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Federal and State Guidance Regarding the COVID-19 Pandemic

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A&B Abstract:

The Alston & Bird Consumer Finance team recognizes that this is a period of great uncertainty both for the nation and our clients. We have received numerous questions and concerns regarding what federal and state regulators are doing in light of the COVID-19 pandemic and how their response may affect day-to-day business. We have been monitoring both the federal and state guidance that has been released in response to the COVID-19 pandemic and have provided a summary of what has been released thus far.  We are continuing to monitor for new developments and will update this blog post accordingly.

Federal Guidance

Federal Administrative Agencies:

  • HUD/FHA: On March 18, 2020, HUD released Mortgage Letter 2020-4, which placed a foreclosure and eviction moratorium on all FHA-insured Single Family mortgages for a period of 60 days. The moratorium applies both to the initiation of foreclosures and to the completion of foreclosures in process.  Similarly, evictions of persons from properties secured by FHA-insured single-family mortgages are suspended for 60 days.  Deadlines of the first legal action and reasonable diligence timelines for Home Equity Conversion Mortgages are extended by 60 days.  In light of the broad language of the Mortgagee Letter, it does not appear that HUD intended to carve out vacant and abandoned properties from the foreclosure moratorium.  HUD has informally confirmed this interpretation.
  • USDA: On March 19, 2020, the USDA issued SFH Guaranteed Servicing Notice (March 19, 2019) which, effective immediately, provides that borrowers with USDA guaranteed loans are subject to a moratorium on foreclosure for a period of 60 days. The moratorium applies to the initiation of foreclosures and to the completion of foreclosures in process.  In addition, deadlines of the first legal action and reasonable diligence timelines are extended by 60 days. Similarly, evictions of persons from properties secured by USDA guaranteed loans are also suspended for a period of 60 days.
  • VA: On March 18, 2020, the VA issued Circular 26-20-8, which strongly encourages loan holders to establish a sixty-day moratorium beginning March 18, 2020, on completing pending foreclosures or imitating new foreclosures on loans.  Additionally, due to the widespread impact of COVID-19, loan holders should consider the impact of completing an eviction action when choosing to retain the property instead of conveying to VA.  VA requests holders not to expose Veterans and their families to additional risk through an eviction, if at all feasible.  Previously, on March 16, 2020, the VA issued Circular 26-20-7, which provides, in relevant part, that (1) lenders should have continuity of operation plans in place to support its ongoing ability to conduct business operations in the event of an interruption to business operations and processes; (2) servicers may employ the following relief to veterans impacted by COVID-19: (a) forbearance, (b) late charge waivers on affected loans, and (c) suspension of credit bureau reporting on affected loans; and (3) appraisers should continue to conduct business as outlined in Chapter 10 of the M26-7, Lenders Handbook.

Federal Government-Sponsored Entities:

  • Fannie Mae: Fannie Mae released a Bulletin for borrowers detailing its response to the COVID-19. Fannie Mae has placed a moratorium on foreclosure sales and evictions for sixty (60) days. In conjunction with the Bulletin, Fannie Mae also issued Lender Letter LL-2020-02, which sets forth guidance for lenders in responding to COVID-19.  The letter provides guidance for lenders concerning topics such as (1) forbearance plan eligibility for borrowers, (2) evaluating borrowers for mortgage modifications, (3) credit bureau reporting, and (4) suspension of foreclosure sales.
  • Freddie Mac: Freddie Mac released a Bulletin for mortgage servicers detailing its response to the COVID-19 and new guidelines for Freddie Mac mortgage servicers during the COVID-19 pandemic. Similar to Fannie Mae, the Bulletin provides guidance for lenders concerning topics such as (1) forbearance plan eligibility for borrowers, (2) evaluating borrowers for mortgage modifications, (3) credit bureau reporting, and (4) suspension of foreclosure sales.

State Guidance

State Legislatures:

  • Enacted Legislation and Executive Orders
    • District of Columbia: On March 17, 2020 Mayor Bowser signed the COVID-19 Response Emergency Amendment Act of 2020, which expires on June 15, 2020. The act provides for, among other things, a prohibition on evictions for as long D.C. is under a public health emergency.
    • New Hampshire: On March 17, 2020, New Hampshire Governor Christopher Sununu issued Emergency Order #4 pursuant to Executive Order 2020-04, which (1) prohibits an owner of non-restricted property or restricted property, as those terms are defined in RSA 540:1-a, from initiating eviction proceedings under RSA 540, and (2) prohibits all judicial and non-judicial foreclosure actions under RSA 479 or any other applicable law, rule or regulation, during the State of Emergency declared in Executive Order 2020-04.
    • New Jersey: The New Jersey Legislature passed Assembly Bill 3859, which allows the New Jersey governor to issue an executive order during a Public Health Emergency, pursuant to the New Jersey Emergency Health Powers Act, prohibiting the removal of any lessee, tenant, or homeowner from a residential property as the result of an eviction or foreclosure action.  Governor Philip Murphy subsequently issued Executive Order No. 106, which prohibits any lessee, tenant, homeowner or any other person from being removed from a residential property as a result of an eviction or foreclosure proceeding.
    • Kansas: On March 17, 2020, Governor Laura Kelly issued Executive Order No. 20-06, which orders all financial institutions operating in Kansas to temporarily suspend the initiation of any mortgage foreclosure efforts or judicial proceedings and any commercial or residential eviction efforts or judicial proceedings until May 1, 2020.
  • Pending Legislation
    • Massachusetts: The Massachusetts Legislature is considering House Docket No. 4935, which, if enacted, would impose a moratorium on evictions and foreclosures during the COVID-19 emergency.
    • Virginia: Currently, Virginia House Bill 340 is on Governor Northam’s desk, and he has until April 11th to take action on the bill. If passed, the bill would provide foreclosure and eviction protections for federal workers upon the closure of the federal government.

State Regulators:

In addition to state legislation and executive order, state regulators across the country have released guidance to regulated entities concerning the COVD-19 pandemic and indicating what the state regulators are doing in response. The Nationwide Multistate Licensing System (“NMLS”) has compiled state regulator guidance issued in response to COVID-19. The NMLS has posted this document to their website, and it is updated regularly. Below, we have included a summary of the information released by state regulators as of (March 20, 2020):

  • Alaska Department of Commerce, Community & Economic Development (“Department”): The Department posted guidance on its website stating that licensed mortgage-broker lenders may require licensed mortgage loan originators to work and undertaken licensed activities from home. The Department stated that it would not take administrative or other punitive action against a licensed mortgage loan originator or the sponsoring licensed company if the mortgage loan originator conducts activities requiring licensure from home. This guidance does not have an expiration date but is subject to revision.
  • Alabama State Banking Department (“Department”): The Department released guidance for any entity licensed by the Department. The Department instructed that licensees need to comply with all applicable statutes, regulations, and data security regulations. The Department noted that not all licenses may be able to work from home if their home location does comply with the applicable statutes, regulations, and data security regulations. This guidance does not have an expiration date but is subject to revision.
  • Arkansas Securities Department (“Department”): The Department released guidance for licensed mortgage loan companies, mortgage loan officers, and branch managers. The Department stated that mortgage loan companies may have mortgage loan officers work from home at unlicensed locations as long as state and federal data security standards are upkept. This guidance is in effect until June 1, 2020 but is subject to revision.
  • Colorado Department of Real Estate (“Department”): The Department released guidance that since Colorado law is silent as to the location at which mortgage loan originators are required to work. Therefore, the Department instructed that licensed mortgage loan originators may work from home. This guidance does not have an expiration date but is subject to revision.
  • Connecticut Department of Banking (“Department”): The Department released guidance for all consumer credit licensees. The Department is allowing consumer credit licensees to work from home during the CORVID-19 pandemic as long as the licensee follows applicable law, notifies the Department in writing, and that no licensable activity can take place at home with a member of the public. This guidance is in effect until April 30, 2020.
  • Iowa Division of Banking (“Division”): The Division released guidance for all entities that it regulates. The Division stated that all licensees may work from home during the CORVID-19 pandemic even if their home is an unlicensed office as long as appropriate data security measures are put into place. This guidance does not have an expiration date but is subject to revision.
  • Idaho Department of Finance (“Department”): The Department released guidance for all entities that it regulates. The Department is allowing licensed and registered entities to allow their employees to work from home even if that location is not a licensed location. Licensed and registered entities must keep up data security, may not advertise the unlicensed location as a licensed location, and may not meet with consumers or have consumers come to an unlicensed location. This guidance is in effect until June 30, 2020 but is subject to revision.
  • Indiana Department of Financial Institutions (“DFI”): The DFI issued temporary guidance offering licensees the ability to take precautions deemed necessary to avoid the risk of exposure or to comply with requirements of voluntary or mandated quarantines and is effective through June 30, 2020, unless otherwise modified or withdrawn.
  • Kansas Office of the State Bank Commissioner (“Commissioner”): The Commissioner released guidance for all entities that it regulates. The Commissioner is allowing licensed and registered entities to allow employees to work from home even if that location is not a licensed location. Licensed and registered entities must keep up adequate data security protection and may not take physical records out of the licensed location if they have confidential information. This guidance does not have an expiration date but is subject to revision.
  • Kentucky Department of Financial Institutions (“DFI”): The DFI released guidance to Kentucky-chartered financial institutions recommending that such institutions take certain actions in response to the COVID-19 pandemic.  Such actions include, among others, (1) working with customers affected by the coronavirus to meet their financial needs, which may include waiving overdraft and/or minimum balance fees, restructuring existing loans, extending loan repayment terms, and easing terms for new loans, (2) managing COVID-19 related staffing issues, and (3) making sure business continuity plans include pandemic planning.
  • Louisiana Office of Financial Institutions Non-Depository Division (“Division”): The Division released guidance for all licensed mortgage lenders, brokers, and originators. The Division is allowing entities to close their licensed locations and work from home, but entities that do so much provide the Division with notice of the new location. This guidance is in effect until April 9, 2020, but is subject to revision.
  • Massachusetts Division of Banks (“Division”): The Division released guidance for all licensed entities. The Division is allowing licensed entities to work from home as long as the unlicensed location is not advertised to the public and licensed entities do not meet with consumers at unlicensed locations. This guidance does not have an expiration date but is subject to revision.
  • Maryland Commissioner of Financial Regulation (“Commissioner”): The Commissioner released guidance for all licensed mortgage brokers, lenders, and servicers. The Commissioner is allowing licensed mortgage brokers, lenders, and servicers to work from home provided that the work would not require the location to be licensed as a branch office under Maryland law. This guidance does not have an expiration date but is subject to revision.  In addition, the Commissioner issued an Industry Advisory on March 19, 2020, advising the industry of Maryland Court of Appeals Chief Judge Mary Ellen Barbera’s March 18, 2020 order, which immediately stays all residential foreclosure and eviction actions in Maryland.
  • Michigan Department of Insurance and Financial Services (“DIFS”): The DIFS is seeking information regarding responses to the COVID-19 pandemic from all Michigan consumer finance licensees and registrants.  Responses were due on Friday, March 20, 2020 by 5:00pm and were required to address  whether (1) the licensee/registrant had temporarily or permanently reduced any services provided in their office locations or by your business, (2) whether the licensee/registrant had implemented a program to allow staff to work remotely and, if so, certain additional information about such program, (3) whether and in what way the licensee/registrant had communicated with their customers to provide them with information regarding any changes the licensee/registrant had implemented in response to the pandemic and how those changes may affect them, and (4) whether the licensee/registrant had proactively reached out to their customers to provide them with information concerning what they should do if they are having trouble making their loan payment.
  • Minnesota Department of Commerce (“Department”): The Department has issued separate guidance to Minnesota Industrial Loan & Thrift Companies, Licensed Mortgage Originators and Servicers (companies and individuals), Licensed Non-Depository Financial Institutions, and Regulated Loan Companies.  The guidance is intend to address certain issues and questions related to changes in branch locations or employees working from home as a result of the COVID-19 pandemic.
  • Mississippi Department of Banking and Consumer Finance (“DBCF”): The DBCF released guidance for licensed mortgage loan originators. The DBCF is allowing licensed mortgage loan originators to work from home provided that data security measures are put in place and the licensed mortgage loan originator does not have consumers meet with the licensed mortgage loan originator at their home. This guidance does not have an expiration date but is subject to revision. The DBCF also issued separate guidance to Mississippi Mortgage Licensees and Consumer Finance Licensees regarding industry pandemic preparedness and outline flexibility in DBCF processes in response to the COVID-19 pandemic.
  • Montana Division of Banking and Financial Institutions (“DBFI”): On March 19, 2020, the DBFI issued a Supervisory Memorandum on Operations During Novel Coronavirus Situation, in which the DBFI provides the industry with answers to FAQs regarding preferred methods of communication as well as notification requirements for branch and loan production office closures and hours changes during the COVID-19 pandemic.
  • Nebraska Department of Baking and Finance (“DBF”): The DBF released guidance for licensed mortgage bankers and sponsored/licensed mortgage loan originators. The DBF is allowing mortgage bankers and mortgage loan originators to work from home provided that they notify the DBF and the DBF approves the new location. All physical documents must remain at a licensed location, but licensees may access information digitally. This guidance is in effect until December 31, 2020 but is subject to revision.
  • New Hampshire Banking Department (“Department”): The Department released guidance for licensed mortgage loan originators. The Department is allowing licensed mortgage loan originators to work from home even if that location further than 100 miles from their supervisory office as would otherwise be required under New Hampshire law. This guidance does not have an expiration date but is subject to revision.
  • New Mexico Financial Institutions Division (“Division”): The Division released guidance for all mortgage licensees. The Division is allowing all mortgage licensees to work from home provided that data security measures are put in place and no mortgage licensee advertise from or meet with consumers from their home if it is an unlicensed location. This guidance is in effect until May 31, 2020 but is subject to revision.
  • Nevada Division of Mortgage Lending (“Division”): The Division released guidance for all licensed mortgage companies and mortgage loan originators. The Division is allowing licensed mortgage companies and mortgage loan originators to work from home even if it would be considered an unlicensed location. This guidance is in effect until May 31, 2020 but is subject to revision.
  • New York Department of Financial Services (“NY DFS”): The NY DFS has asked licensees to submit plans to the NY DFS on how they plan to address the CORVID-19 pandemic. In addition, the NY DFS issued guidance to New York State regulated and exempt mortgage servicers regarding support for borrowers impacted by COVID-19.
  • Oklahoma Department of Consumer Credit (“Department”): The Department has released guidance for licensed mortgage loan originators and their employees. The Department has stated that licensed mortgage loan originators and their employees may work from home as long as they put in place appropriate data security measures. This guidance is in effect until April 30, 2020 but is subject to revision.
  • Oregon Division of Financial Regulation (“Division”): The Division has released guidance for all licensed entities. Licensed entities can work from home provided that the entity provides notice to the department, the entity has procedures in place for data security and more broadly for working from home, and no consumers at met with at unlicensed locations. Mortgage loan originators must keep all physical records at a licensed location. This guidance is in effect until April 30, 2020 but is subject to revision.
  • Pennsylvania Department of Banking and Securities (“Department”): The Department issued FAQs related to compliance with Governor Wolf’s Order that non-life-sustaining businesses shut down their physical operations.
  • Puerto Rico Office of the Commissioner of Financial Institutions (“OCFI”): The OCFI issued Circular Letter CIF Number CC-2020-002 to all financial institutions required to file reports with the OCFI, which extends the deadlines for filing such reports in light of the governmental closure ordered by Governor Garced, due to the State of Emergency declared in response to COVID-19.
  • Rhode Island Division of Banking (“Division”): The Division has released guidance for licensed mortgage loan originators, mortgage lenders, loan brokers, and exempt company registrants. The Division is allowing licensed mortgage loan originators to work from home if they and their sponsoring entities have adequate data security measure in place. Consumers are not allowed to visit any unlicensed location including the home of a mortgage loan originator if it is not a licensed location. This guidance is in effect until April 30, 2020 but is subject to revision.
  • South Carolina Consumer Finance Division of the Board of Financial Institutions (“Division”): The Division has released guidance for licensed mortgage origination and servicing companies. Licensed mortgage origination and servicing companies can work from home provided that they have a contingency plan in place, adequate data security measures, and do not remove any physical records from licensed offices. This guidance is in effect until April 30, 2020 but is subject to revision.
  • South Dakota Division of Banking (“Division”): The Division had released guidance for licensed mortgage loan originators and their sponsoring entities. Licensed mortgage loan originators can work from home provided that they have adequate data security measures in place and do not take any physical records out of licensed locations. This guidance is in effect until June 5, 2020 but is subject to revision.
  • Texas Office of Consumer Credit Commissioner (“Commissioner”): The Commissioner has released guidance for licensed regulated lenders. All licensed regulated lenders can work from home provided that they prepare a written plan describing the steps it is taking, have adequate data security measures, and ensure that all physical records remain in a licensed location. This guidance is in effect until May 31, 2020 but is subject to revision.
  • Texas Department of Savings and Mortgage Lending (“Department”): The Department has issued guidance temporarily suspending any requirement that a physical office be open to the public during posted normal business hours.  Additionally, licensed mortgage loan originators may work from home or another remote location, whether located in Texas or another state, even if the home or remote location is not a licensed branch.  The guidance provides certain requirements in the event that a licensed residential mortgage loan originator or mortgage loan staff work remotely.  These allowances do not amend Texas Financial Code, Chapter 156 and/or 157 and are being allowed strictly due to the COVID-19 pandemic.
  • Vermont Department of Financial Regulation (“Department”): The Department has released guidance for licensed mortgage loan originators and their sponsoring entities. All licensed mortgage loan originators may work from home provided that no licensable activity is taken place with a consumer at an unlicensed location, adequate data security measures are put into place, and a plan is contingency plan is put in place. This guidance does not have a current expiration date but is subject to revision.
  • Washington Department of Financial Institutions (“Department”): The Department released guidance for licensed mortgage loan originators and their sponsoring entities. All licensed mortgage loan originators may work from home provided that adequate data security measures are put in place. Consumers are not allowed to visit licensed mortgage loan originators at unlicensed locations. This guidance is effective until June 5, 2020 but is subject to change.  The DFI also issued guidance to Washington regulated and exempt residential mortgage loan servicers regarding support for borrowers impacted by COVID-19.  The guidance urges such institutions to take reasonable and prudent actions, subject to the requirements of any related guarantees or insurance policies, to support those adversely impacted by COVID-19.
  • Wisconsin Department of Financial Institutions (“Department”): The Department released guidance for licensed mortgage loan originators. All licensed mortgage loan originators may work from home provided that their sponsoring entity notify the Department, a list is kept of all mortgage loan originators who elect to work from home where the home is not a licensed branch, appropriate data security measures are taken, and no physical records are present at unlicensed locations. Consumers are not allowed to visit unlicensed locations. This guidance does not have a current expiration date but is subject to revision.
  • West Virginia Division of Financial Institutions (“DFI”): The DFI issued guidance to West Virginia Regulated Financial Institutions allowing employees of regulated entities to temporarily work from home or some other remote location approved by the financial institutions, whether located in West Virginia or another state. Regulated financial institutions may permit employees to work at home or from a designated remote location, to the extent that the position allows, as long as privacy and security issues may be adequately addressed.  The guidance is in effect from March 13, 2020 through May 1, 2020.

Takeaway

As the federal government and the states work feverishly to address the growing concerns surrounding the COVID-19 pandemic, members of the financial services industry must stay abreast of the rapid changes in the legal and regulatory landscape.  We will continue to monitor for new developments and will update this post to highlight additional federal or state guidance that is issued.

New York Financial Regulator Requires COVID-19 Risk Assessment, Operational Planning

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Last week the New York Department of Financial Services (the “Department”) issued letters to all its licensed financial institutions. Based on these letters (available here and here), all Department licensees must assess and plan for the financial risk of COVID-19 and, separately, develop operational plans for managing their response to the virus. The Department requires written responses “as soon as possible” but within 30 days in any case. As a result, impacted businesses should be actively preparing responses to the Department’s detailed request, if they have not already.

Citing the “potentially significant effects an outbreak of COVID-19 could have on your institutions,” the Department “requires that each regulated institution submit a response to DFS describing the institution’s plan of preparedness to manage the risk of disruption to its services and operations.” The Department’s letter regarding such operational preparedness indicates the topics that the Department expects to see reflected within such plans, including:

  • Impact Minimization Measures – Preventative measures to minimize operational impact on customers and business partners;
  • Scaled Strategies to Outbreak Stages – Documented strategies addressing the impact in stages, so the organizations approach may be scaled in accordance with the effects of the stage of an outbreak (with approximate deployment timeframes);
  • Facilities, Resources and Testing Assessments – Assessment of all facilities (including alternative or back-up sites), systems, policies and procedures necessary to continue critical operations and services if members of the staff are unavailable for long periods (perhaps sick) or are working off-site, including an assessment and testing as to whether large scale off-site working arrangements can be activated and maintained to ensure operational continuity;
  • Cyber and Fraud Are Contemplated in the Assessments – Any assessment should include an assessment of potential increased cyber-attacks and fraud;
  • Employee Health Considerations – An assessment of employee protection strategies, critical to sustaining the entire workforce during the outbreak, including employee awareness and steps employees can take to reduce the likelihood of contracting COVID-19;
  • Service Provider Assessments – Of the preparedness of critical outside-party service providers and suppliers (at a minimum, this anticipates contacting these providers and touching base as to their capabilities);
  • Communications Plans– Development of a communication plan to effectively communicate with customers, counterparties and the public and to deliver important news and instructions to employees, along with establishing forums for questions to be asked and addressed;
  • Testing, Governance and Oversight of the Overall COVID-19 Plan

In addition to operational planning, a separate letter issued by the Department requires institutions to additionally provide a plan “regarding managing the potential financial risk arising from COVID-19.” Such financial risk management plans must assess credit exposure to counterparties impacted by COVID-19 (potentially including stress testing or sensitivity analysis of loan portfolios); assess the valuation of assets impacted by COVID-19; assess overall financial impacts on earnings, profits, capital and liquidity; assess the credit risk ratings of the customers, counterparties and business sectors impacted by COVID-19; and assess “reasonable and prudent steps to assist those adversely impacted by COVID-19.”

The Department has issued a separate letter for institutions engaged in virtual currency activity, and requires operational and financial planning for these businesses as well. Finally, the Department issued a fourth letter on March 10 encouraging banks, credit unions and lenders to “consider all reasonable and prudent steps to assist businesses that have been adversely impacted by COVID-19,” including waiving fees, easing credit terms, and offering payment accommodations.

If you have any questions regarding the development of this alert or crafting responses to the NYDFS, please contact Jim Harvey, Nanci Weissgold, Amy Mushahwar, or Michael Young.

Coronavirus and Securitization: Disclosure and Diligence Issues

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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

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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

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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.