Alston & Bird Consumer Finance Blog

Mortgage Loans

HUD Issues Guidance on Appraisal Reviews and Reconsiderations of Value

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What Happened?

Continuing its focus on appraisal bias, the U.S. Department of Housing and Urban Development (“HUD”) issued new guidance to Federal Housing Administration (“FHA”) mortgagees regarding appraisal reviews and reconsiderations of value (“ROVs”).  On May 1, HUD issued Mortgagee Letter 2024-07 (the “Letter”), announcing updates to the FHA Single Family Housing Policy Handbook (Handbook 4000.1), finalizing a proposal that outlines when a borrower may request an ROV and how the lender must respond.  The Mortgagee Letter includes substantially identical provisions applicable to FHA-insured forward and HECM (reverse) mortgage loans.

Why Is It Important?

Combatting appraisal bias has been a federal government priority since the 2021 announcement of the Interagency Task Force on Property Appraisal and Valuation Equity (“PAVE”).  As part of the PAVE efforts (as we previously reported), HUD published a draft version of the Letter (Borrower Request for Review of Appraisal Results) for public comment.  In the proposal, HUD sought comment on (among other issues) when material deficiencies in the appraisal process may merit a second appraisal and/or permit a borrower to request an ROV.  The Mortgagee Letter finalizes that proposed guidance, incorporating feedback received.

First, HUD has amended the criteria for determining whether a deficiency in an appraisal is “material.” In addition to having “a direct impact on value and marketability,” a material deficiency may be one that “indicates a potential violation of fair housing laws or professional standards related to nondiscrimination” (such as the USPAP Ethics Rule).  As an example of such deficiency, the amended Handbook will include “statements related to characteristics of a protected class,” unless the consideration is permitted by fair housing laws.

Second, HUD has clarified that when the nature of a material deficiency is such that the appraiser cannot resolve it, the underwriter may forgo communication with the appraiser before ordering a second appraisal.  If a mortgagee orders a second appraisal because of material deficiencies, it must report the deficient appraisal to the relevant state regulator (the appraisal board or equivalent).

Third, HUD has updated its requirements for appraisal review as they relate to the criteria for determining the acceptability of a property.  As in its proposed version, the Letter requires a mortgagee to ensure that its underwriters “review the appraisal and determine that it is complete, accurate, and provides a credible analysis of the marketability and value of the Property.”  The mortgagee must also ensure that as part of such review, the underwriter is able to identify appraisal deficiencies, including discriminatory practices.  The underwriter must remediate such deficiencies by: (a) requesting that the appraiser provide a correction, explanation, or substantiation (as appropriate); (b) requesting an ROV; and/or (c) ordering a second appraisal.

Fourth, HUD has added ROV requirements to its general property acceptability criteria.  When communicating with an appraiser regarding an ROV, the Letter requires the underwriter to: (a) include a description of the areas in the appraisal report and the additional information that require a response from the appraiser; (b) provide, as available, detailed information, data, or relevant comparables; (c) only include comparables that are relevant as of the appraisal’s effective date; and (d) include a maximum of five alternate comparables.  The appraiser must include his or her response in a revised version of the appraisal, and the mortgagee may not charge the borrower for costs associated with the ROV process.

Further, the Letter requires each mortgagee to establish a process for a borrower-initiated ROV request (which an underwriter must assess for applicability, and relevance and appropriateness of information, before communicating to the appraiser).  The Letter requires a mortgagee’s process for borrower-initiated ROVs to include: (a) the provision of a disclosure regarding the process, both at application and upon delivery of the appraisal report to the borrower; (b) specification in such disclosure of the process for submitting an ROV request, including any requirements for or limitations on supporting information; and (c) the establishment of protocols for communication with the borrower regarding the request throughout the ROV process.

Finally, the Letter requires a mortgagee to include in its Quality Control Plan standards for both the appraisal review and the ROV process.

What Do I Need to Do?

Mortgagees of FHA-insured loans have until September 2 to implement the Letter’s requirements (for FHA case numbers assigned on or after that date). However, given that early adoption is permitted, lenders should review the new requirements against their current practices to ensure these requirements are appropriately incorporated into a mortgagee’s policies and procedures and its vendor management oversight program (to the extent the mortgagee utilizes appraisal management companies).

Large Nonbank Ginnie Mae Issuers: Ginnie Mae Wants Your Recovery Plans

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What Happened?

Following the release of the Financial Stability Oversight Council (FSOC) Report on Nonbank Mortgage Servicing, Ginnie Mae announced in APM 24-08 that certain large nonbank Ginnie Mae Issuers will now be required to prepare and submit recovery plans to address the event of a material adverse change in business operations or failure.  Such issuers will also be required to attest to the content in the recovery plans every to two years.

Why Does it Matter?

To understand why it matters, it is important to consider some interesting statistics.  According to the recent report of FSOC (an interagency panel of regulators commissioned by the Dodd Frank Act to monitor financial stability) on nonbank mortgage servicing, the share of loans serviced by nonbank mortgage servicers for Ginnie Mae rose from 34 percent in 2014 to 83 percent in 2023.  For the last several annual reports, FSOC has highlighted the vulnerabilities of nonbank mortgage companies.  In its most recent report specific to nonbank mortgage servicing, FSOC has indicated that such concerns are becoming “more acute” because of government’s increasing exposure to nonbank mortgage companies, the strain on mortgage origination due to the high interest rate environment, and the fact that “vulnerabilities in mortgage origination can bleed into mortgage servicing.”  FSOC is particularly concerned with the ability of nonbank mortgage companies to carry out their responsibilities in times of stress and provides, in relevant part, that “[t]he federal government has an interest in addressing servicing risks due to . . . the direct responsibility for Ginnie Mae’s guarantee to bond investors.” FSOC encourages Congress to provide Ginnie Mae more tools to manage counterparty risk.  If and until that occurs, it should come as no surprise that Ginnie Mae is utilizing its existing tools for managing the failure of servicers (such as facilitating servicing transfers), by requiring its nonbank Issuers to document how they would proceed if an adverse event were to occur.

What Do I Need to Do?

First, it is important to determine if your company is subject to these new obligations.  Generally speaking, nonbank Ginnie Mae Issuers whose portfolios equal or exceed a remaining principal balance of $50 billion at the end of December 31, 2024 will be required to prepare and submit recovery plans to Ginnie Mae by no later than June 30, 2025. Of note, the requirements do not apply to bank holding companies, banks, wholly owned subsidiaries of bank holding companies that are consolidated for purposes of regulatory oversight, thrifts, savings and loan holding companies, and credit unions.

Second, it is important to start developing a plan which, at a high level, must include:

  • Business Operations Description: For business operations relevant to the Ginnie Mae MBS Program (i.e., single-family, multi-family, manufactured housing and HECM), the plan must provide a detailed description of the company’s corporate structure, identify the interconnections and interdependencies among the company and its key stakeholders, related financial entities, and critical operations of the core business. The plan must also identify major counterparties, to whom the company had pledged MBS collateral, and the locations of its servicing operations.
  • Information Systems: In the event that Ginnie Mae must complete a servicing transfer, it is requiring companies to provide a detailed inventory and description of all key management information systems and applications in servicing Ginnie Mae loans along with a mapping of such systems and a description of how ancillary systems feed into the core servicing system.
  • Recovery Planning: Companies will need to consider and respond to a series of questions including but not limited to, providing a general framework for the order in which the company’s assets would be liquidated in the event of a material adverse event, identifying whether funding has been set aside to continue operations for a certain period. Ginnie Mae also requires how intercompany services would continue under such circumstances and to provide excerpts of its business continuity plan relevant to this recovery planning exercise.
  • Current Documentation: Ginnie Mae requires the plan to identify senior management official who will serve as a point of contact and a vendor directory for material vendors.

While the deadline for submitting recovery plans to Ginnie Mae is June 30, 2025, it is not too early to start gathering all the stakeholders, calendaring the deadline, and starting the framework for a thoughtful plan.

Appraisal Bias Settlement: Potential Roadmap

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What Happened?

The lender and consumers reached a settlement in an appraisal bias case, Nathan Connolly and Shani Mott v. Shane Lanham, 20/20 Valuations, LLC, and loanDepot.com, LLC, filed in Maryland District Court, that gained the attention of the CFPB and DOJ. While some of the terms in the settlement are already industry standard, there appear to be some newer obligations that could be a template for other lenders to follow.

Why it Matters?

The settlement is important – both for what it does and what it doesn’t do. Unfortunately, the settlement does not address the question of whether a lender is responsible for the actions of an appraiser who is neither an employee nor an agent of the lender.

By way of background, in response to the Great Financial Crisis, the Dodd-Frank Act established new rules to ensure appraisal independence and address issues of inflated appraisals or overvaluation. More recently, however, partially due to changes in the market, consumers have lodged complaints of undervaluation, alleging that discrimination resulted in the appraisal coming in too low.

Given this increase in complaints and the Administration’s focus on racial equity, regulators have been grappling with how best to address and eliminate appraisal bias. Prior to the settlement, the CFPB and DOJ jointly made arguments in a statement of interest that would hold lenders liable for the actions of an appraiser who is neither an employee nor an agent of the lender.

In response, the MBA issued an amicus brief requesting that the Court recognize that there is no existing legal authority to hold a lender liable for the alleged actions of an independent appraiser. The resulting settlement is silent on this point.

The settlement does, however, impose several obligations on the lender and its and appraisal management companies (AMCs), providing insight into what the mortgage industry could do to combat appraisal bias.

In particular, the settlement requires mortgage loan applications be provided with information on how to raise concerns with a valuation sufficiently early in the valuation process so that issues or errors can be resolved before a final decision on the application is made, including:

  • The right to request a reconsideration of value (ROV) as soon as possible;
  • A description of the process to obtain an ROV (which may not create unreasonable barriers or discourage applicants from making ROV requests) and a description of the lender’s evaluation process;
  • If the ROV is denied or the value is unchanged, a written explanation of the lender’s evaluation of the submitted material;
  • The standards that trigger a second appraisal; and
  • The applicant’s right to file a complaint with the CFPB or HUD, as part of the ROV process.

Further, the settlement requires the lender to:

  • Conduct statistical analysis tracking appraisal outcomes by protected class and neighborhood demographics including whether the loan was denied, whether a second appraisal was ordered, and whether there was a change in the valuation as a result of the ROV process. Such analysis must track individual appraisers including appraisal outcomes, ROV requests, and bias complaints.
  • Not utilize appraisers who, according to the statistical analysis, received multiple complaints from minority applicants in minority neighborhoods alleging appraisal bias, or who have a pattern of undervaluing homes owned by minority applicants or homes in minority neighborhoods, or who have been found to have discriminated in an appraisal.
  • Clearly outline internal stakeholder roles and responsibilities for processing an ROV request.
  • Ensure that ROV requests of valuation bias or discrimination complaints across all relevant business channels are escalated to the appropriate channel for research or a response.
  • Adhere to ROV timelines for certain milestones.
  • Review appraiser response to ROV requests for completeness, accuracy, and indicia of bias and discrimination.
  • Establish standards for offering a second appraisal which at a minimum must include when the first appraisal has indicia of bias or discrimination is otherwise defective.
  • Ensure that the applicant’s interest rate will remain locked during the ROV process.
  • Ensure that ensure applicants are not charged for the cost of an ROV or second appraisal.
  • Include on its website educational information on how to understand an appraisal report and contact information for questions on the appraisal report.
  • Update its fair and responsible lending policy to explicitly prohibit discrimination in violation of state and federal fair lending laws on the basis of race, color, religion, sex, familial status, national origin, disability, marital status, or age.
  • Provide training annually and for new employees on discrimination in residential mortgage lending and appraisals, and on all policies related to the ROV process, appraisal reviews, and the use of value adjustments.
  • Not utilize appraisers who previously were found by a regulatory body or court of law to have discriminated in an appraisal.

Finally, the settlement requires that AMCs and appraisers doing business with the lender contractually agree to:

  • Represent that appraisers will receive fair lending training; and
  • Certify that appraisers have not been subject to any adverse finding related to appraisal bias or discrimination, or list or describe any findings.

What to do now?

Lenders should carefully review the settlement and compare it to existing policies and procedures. While the settlement is only binding on the parties to the agreement, others should take interest. Historically, lenders conduct fair lending statistical testing for underwriting, pricing, and redlining risk. It might be time to consider adding appraisal risk.

FHA and VA Announce New Loss Mitigation Options

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What Happened?

Both the FHA and VA have established new loss mitigation options to provide payment reduction to delinquent borrowers.  On February 21, 2024, the Federal Housing Administration (“FHA”) within the U.S. Department of Housing and Urban Development (“HUD”) issued a new mortgagee letter (ML 2024-02) which, among other things, establishes the Payment Supplement loss mitigation option for all FHA-insured Title II Single-Family forward mortgage loans (the “Payment Supplement”) and also extends FHA’s COVID-19 Recovery Options through April 30, 2025. The provisions of ML 2024-02 may be implemented starting May 1, 2024 but must be implemented no later than January 1, 2025. The Payment Supplement will bring a borrower’s mortgage current and temporarily reduce their monthly mortgage payment without requiring a modification.

And, on April 10, 2024 , the U.S. Department of Veterans Affairs (“VA”) announced the release of its much-anticipated Veterans Affairs Servicing Purchase (“VASP”) program, which is a new, last-resort tool in the VA’s suite of home retention options for eligible veterans, active-duty servicemembers, and surviving spouses with VA-guaranteed home loans who are experiencing severe financial hardship. The VASP program will take effect beginning on May 31, 2024.

Why Does it Matter?

FHA’s Payment Supplement

ML 2024-02 establishes the Payment Supplement as a new loss mitigation option to be added to FHA’s current loss mitigation waterfall. Specifically, if a servicer is unable to achieve the target payment reduction under FHA’s current COVID-19 Recovery Modification option, the mortgage must review the borrower for the Payment Supplement. The Payment Supplement is a loss mitigation option that utilizes Partial Claim funds to bring a delinquent mortgage current and couples it with the subsequent provision of a Monthly Principal Reduction (“MoPR”) that is applied toward the borrower’s principal due each month for a period of 36 months to provide payment relief without having to permanently modify the borrower’s mortgage loan. The maximum MoPR is the lesser of a 25 percent principal and interest reduction for 36 months, or the principal portion of the monthly mortgage payment as of the date the Payment Supplement period begins.

The Payment Supplement will temporarily reduce an eligible borrower’s monthly mortgage payment for a period of three years, without requiring modification of the borrower’s mortgage loan. At the end of the three-year period, the borrower will be responsible for resuming payment of the full monthly principal and interest amount. A borrower is not eligible for a new Payment Supplement until 36 months after the date the borrower previously executed Payment Supplement documents.

To be eligible for the Payment Supplement, servicers must ensure that:

  • that at least three or more full monthly payments are due and unpaid;
  • the mortgage is a fixed rate mortgage;
  • sufficient Partial Claim funds are available to bring the mortgage current and to fund the MoPR;
  • the borrower meets the requirements for loss mitigation during bankruptcy proceedings set forth in Section III.A.2.i.viii of FHA Single-Family Handbook 4000.1;
  • the principal portion of the borrower’s first monthly mortgage payment after the mortgage is brought current will be greater than or equal to a “Minimum MoPR” which must be equal to or greater than 5 percent of the principal and interest portion of the borrower’s monthly mortgage payment, and may not be less than $20.00 per month, as of the date the Payment Supplement period begins;
  • the MoPR does not exceed the lesser of a 25% principal and interest reduction for three years or the principal portion of the monthly mortgage payment as of the date the Payment Supplement period begins; and
  • the borrower indicates they have the ability to make their portion of the monthly mortgage payment after the MoPR is applied (servicers are not required to obtain income documentation from the borrower).

Servicers are responsible for making monthly disbursements of the MoPR from a Payment Supplement Account, which is a separate, non-interest bearing, insured custodial account that holds the balance of the funds paid by FHA for the purpose of implementing the Payment Supplement, and which must segregated from funds associated with the FHA-insured mortgage, including escrow funds, and any funds held in accounts restricted by agreements with Ginnie Mae. Neither the servicer nor the borrower has any discretion in how the Payment Supplement funds are used or applied.

Borrowers will be required to execute a non-interest-bearing Note, Subordinate Mortgage, and a Payment Supplement Agreement, which is a rider to and is incorporated by reference into the Payment Supplement promissory Note, given in favor of HUD, to secure the Partial Claim funds utilized and the amount of the MoPR applied toward the borrower’s principal during the 36-month period. The Note and Subordinate Mortgage do not require repayment until maturity of the mortgage, sale or transfer of the property, payoff of the mortgage, or termination of FHA insurance on the mortgage.

After the Payment Supplement is finalized, servicers must send borrowers written disclosures annually and 60-90 days before the expiration of the Payment Supplement period. ML 2024-02 also sets forth servicers’ obligations if a borrower defaults during the Payment Supplement period.

Contemporaneous with the publication of ML 2024-02, HUD published the following model documents necessary to complete a Payment Supplement: (1) Payment Supplement Promissory Note and Security Instrument, (2) Payment Supplement Agreement Rider, (3) Annual Payment Supplement Disclosure, and (4) Final Payment Supplement Disclosure. However, servicers will need to ensure these model documents comply with applicable state law.

Given that the Payment Supplement only provides temporary relief, it is likely that borrowers will experience “payment shock” at the end of the Payment Supplement period. HUD has indicated that it is aware of this risk and intends to assess this issue on an ongoing basis as borrowers begin to reach the end of their Payment Supplement period to help inform future updates to FHA loss mitigation.

VA’s VASP Program

Effective May 31, 2024, VASP will be added as the final home retention option on the VA Home Retention Waterfall where the VA may elect to purchase a loan from the servicer under an expediated basis after the servicer evaluates the loans and certain criteria are met.  Unlike a traditional VA Purchase, a trial payment period may also be required before VA purchases the loan.

Importantly, a borrower cannot elect to use the VASP program. Rather, servicers must follow the VA’s home retention waterfall to determine the most appropriate home retention option. If the waterfall leads to VASP, then the servicer must determine if certain qualifying loan criteria are met, including:

  • the loan is between 3 to 60-months delinquent on the date the servicer submits to VALERI either the VASP TPP event or VASP with No TPP event;
  • the property is owner-occupied;
  • none of the obligors are in active bankruptcy at the time of the applicable VASP event;
  • the reason for default has been resolved and the borrower has indicated they can resume scheduled payments;
  • the loan is in first-lien position and is not otherwise encumbered by any liens or judgments that would jeopardize VA’s first-lien position;
  • the borrower has made at least six monthly payments on the loan since origination;
  • the borrower is the property’s current legal owner of record; and
  • the borrower and all other obligors agree to the terms of the VASP modification.

After determining that a loan qualifies for VASP, the servicer must determine the appropriate terms that may be offered to the borrower. Until further notice, all VASP loans will be modified at a fixed rate of 2.5% interest, with either a 360-month term or, if this does not realize at least a 20% reduction in the principal and interest payment, a 480-month term. Borrowers who cannot afford to resume monthly payments at the 480-month term are to be evaluated for and offered any appropriate alternatives to foreclosure. A three-payment trial payment plan will be required if (i) the loans is 24 months or more delinquent, or (ii) the principal and interest portion of the monthly payment is not reduced by at least 20%. Borrowers who fail three trial payment plans during a single default episode are no longer eligible for VASP.

Once VA has certified the VASP payment, servicers have 60 days to complete a standard transfer to VA’s contractor, after which the servicer must report the transfer event in VALERI.

Importantly, servicers that fail to properly evaluate the loan in accordance with VA’s requirements may be subject to enforcement action and/or refusal by VA to either temporarily or permanently guarantee or insure any loans made by such servicer and may bar such servicer from servicing or acquiring guaranteed loans. The risk of enforcement is exacerbated by the VASP program’s technical requirements, which may cause operational challenges for servicers.

What Do I Need to Do?

FHA’s Payment Supplement and VA’s VASP programs both have relatively short implementation timelines but will likely require substantial effort to operationalize given their technical requirements.  Therefore, servicers of FHA-insured and/or VA-guaranteed mortgage loans should begin reviewing the requirements of both programs now, as applicable, and ensure that they make any necessary updates to policies, procedures, systems, training, and other controls to ensure compliance with these programs once they take effect. Alston & Bird’s Consumer Financial Services team is well-versed in these programs and is happy to assist with such a review.

CFPB and FTC Amicus Brief Signals Stance on “Pay-to-Pay” Fees under FDCPA

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What Happened?

On February 27, the Consumer Finance Protection Bureau (CFPB) and the Federal Trade Commission (FTC) filed an amicus brief in the 11th Circuit case Glover and Booze v. Ocwen Loan Servicing, LLC arguing that certain convenience fees charged by mortgage servicer debt collectors are prohibited by the Fair Debt Collection Practices Act (FDCPA).  This brief comes on the heels of an amicus brief Alston & Bird LLP filed on behalf of the Mortgage Bankers Association (MBA).  In its brief, the MBA urged the 11th Circuit to uphold the legality of the fees at issue.

While litigation surrounding convenience fees has spiked in recent years, there is no consensus on whether convenience fees violate the FDCPA.  Federal courts split on the issue, as there is little guidance at the circuit court level, and the issue before the 11th Circuit is one of first impression.  Consequently, the 11th Circuit’s ruling could significantly impact what fees a debt collector is permitted to charge, both within that circuit and nationwide.

Why is it Important?

Convenience fees or what the agencies refer to as “pay-to-pay” fees are the fees charged by servicers to borrowers for the use of expedited payment methods like paying online or over the phone.  Borrowers have free alternative payment methods available (e.g., mailing a check) but choose to pay for the convenience of a faster payment method.

Section 1692f(1) of the FDCPA provides that a “debt collector may not use unfair or unconscionable means to collect or attempt to collect any debt,” including the “collection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law.”  The CFPB and FTC argues that Section 1692f(1)’s prohibition extends to the collection of pay-to-pay fees by debt collectors unless such fees are expressly authorized by the agreement creating the debt or affirmatively authorized by law.

First, the agencies contend that pay-to-pay fees fit squarely with the provision’s prohibition on collecting “any amount” in connection with a debt and that charging this fee constitutes a “collection” under the FDCPA.  Specifically, the agencies attempt to counter Ocwen’s argument that the fees in question are not “amounts” covered by Section 1692f(1) because the provision is limited to amounts “incidental to” the underlying debt. They argue that fees need not be “incidental to” the debt in order to fall within the scope of Section 1692f(1). In making this point, the agencies claim the term “including” as used is the provision’s parenthetical suggests that the list of examples is not an exhaustive list of all the “amounts” covered by the provision.  Further, the agencies attempt to counter Ocwen’s argument that a “collection” under the FDCPA refers only to the demand for payment of an amount owed (i.e., a debt). They argue that Ocwen’s understanding of “collects” is contrary to the plain meaning of the word; rather, the scope of Section 1692f(1) is much broader and encompasses collection of any amount , not just those which are owed.

Next, focusing on the FDCPA’s exception for fees “permitted by law,” the agencies contend that a fee is not permitted by law if it is authorized by a valid contract (that implicitly authorizes the fee as a matter of state common law). The agencies suggest if such fees could be authorized by any valid agreement, the first category of collectable fees defined by Section 1692(f)(1)—those “expressly authorized by the agreement creating the debt”—would be superfluous. Lastly, the Agencies argue neither the Electronic Funds Transfer Act nor the Truth in Lending Act – the two federal laws Ocwen relies on in its argument – affirmatively authorizes pay-to-pay fees.

What Do You Need to Do?

Stay tuned. The 11th Circuit has jurisdiction over federal cases originating in Alabama, Florida, and Georgia. Its ruling is likely to have a significant impact on whether debt collectors may charge convenience fees to borrowers in those states, and it could be cited as persuasive precedent in courts nationwide.