Alston & Bird Consumer Finance Blog

Mortgage Loans

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.

 

FHFA Clarifies Repayment Requirements for GSE Forbearance Plans

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A&B ABstract:

On April 27, the FHFA provided clarification on the repayment of mortgage loan forbearance granted in response to the COVID-19 pandemic.

FHFA Announcement

On April 27, Federal Housing Finance Agency (“FHFA”) Director Mark Calabria clarified that borrowers who have a GSE-backed mortgage will not be required to make a lump sum repayment at the end of a forbearance plan granted in response to the COVID-19 pandemic.

CARES Act

The CARES Act grants forbearance rights to borrowers with a federally backed mortgage loan.  Specifically, during the covered period, a borrower with a federally backed mortgage loan who is experiencing a financial hardship that is due, directly or indirectly, to the COVID-19 emergency may request a forbearance for up to 180 days, with the possibility of up to an additional a 180-day extension.

The CARES Act is silent on when a borrower is required to repay the forborne payments.   Technically, at the point the borrower is delinquent and according to the terms of the security instrument, those payments can be called due. However, in light of the current crisis, lawmakers have expressed concern that borrowers who have lost or reduced income will be able to repay the forborne payments in a lump sum following the forbearance period.

FHFA Clarification

According to the FHFA, the mortgage servicer will contact each impacted borrower 30 days prior to the end of the forbearance plan period to discuss repayment options.  Potential repayment options include: (1) establishment of a repayment plan; (2) modification of the loan to add the payments to the end of the mortgage; or (3) modification of the loan to reduce the borrower’s monthly mortgage payment.  If a hardship persists as of that time, the servicer may extend the forbearance plan.

Takeaway

Last week, attorneys general in 33 states, the District of Columbia, and Puerto Rico urged Director Calabria “to revise the forbearance programs so that the obligation to repay forborne payments is automatically placed at the end of the loan.”  Today’s announcement may be in response to that request.