Alston & Bird Consumer Finance Blog

Mortgage Loans

Alston & Bird Hosts Calabria, Kraninger to Discuss COVID-19 Challenges

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A&B ABstract: On June 15, Alston & Bird partners Nanci Weissgold and Brian Johnson hosted Dr. Mark A. Calabria, Director of the Federal Housing Finance Agency, and Kathy Kraninger, Director of the Consumer Financial Protection Bureau, to discuss federal regulatory responses to the COVID-19 pandemic and how they affect consumer lending and mortgage servicing.

The discussion was the inaugural event in Alston & Bird’s Financial Services Regulatory Speaker Series.

Pandemic Response

Directors Kraninger and Calabria first addressed their respective agencies’ efforts (individually and jointly) to respond to the effects of the pandemic.

Focusing on efforts relating to the GSEs, Dr. Calabria discussed the foreclosure moratorium (which he stated will soon be extended past June 30), and the focus on borrowers who are truly suffering a hardship.  He further indicated that approximately a quarter of borrowers in forbearance are continuing to make payments, which lead to the agency’s announcement in May that such borrowers will be treated as current for purposes of eligibility for refinancings or new purchases.

Director Kraninger expressed pride in the CFPB’s broad-based response to the crisis, and specifically mentioned efforts to educate consumers on their rights and expectations for relief, adjusting supervisory and enforcement processes to be more responsive to current needs and circumstances, and engaging all of the CFPB’s stakeholders in regulatory work (including the production of guidance relating to mortgages and consumer loans).

Market Prognosis

Asked for his assessment of the overall health of the residential mortgage market, Dr. Calabria compared current circumstances favorably to the 2008 financial crisis.  He specifically referenced the low number of GSE loans for which borrowers are underwater, indicating that borrowers with equity are less likely to walk away.  However, he anticipated that it will not be until the fourth quarter of the year that the true “wild card” – the number of loans in forbearance that will go into delinquency and foreclosure – will be known.

Coordinated Action

Director Kraninger stressed the importance of federal regulators acting in concert, and continuing conversations with the states to send a “clear signal across the regulatory landscape” of expectations for regulated institutions to accommodate their customers.  She stressed that the CFPB is using the examination process to conduct priority assessments as an opportunity to engage institutions, understanding how forbearance programs work and how they are engaging consumers.  Regulated institutions, she said, should expect the process to be iterative, rather than only a matter of identifying violations.

CARES Act and the Mortgage Servicing Rules

With respect to the interplay of the CARES Act and the Mortgage Servicing Rules, Director Kraninger addressed specific concerns regarding payment deferral.  Specifically, as to whether servicers are required to collect a complete loss mitigation application before approving a borrower for a payment deferral, she indicated that the CFPB is actively working with the FHFA on how best to provide options to consumers, and that the agencies expect to provide clarification on how the Mortgage Servicing Rules apply to CARES Act deferrals in the near term.  In the longer term, Director Kraninger suggested that the CFPB is considering new provisions  of the Rules applicable to national disasters (e.g., the COVID-19 pandemic, or severe weather).

Takeaways

Closing the discussion, Directors Calabria and Kraninger discussed overall perceptions of their agencies’ responses to the pandemic. Director Kraninger reiterated that the CFPB is committed to making clear its expectations for regulated entities.  By comparison to the financial crisis, the CFPB is focused on getting ahead of issues (e.g., with the credit reporting industry).

Dr. Calabria said that the greatest misunderstanding about the CARES Act relates to the scope of and eligibility for forbearance.  Borrowers are eligible for “up to” a year of forbearance – a ceiling, not a floor.  Additionally, to obtain an initial forbearance and the optional extension, a borrower must have suffered (and continue to suffer) economic hardship relating to the pandemic.  Thus, he indicated, initial estimates about the number of loans that would be in forbearance were too high.  Further, the number of borrowers with significant equity in their homes makes it more likely for the impact of the pandemic to be a liquidity event, not a solvency event.

Alston & Bird thanks Directors Calabria and Kraninger for sharing their insights with the hundreds of listeners in attendance. Stay tuned for more events in the series.

OCC Rule Affirms Valid-When-Made Doctrine

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A&B ABstract:

On May 15, the Office of the Comptroller of the Currency  (“OCC”) issued a final rule, effective August 3, 2020, addressing the “valid-when-made” doctrine.  The rule clarifies that the interest rate on a loan originated by a national bank or federal savings association, if permissible at the time of origination, will continue to be a permissible and enforceable term of the loan following a sale, transfer, or assignment of the loan, regardless of whether the third party debt buyer is a federally chartered bank.

Discussion

In November, 2019 the OCC issued a proposed rule to address the ambiguity created by the Second Circuit in Madden v. Midland Funding, LLC. The Madden court held that a purchaser of a loan (unsecured credit card debt) originated by a national bank could not charge interest at the rate permissible for the bank if that rate would not be permissible under the applicable state usury cap. Madden did not address the valid-when-made doctrine, and the U.S. Supreme Court declined to hear the case in 2016.

Final Rule

The OCC’s final rule, effective August 3, 2020, effectively codifies the valid-when-made doctrine.  Specifically, the rule provides that interest on a loan that is permissible pursuant to section 85 (applicable to national banks) and section 1463(g) (applicable to federally chartered thrifts) of the National Bank Act “shall not be affected by the sale, assignment or other transfer of the loan.” The OCC emphasized that “that sections 85 and 1463(g) incorporate, rather than eliminate, these state caps.”  A bank must comply with the interest rate limit established under the law of the state where it is located. The OCC recognized that disparities between interest rates between banks arise as a result of the state laws that impose such caps.

In affirming the valid-when-made doctrine, the OCC indicated that “to effectively assign a loan contract and allow the assignee to step into the shoes of the national bank assignor, a permissible interest term must remain permissible and enforceable notwithstanding the assignment”.  Further, the OCC, in rebutting comments made during the rulemaking that a third party non-bank debt buyer should not step into the shoes of the national bank originator, observed that “the enforceability of an assigned interest term should [not] depend on the licensing status of the assignor or assignee.”  Simply put, the OCC affirmed that when a bank transfers a loan, interest permissible before the transfer continues to be permissible after the transfer.

The rule does not address which entity is the true lender when a bank transfers a loan to a third party. The OCC’s rule applies to “interest,” as that term is defined in 12 C.F.R. §§ 7.4001(a) and 160.110(a).

Takeaways

The rule is welcome news, ensuring that uncertainty concerning the effects of the Madden decision does not erode the liquidity of the secondary market for loans originated by national banks and federally chartered thrifts.  It effectively levels the playing field by allowing purchasers of these loans to collect the same agreed upon interest rate and contractual loan terms as the original. Such uniformity is critical for the secondary market.  Hopefully, the FDIC will similarly finalize its proposed rule.

Nevertheless, we note that the OCC rulemaking does not reverse Madden, and while the pronouncement should be influential in circuits aside from the Second Circuit, it is expected to face court challenges, not to mention criticism from congressional Democrats.   The saga will likely continue.

Alston & Bird Financial Services Regulatory Speaker Webinar Series

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On June 15, from 1 to 2 p.m., Alston & Bird will host the inaugural event in its Financial Services Regulatory Speaker Webinar Series.  The event will feature a discussion with Dr. Mark A. Calabria, Director of the Federal Housing Finance Agency and Kathy Kraninger, Director of the Consumer Financial Protection Bureau, discussing federal regulatory responses to the COVID-19 pandemic and how they affect consumer lending and mortgage servicing. Login information will be provided to participants before the program.

To register, click here.

Questions? Contact Megan Belliveau at megan.belliveau@alston.com or 202.239.3134.

CFPB Announces Two Updates Relating to COVID-19 Pandemic

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A&B ABstract:

Last week, the Consumer Financial Protection Bureau issued two announcements of interest to servicers as they continue to respond to borrowers impacted by the COVID-19 pandemic.

Consumer Complaint Report:

On May 21, the CFPB issued a report analyzing approximately 4500 complaints relating to the COVID-19 pandemic.  Among other findings, the report indicates that approximately 22 percent of COVID-19 related complaints addressed mortgages; inability to pay appeared as the most common issue.

The report’s observations include that consumers:

  • complained about being unable to reach customer service representatives, or having access to methods other than telephone contact to discuss payment options;
  • indicated concerns about potential negative credit reporting implications of alternative payment options; and
  • indicated concerns about repayment options at the end of a forbearance period, particularly whether a lump-sum or balloon payment would be required.

No-Action Letter Template:

On May 22, the CFPB issued a No-Action Letter Template permitting mortgage servicers who are seeking to engage in loss mitigation activities with consumers.  The template, requested by Brace Software, Inc., would permit servicers to use Brace’s online platform (an online version of Fannie Mae Form 710) to implement loss mitigation efforts.  According to the CFPB’s announcement,  digitizing the loss mitigation application process may improve its operation.

The No-Action Letter is the latest example of the CFPB’s use of the No-Action Letter Policy announced in September 2019 as part of the CFPB’s effort to promote innovation and facilitate compliance.

Takeaway:

Taken together, these two announcements are indicative of the Bureau’s continued focus on the impact of COVID-19 on borrowers, and on how servicers are responding to borrower needs.

 

Attorneys General Urge FHFA and HUD to Take Additional Measures to Protect Borrowers Affected by COVID-19

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A&B Abstract:

On April 23, 2020, the attorneys general of 33 states, the District of Columbia and Puerto Rico (the “Attorneys General”) sent two letters, one to the Federal Housing Finance Agency (“FHFA”) and the other to the U.S. Department of Housing and Urban Development (“HUD” and collectively with FHFA, the “Agencies”), respectively, noting that the “national response must recognize the unique challenges presented by the unprecedented number of homeowners who are affected by COVID-19, including the fact that all of these homeowners need relief at the same time..[and that] [m]eeting this challenge will require straightforward and consistent guidance that can be quickly operationalized.”  As a result, the Attorneys General urged the Agencies to make changes to their respective guidelines addressing COVID-19-related mortgage and foreclosure relief.

Revision of Forbearance Programs

The Attorneys General acknowledged that forbearance plans are a critical first response to borrowers affected by the COVID-19 pandemic.  However, the Attorneys General expressed concern that both the mortgage servicing industry and homeowners will become overwhelmed if changes are not made.   The Attorneys General recommended or encouraged that:

  • the Agencies “issue simple, self-executing guidance that servicers can easily implement to meet demand while providing an immediate, responsive resolution to borrowers.” The Attorneys General specifically expressed concern about HUD guidelines requiring an individualized evaluation for every borrower who receives a CARES Act forbearance, as well as guidelines issued by both of the Agencies requiring an individualized evaluation for borrowers coming out of forbearance, due to “grave doubts about servicers’ abilities to effectively manage the unprecedented number of borrowers who will be emerging from forbearance plans related to COVID-19 if individualized evaluations are required for each borrower.”
  • the Agencies amend their forbearance programs so that the obligation to repay forborne payments is automatically placed at the end of the loan term in the form of additional monthly payments that will follow the current term of the loan.  The Attorneys General noted that “there can be no reasonable expectation that a borrower who has experience a loss of employment or a reduction in income will be able to repay the forborne payments in a lump sum at the end of the forbearance period.” FHFA subsequently clarified its repayment requirements for its forbearance program on April 27, 2020.
  • the Agencies issue guidance allowing these post-forbearance agreements to occur without requiring borrowers to execute any additional documents, such as a loan modification agreement or a promissory note for the forborne payments, or at least waiving or easing those requirements until the pandemic abates.
  • FHFA to clarify that a borrower may receive a forbearance based on the borrower’s verbal attestation of a hardship related to COVID-19, and to encourage servicers to proactively notify borrowers of their right to verbally request a forbearance.

Expanded Eligibility for Disaster Relief-Related Modifications and Loss Mitigation Programs

The Attorneys General urged the Agencies to expand their eligibility standards for post-forbearance loss mitigation programs to enable a greater number of borrowers to qualify.  The Attorneys General urged HUD to reconsider its decision to remove the Disaster Loan Modification option for borrowers affected by COVID-19.  Further, the Attorneys General requested that the Agencies revise their respective loan modification eligibility criteria to ensure these programs have the same reach as the forbearance program mandated by the CARES Act, as the Agencies’ current guidelines impose several delinquency-related eligibility requirements.  For example:

  • Under current Fannie Mae and Freddie Mac guidelines, borrowers affected by COVID-19 are eligible for any one of three modification programs. Currently, however, a borrower is only eligible for such programs if the borrower was current or less than 31 days delinquent as of March 13, 2020. Additional delinquency-related eligibility criteria apply for the Cap and Extend Modification and Flex Modification programs.
  • Under current HUD guidelines, a borrower is only eligible for the COVID-19 Partial Claim if the borrower was current or less than 30 days delinquent as of March 1, 2020 and the partial claim amount does not exceed 30 percent of the unpaid balance. If a borrower is ineligible for the COVID-19 Partial Claim, then the borrower will be reviewed for HUD’s FHA-HAMP program. The Attorneys General noted that the FHA-HAMP program has additional seasoning requirements, such as requiring the borrower to have made at least 4 payments and the loan to have aged at least 12 months.

The Attorneys General urged the Agencies to waive the delinquency status requirements of these modification programs and noted that post-forbearance modification programs should be commensurate with the forbearance plans required by the CARES Act, as the CARES Act requires forbearance for any borrower experiencing a COVID-19 financial hardship regardless of delinquency status.  Moreover, the CARES Act authorizes forbearances of up to 360 days, so many borrowers receiving CARES Act forbearances will be more than 360 days delinquent by the end of the forbearance period.

Eviction and Foreclosure Moratoriums

Finally, the Attorneys General urged the Agencies to “instruct servicers that they also must suspend all foreclosures and evictions currently in process and cannot move forward to complete any step in the judicial or non-judicial foreclosure or eviction process while the moratorium is in place,” to address differences in various states’ foreclosure and eviction processes.

Currently, the CARES Act states that servicers of federally backed mortgages may not initiate any judicial or non-judicial foreclosures process, move for a foreclosure judgment or order of sale, or execute a foreclosure-related eviction or foreclosure sale until at least May 17, 2020. The Attorneys General asserted that advancing any step of the eviction or foreclosure process during a forbearance related to COVID-19 will only lead to borrower confusion and harm.

Takeaway

As the COVID-19 pandemic continues to affect homeowners and the mortgage servicing industry, there will likely be continued political pressure on the Agencies to further revise servicer loss mitigation guidelines. Servicers will need to be vigilant to stay on top of the rapidly evolving market conditions and regulatory environment.