Alston & Bird Consumer Finance Blog

Mortgage Loans

Coronavirus and Securitization: Disclosure and Diligence Issues

Mortgage-backed and asset-backed securities are beginning to feel the effects of quarantines and social distancing as people spend – and earn – less money. Our Finance Group explores the basic disclosures to consider with any securitization and how best to address them during the coronavirus pandemic.

  • Four disclosure issues for securitization
  • Two key diligence issues for securitization
  • Additional thoughts

Alston & Bird has formed a multidisciplinary task force to advise clients on the business and legal implications of the coronavirus (COVID-19).  Please visit our website for the full advisory.

NYDFS Extends Transition Period for Part 419 Compliance by Additional 90 Days

On March 13, 2020, the New York Department of Financial Services (“NYDFS”) adopted, on an emergency basis, amendments (the “Emergency Adoption”) to the final mortgage servicer business conduct rules found in Part 419 of the Superintendent’s Regulations (the “Final Rules”), to extend the transition period for compliance with the Final Rules by an additional 90 days.  Prior to the Emergency Adoption, the transition period was set to expire on March 17, 2020.

As we previously reported, the NYDFS adopted the Final Rules on December 18, 2019.  The Final Rules made numerous revisions to the prior version of Part 419 that had been adopted, and readopted, on an emergency basis.  To facilitate the mortgage industry’s transition to the new rules, the Final Rules added Section 419.14 to provide a 90-day transition period for mortgage servicers to comply with the Final Rules.  However, the NYDFS indicated that “the transition period stated in Part 419.14 ha[d] proven to be insufficient.”

In issuing the Emergency Adoption, the NYDFS acknowledged the “volume and complexity of the changes required by the [Final Rules], especially computer programming required to address the new reporting, notice and disclosure requirements for the home equity line of credit {‘HELOC’) product, [which] is creating the biggest issue for servicers” as the HELOC product had previously been exempt from Part 419.  The NYDFS also cited, as additional reasons supporting the Emergency Adoption, the additional time needed by regulated institutions for purposes of revising procedures, training compliance staff, and providing information to consumers, as well as the business continuity and pandemic planning around the Coronavirus, which is diverting the limited resources of smaller financial institutions.

Mortgage servicers now have an additional 90-days to transition to the new requirements under the Final Rules.

CFPB Issues Winter 2020 Supervisory Highlights

A&B ABstract:

The Winter 2020 Supervisory Highlights identifies the CFPB’s findings from recent examinations, noting violations that resulted in compliance management system weakness.

CFPB Issues New Edition of Supervisory Highlights:

The Winter 2020 edition of the Consumer Financial Protection Bureau (“CFPB”) Supervisory Highlights details recent examination findings relating to debt collection, mortgage servicing, and student loan servicing, among other topics.

Debt Collection

 With respect to debt collection, the CFPB focused on:

  • Failure to disclose in communications subsequent to the initial written communication that the communication is from a debt collector, in violation of Section 807(11) of the FDCPA; and
  • Failure to send a written validation notice within five days after the initial communication with the consumer, in violation of Section 809(a) of the FDCPA.

As a result of these deficiencies, the CFPB reported that servicers revised their policies and procedures, and monitoring and training programs.

Mortgage Servicing and Loss Mitigation

With a focus on compliance with the loss mitigation provisions of Regulation X, the CFPB’s first finding was that servicers failed to notify borrowers in writing of the servicer’s determination that the loss mitigation application is complete or incomplete within five business days of receiving a loss mitigation application.  Second, the CFPB found that servicers failed to provide borrowers with a written notice of available loss mitigation options within 30 days of receiving the complete loss mitigation application.

Finally, the CFPB cited servicers’ failure to comply with Regulation X’s requirements, including providing a written notice to borrowers, for offering a short term loss mitigation option to a borrower based on an evaluation of an incomplete loss mitigation application. In this instance, the servicers granted short-term forbearance if the borrower in a disaster area experienced home damage or loss of income from the disaster. The borrowers received such accommodation after speaking with the servicer over the phone and responding to certain questions.

In response to that finding, the CFPB reminded servicers that an application for loss mitigation can be oral or written.   Because the servicer’s efforts to respond to a natural disaster were the partial cause of violations, the CFPB only required the servicer to develop plans to ensure staffing capacity in response to any future disaster-related increases in loss mitigation applications. The CFPB also reminded servicers of its September 2018 Statement on Supervisory Practices Regarding Financial Institutions and Consumers Affected by a Major Disaster or Emergency, which provides flexibility for servicers to assist borrowers during a major disaster or emergency but does not lift the Regulation X requirements.

Payday Lending

With a focus on Regulation Z, Regulation B, and unfair acts or practices, the CFPB found that lenders engaged in unfair acts or practices when they: (1) processed borrowers’ payments, but did not apply such payments to borrowers’ loan balances in lenders’ systems; (2) lacked systems to detect unapplied payments; and (3) incorrectly treated borrowers accounts as delinquent. The CFPB found that the injury was not reasonable avoidable by the borrowers because lenders conveyed incorrect information to them about their accounts and failed to follow up on borrower’s complaints. Furthermore, because the cost to lenders to implement appropriate accounting controls to reconcile payments would have been reasonable, countervailing benefits did not outweigh the injury.

Additionally, the CFPB found that a payday lender engaged in unfair acts or practices by assessing consumers a fee as a condition of paying or settling a delinquent loan when the underlying loan contract required the lender to pay that particular fee. The lender mischaracterized the fee as a court cost (which would have been paid by the borrower) or did not disclose it. According to the CFPB, a lack of monitoring and/or auditing of the lender’s collection practices caused the error. In response to this finding, the lender refunded the fee to affected consumers and made changes to its compliance management system.

Other Payday Lending Observations

Further, the CFPB found that payday lenders:

  • Violated Regulation Z by relying on employees to manually calculate APRs when the lender’s loan origination system was unavailable. The CFPB found that errors made in calculating the term of the loan, which resulted in misstated APRs, were caused by weaknesses in employee training.
  • Violated Regulation Z by charging a loan renewal fee to consumers who were refinancing delinquent loans and omitted such fee from the finance charge, resulting in inaccurate disclosure of the APR and finance charge. The CFPB found that a lack of detailed policies and procedures and training contributed to the Regulation Z violations. In response, the lender refunded the fee to the consumer explaining the reason for the refund and strengthened its policy and procedures and training program.
  • Violated record retention requirements of Regulation Z by failing to maintain evidence of compliance for two years. The CFPB found that the violation resulted in part from a lack of training and detailed policies and procedures on record retention.
  • Violated Regulation B by providing consumers with an adverse action notice that incorrectly stated the principal reason for taking an adverse action as a result of a coding error. In response, the lenders sent corrected adverse action notices to consumers and made changes to the system that generate the notices.

Student Loan Servicing

With a focus on unfair practices, the CFPB found that servicers engaged in an unfair act or practice caused by a data mapping errors during the transfer of private loans between servicing systems that resulted in inaccurate calculations of monthly payment amounts. As a result, borrowers may have made payments based on the inaccurate amounts, incurred late fees on such inaccurate amounts, or had inaccurate amounts debited from their account. In response to the examination findings, the CFPB required servicers to remediate affected consumers and implement new processes to eliminate data mapping errors.

 Takeaways

Highlighting debt collection, mortgage servicing, payday lending and student loan servicing, the Supervisory Observations in the Winter 2020 Supervisory Highlights showcase the importance of adequate policies and procedures, training, monitoring and auditing and system controls to avoid consumer harm and violation of consumer financial laws.  Although they cut across multiple industries, the CFPB’s findings highlight common themes – such as entities’ liability for violations that result from system errors or the assessment of unauthorized fees, and the need for careful monitoring in connection with servicing transfers.

 

Puerto Rico Office of the Commissioner of Financial Institutions Announces Mandatory Mortgage Servicer Reporting in Response to Recent Earthquakes

A&B ABstract:

In the wake of the recent earthquakes in Puerto Rico, the Puerto Rico Office of the Commissioner of Financial Institutions (“OCFI”) released Circular Letter No. CFI-2020-01 (the “Circular Letter”). The Circular Letter imposes weekly and monthly reporting requirements on all Puerto Rico licensed mortgage lenders, mortgage servicers, Home Equity Conversion Mortgage servicers, reverse mortgage servicers, and all financial institutions acting as mortgage servicers (collectively “Mortgage Servicers”) for specific zip codes and “persons affected by the earthquake” in Puerto Rico. Significantly, the Circular Letter does not include a deadline for Mortgage Servicers to submit the first monthly report, but it provides that the first weekly report is due by 4:30 P.M. on February 5, 2020, for the week ending January 31, 2020.

Purpose of the Circular Letter

The Circular Letter requires that all Mortgage Servicers report to OCFI on their on-going activities to assist all persons affected by the earthquakes that took place in southern Puerto Rico commencing on December 28, 2019, and which continue as of the date of the Circular Letter, January 31, 2020. Specifically, the OCFI is interested in the efforts undertaken by Mortgage Servicers to help the affected persons to file insurance claims to recover their property losses caused by the earthquakes.

Covered Persons for Reporting

For purposes of the reporting requirement, “persons affected by the earthquake” include “persons who suffered a physical damage to their residence or buildings (whether or not covered by hazard or homeowner’s insurance and/or other type of property insurance), persons who have suffered economic injury or loss attributable to the earthquakes (including, but not limited to, loss of income from employment or business), and persons who have been harmed or suffered injuries from the earthquakes or circumstances or events directly related to the earthquakes, which persons’ principal residence or place of employment or business is located in [the following 17 zip codes in Puerto Rico]”:

  • Adjuntas, 00601
  • Maricao, 00606
  • Arecibo, 00612
  • Peñuelas, 00624
  • Sabana Grande, 00637
  • Ciales, 00638
  • Utuado, 00641
  • Guánica, 00653
  • Guayanilla, 00656
  • Hatillo, 00659
  • Jayuya, 00664
  • Lajas, 00667
  • Lares, 00669
  • Yauco, 00698
  • Ponce, 00730
  • Ponce, 00731
  • Juana Díaz, 00795

Reporting Requirements

Monthly Reporting Requirement: For all persons affected by the earthquake, Mortgage Servicers must provide a monthly report, for each of the 17 zip-codes listed above, on the OCFI’s “Report of Moratorium Granted Due to Earthquake PR” Form. This form does not appear to be publicly-available on the OCFI’s website. The Circular Letter did not specify when Mortgage Servicers must submit the monthly reports or any associated timing requirement. A conservative reading of the Circular Letter would suggest that the end of the first monthly reporting period would be February 29, 2020, one month after the OCFI released the Circular Letter.

Weekly Reporting Requirement: For all consumer mortgages on properties located in the 17 listed zip-codes, or for persons affected by the earthquake, Mortgage Servicers must provide weekly individual reports by zip-code using the OCFI’s “Mortgage Delinquency Report” Form for the entirety of their portfolio. This form also does not appear to be publicly-available on the OCFI’s website. The Circular Letter states that the first weekly report is due to the OCFI by 4:30 p.m. on Wednesday, February 5, 2020, and all subsequent weekly reports must be submitted the Wednesday after the proceeding week, by 4:30 p.m. Each weekly report must cover all activity Monday-Friday from the previous week.

The Circular Letter specifies that Mortgage Servicers are required to transmit the weekly and monthly reports to the OCFI in electronic form using the corresponding excel forms in the appendix of the Circular Letter. However, the Circular Letter does not provide an email or portal where licensed Mortgage Servicers are supposed to submit their reports.

Takeaways:

Licensed Mortgage Servicers in Puerto Rico are now required to submit a monthly report for mortgage servicing activity taken to help borrowers affected by the recent earthquakes and are required to submit weekly reports for all consumer mortgages located in the 17 zip-codes and for all persons affected by the earthquake. The first weekly report, which shall cover activities undertaken in the week commencing on January 27, 2020, is due tomorrow, February 5, 2019, in electronic format to the OCFI by 4:30 P.M. EST. Going forward, weekly reports are due every Wednesday at 4:30P.M. EST, which must include any relevant activity from the previous week.

Mortgage Servicers that fail to provide their reports to the OCFI in a timely manner may be subject to penalties: the OCFI may impose fines of up to $10,000 for each violation of any rules and regulations under title 7 chapter 143 of the Laws of Puerto Rico, and the OCFI may also impose fines of up to $5,000 for each day that a Mortgage Servicer fails to comply with any orders issued by the Commissioner.

FHFA Proposes New Minimum Financial Requirements for Fannie Mae and Freddie Mac Seller/Servicers

A&B ABstract

 In keeping with broader scrutiny on non-bank servicers, the Federal Housing Finance Agency (FHFA) is proposing new financial eligibility requirement for non-bank servicers doing business with Fannie Mae or Freddie Mac.

The Proposal:

On January 31, the FHFA proposed new financial eligibility requirements for approved nonbank Seller/Servicers doing business with Fannie Mae or Freddie Mac.  FHFA will accept comments for 60 days and anticipates that the requirements will be finalized in the second quarter of 2020 and take effect six months thereafter.

FHFA’s announcement follows the Financial Stability Oversight Council’s (FSOC) finding in its 2019 Report to Congress that nonbank mortgage companies are a “potential emerging threat” to the U.S. economy.  Specifically, FSOC noted that such nonbanks play a large role in originating and servicing mortgage loans, including those held by Fannie Mae, Freddie Mac and Ginnie Mae securities.

FSOC:

The Dodd-Frank Act created FSOC to identify risks, promote market discipline, and respond to emerging threats to the stability of the U.S. financial system.  FSOC comprises 10 voting members (one of which is FHFA), and five nonvoting members (that serve an advisory role).

In its annual report to Congress, FSOC made several statements concerning the potential risks from nonbank mortgage companies.  For example, FSOC found that nonbanks “rely heavily on short-term funding sources,” “typically have low capital levels,” and “have few resources to absorb adverse economic shocks.”  FSOC concluded that “[g]iven these fragilities, the nonbank sector could potentially be a source of weakness as a contraction in the largest nonbanks’ ability to originate and service mortgages may transit risk to the broader financial system  through several channels.”   FHFA is taking steps to address FSOC’s concerns.

FHFA’s New Financial Requirements

FHFA proposes the following updates to its minimum net worth and liquidity requirements:

Increased Net Worth for Ginnie Mae Servicing:

FHFA would increase by 10 basis points the minimum net worth requirement to service Ginnie Mae mortgages.  Currently, the minimum net worth is $2.5 million plus 25 basis points of the unpaid principal balance for total 1-4 unit residential mortgage loans serviced.  FHFA proposes to increase the minimum net worth for servicing of Ginnie Mae mortgages to 35 basis points.

Liquidity Requirements
Increased Minimum Base Liquidity:

Currently, the base liquidity is 3.5 basis points of the aggregate unpaid principal balance of single-family mortgages serviced by the Seller/Servicer for Freddie Mac, Fannie Mae and Ginnie Mae (Agencies). FHFA proposes to increase the base liquidity to 4.0 basis points, plus an additional 10 basis points of the unpaid principal balance of Ginnie Mae servicing.

Reduced Allowable Assets: 

FHFA would revise the allowable assets for determining liquidity to exclude the unused/available portion of the committed servicing advance lines of credit.  As a result, it would limit allowable assets for liquidity to: (i) cash and cash equivalents and (ii) Available for Sale or Held for Trading Investment Grade Securities: Agency MBS, Obligations of GSEs or U.S. Treasury Obligations.

Changes to NPL Threshold and Charges:

FHFA also proposes increases to the liquidity requirements for nonperforming loans (NPLs), including loans 90 days or more delinquent and loans in the foreclosure process.  Under the proposed standards, FHFA would reduce the NPL threshold from 6% to 4%.  As a result, a Seller/Servicer would be subject to increased liquidity requirements (in the form of an Incremental NPL Charge) for the portion of non-performing single-family mortgages serviced by the Agencies.  The proposal also would increase the Incremental NPL Charge from 200 basis points to 300 basis points.  Thus, for NPLs, Seller/Servicers would be subject to an incremental 300 basis point charge for the portion of Agency NPLs that exceeds 4%.

The proposal clarifies that the requirements apply to the master servicer only; loans that are subserviced are not subject to these capital or liquidity requirements. Rather, a subservicer must meet minimum net worth and tangible capital ratio requirements.  The minimum capital ratio remains unchanged under the proposal.

Further, FHFA clarifies that only nondepository institutions will be tested against the new liquidity requirements, with reviews done on a quarterly basis. While the proposal requires Seller/Servicers to be in compliance as of the effective date, it also provides Fannie Mae and Freddie Mac latitude to: (1) take appropriate action for a Seller/Servicer who does not maintain compliance; (2) grant exception requests; or (3) institute requirements beyond the minimum for certain Seller/Servicers that pose heightened risk.

Takeaways

Nonbank mortgage servicers should prepare for increased financial requirements taking effect later in 2020.  Seller/Servicers concerned with these requirements and how they will be implemented should consider submitting comments to ServicerEligibility@fhfa.gov.