement or cancellation of all non-essential gatherings of individuals apply in the county of the borrower’s residence.

Mortgage Forbearance

New Section 9-x of the Banking Law imposes new requirements on any New York regulated banking organization, including banks, trust companies, private bankers, savings banks, savings and loan associations, credit unions, and investment companies) and regulated mortgage servicers  (collectively, “regulated entities”)subject to supervision by the New York Department of Financial Services (the “Department”).

First, regulated entities must make applications for forbearance widely available to any qualified mortgagor who, during the covered period is in arrears or on a trial period plan or who has applied for loss mitigation. A qualified mortgagor is a natural person who (i) demonstrates financial hardship as result of COVID-19 during the covered period, (ii) whose loan is from or serviced by a regulated entity, and (iii) whose loan meets the following criteria: the loan is incurred for personal, family or household purposes, s secured by mortgage on a 1-4 family property located in New York, and is the borrower’s primary residence.  Forward and reverse mortgage as well as co-operative units are within scope.

Second, regulated entities must grant forbearance of all monthly payments due on a New York residential mortgage secured by a qualified mortgagor’s primary residence for up to 180 days with the option to extend the forbearance for up to an additional 180 days provided the borrower continues to demonstrate a financial hardship. Such forbearances may be backdated to March 7, 2020.

Third, any mortgage forbearance granted by a regulated entity to a qualified mortgagor as a result of a financial hardship pursuant to Executive Order 202.9 the regulation promulgated thereunder (3 NYCRR Part 119) or Section 9-x of the Banking Law subject to post forbearance repayment requirements. Specifically, the qualified mortgagor shall have the following four options:

  • Extend the term of the loan for the length of the period of forbearance with no additional interest or late fees or penalties incurred on the forborne payment
  • Have the arrears accumulated during the forbearance period payable on a monthly basis for the remaining term of the loan without being subject to penalties or late fees as a result of the forbearance
  • Negotiate a loan modification or any other option that meets the changed circumstances of the borrower, or
  • If the borrower and regulated entity cannot reasonably agree on a mutually acceptable loan modification, the regulated entity must offer to defer arrears accumulated during the forbearance period as a non-interest bearing balloon loan payable at the maturity of the loan, or at the time the loan is satisfied through a refinance or sale of the property.  Late fees accumulated as a result of the forbearance must be waived.

The measure prohibits a regulated entity from reporting negatively to any credit bureau that the borrower has exercised any of the four post forbearance options

Significantly, Section 9-x of the Banking Law does not apply to any mortgage loan made, insured, purchased or securitized by: (i) any agency or instrumentality of the United States (such as FHA, VA or USDA); (ii) any government sponsored enterprise  (such as Fannie Mae or Freddie Mac); (iii) a federal home loan bank;  (iv) a corporate governmental  agency of the state constituted as a political subdivision and public benefit corporation; or (iv) “the rights and obligations of any lender, issuer, servicer or trustee of such obligations, including servicers for” Ginnie Mae.

Privately backed mortgage loans are also subject to New York Executive Order 202.9, which modified Subdivision two of Section 39 of the Banking Law to provide that it is an unsafe and unsound business practice for any financial institution subject to the jurisdiction of the Department to, in response to the COVID-19 pandemic, fail to grant a forbearance to any person or business who has a financial hardship as a result of the COVID-19 pandemic for a period of ninety days. The Executive Order also directed the Superintendent of the Department to promulgate emergency regulations to require that the application for such forbearance be made widely available for consumers, and such application shall be granted in all reasonable and prudent circumstances solely for the period of such emergency. These regulations are set forth in new Part 119 to 3 NYCCR. The covered period of Executive Order 202.9 was extended by subsequent executive order to be valid through July 6, 2020, unless further extended.

Capital and Liquidity

New Section 9-x of the Banking Law provides that the obligation to grant the forbearance relief required by Section 9-x is subject to the regulated entity “having sufficient capital and liquidity to meet its obligations and to operate in a safe and sound manner.” If a regulated entity determines it is not able to offer the forbearance to any qualified mortgagor, it must notify the Department within five business days of making such determination. Any such notice filed with the Department must include: (1) information about the mortgagor; (2) the reason the regulated entity determined that it was unable to offer any forbearance relief pursuant to Section 9-x; (3) information about the institution’s financial condition supporting the its determination; and (4) any other information required by the Department. Additionally, when such a notice is provided to the Department, the regulated entity must advise the mortgagor that the application for relief was denied and provide a statement that the applicant may file a complaint with the New York state department of financial services at 1-800-342-3736 or http://www.dfs.ny.gov if the applicant believes the application was wrongly denied.

Defense to Foreclosure

Section 9-x of the Banking Law, provides that adherence with Section 9-x is a condition precedent to commencing a foreclosure action stemming from missed payments which would have otherwise been subject to this section, and that a defendant may raise the violation of this section as a defense to such a foreclosure action commenced on the defendant’s property.

Takeaway

These New York measures provide protections to New York borrowers who aren’t otherwise covered by the CARES Act.  Servicers should take note of these provisions as well as similar ones in other states, such as the District of Columbia, Massachusetts and Oregon.  In the immediate term, servicers will need to quickly operationalize these new protections.  In the longer term, questions may be raised as to whether these types of measures infringe upon any private investors’ rights.