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VA Issues Guidance on Processing Assumptions with Secondary Financing

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What Happened?

On August 11, 2024 the Department of Veterans Affairs (the “VA”) released Circular 26-24-17, clarifying how a servicer should process an assumption when there is secondary financing.  Significantly, the VA clarified an open question of whether a junior mortgage obtained simultaneously with the assumption of a first-lien VA-guaranteed loan must also be assumable.

Why Does it Matter?

Assumable mortgage loans have been gaining in popularity in our current high interest rate environment.  Often, however, buyers will need secondary financing to make up the difference between the mortgage to be assumed and the purchase price of the property.  There has been a lack of guidance on how to process the assumption of a first-lien VA-guaranteed loan that involves secondary financing, as well as the question of whether such secondary financing must also be an assumable loan.

VA Circular 26-24-17 clarifies that the VA does not prohibit an assumer (regardless of whether a Veteran) of a VA-guaranteed loan from obtaining secondary financing (i.e., a junior lien) in conjunction with an assumption of the VA-guaranteed loan, and that such secondary financing does not need to be an assumable mortgage.  However, if the secondary financing is not assumable, “the holder of the VA-guaranteed loan should counsel the assumer that this may restrict their ability to sell the property to another creditworthy assumer through an assumption in the future.”

Additionally, to protect the VA-guaranteed loan priority, holders are expected to ensure:

  • The secondary financing is subordinate to the VA-guaranteed loan, such as through a subordination agreement.
  • Documentation exists in the loan file that provides the name of the secondary lender, the amount of the secondary borrowing, and the repayment terms of the secondary borrowing agreed to by the assumer.
  • Proceeds of the secondary financing are used for amounts due to the seller at closing as part of the assumption process or allowable closing costs.  Note, that the assumer cannot receive cash back from the secondary financing.
  • Contract terms of the secondary financing include a reasonable grace period before a late charge is assessed and, in the event of default, before the secondary lender may commence foreclosure proceedings. The interest rate can be negotiated between the assumer and the lender and can be higher than the rate on the VA-guaranteed loan.
  • Underwriting decisions include the recurring payment of any secondary financing.

What Do I Need to Do?

Servicers that process assumptions of VA-guaranteed loans should review the circular closely and ensure the requirements are implemented into servicers’ compliance management systems, as this circular took effect immediately when issued on August 11, 2024.

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.

Consumer Finance State Roundup

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The latest edition of the Consumer Finance State Roundup features recently enacted measures of potential interest from Colorado and South Carolina:

  • Colorado: Effective May 17, House Bill 24-1011 (2024 Colo. Sess. Laws 189) adds new Section  38-40-106 to the Colorado Revised Statutes addressing requirements for mortgage servicers with respect to the disbursement of insurance proceeds in connection with mortgaged residential property.

First, the new section sets forth certain actions that mortgage servicers must take regarding disbursement of insurance proceeds to borrowers.  Upon a borrower’s request, a mortgage servicer must promptly disclose to the borrower specific conditions under which it will disburse insurance proceeds to the borrower in the event a residential property subject to a mortgage is damaged or destroyed and an insurance company pays insurance proceeds to satisfy a claim for such damage or destruction.  Next, upon receipt from a borrower of a “repair plan” or a “rebuild plan” (either of which the borrower must develop in consultation with a contractor), a mortgage servicer has 30 days to approve or deny such plan.  A repair plan or rebuild plan must include specific milestones, enumerated in the new section, that require the mortgage servicer to disburse insurance proceeds in certain amounts upon meeting those milestones.

Second, immediately when it begins servicing a borrower’s mortgage and upon the borrower’s request thereafter, a mortgage servicer must disclose to the borrower the interest rate associated with the mortgage and provide the borrower with contact information of a primary point of contact for communication with the mortgage servicer.

Finally, the measure makes conforming amendments to the Non-bank Mortgage Servicers Act by adding new Section 5-21-107.5, and repeals Section 10-4-112 as it pertains to property damage and time of payment provisions.

  • South Carolina:  Effective November 21, Senate Bill 700 enacts the “South Carolina Earned Wage Access Services Act,” (the “Act”), S.C. Code Ann. §§ 39-5-810 et seq. For purposes of the Act, “earned wage access services” means “the business of providing consumer-directed wage access services [“offering or providing earned wage access services directly to consumers”] or employer-integrated wage services.” In addition to administrative provisions (e.g., application, recordkeeping, and reporting requirements), we note the following:

First, the Act requires a “provider” – a business entity that will engage in the business of providing earned wage access services to consumers – to register with the South Carolina Department of Consumer Affairs (“Department”).  However, the Act does not apply entities doing business under South Carolina or federal laws relating to banks, credit unions, savings and loan associations, savings banks, or trust companies.

Second, the Act sets forth compliance obligations for a provider.  Among other requirements, a provider must: (a) develop and implement policies and procedures to respond to questions raised by consumers and address any consumer complaints in an expedient manner; and (b) offer a consumer at least one reasonable option to obtain proceeds at no cost to the consumer, and clearly explain to the consumer how to elect such no-cost option.

Third, the Act prohibits a provider from engaging in certain conducting, such as charging a late fee, interest, or any other penalty or charge for failure to repay outstanding proceeds.

Iowa Adopts Mortgage Servicer Prudential Standards

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What Happened?

Effective July 1, Iowa House File 2392 (the “Iowa Law”) enacts mortgage servicer prudential standards (codified in Chapter 535B of the Iowa Code) that largely follow those promoted by the Conference of State Bank Supervisors (“CSBS”).

As we have previously reported, the CSBS adopted model “State Regulatory Prudential Standards for Nonbank Mortgage Servicers” (the “CSBS Standards”) in 2021.  The CSBS Standards address financial condition and corporate governance requirements for certain mortgage servicers.

Why Is It Important?

Following the CSBS Standards, the Iowa Law’s requirements apply to a “covered institution.”  A “covered institution” services or subservices at least 2,000 residential mortgage loans (excluding whole loans owned and loans being interim serviced prior to sale) as of the most recent calendar year end as reported on the NMLS mortgage call report.  For entities within a holding company or an affiliated group of companies, the Iowa Law’s requirements apply at the covered institution level.

Financial Condition:

The Iowa Law requires a covered institution to meet specified financial condition standards. First, a covered institution must maintain capital and liquidity as set forth in new Section 535B.24.  Second, a covered institution must maintain written policies and procedures necessary to implement that section’s capital, operating liquidity, servicing liquidity requirements.

Third, a covered institution must maintain sufficient allowable assets for operating liquidity, in addition to amounts required for servicing liquidity.  Fourth, a covered institution must develop, establish, and implement written plans, policies and procedures, utilizing sustainable documented methodologies to maintain operating liquidity.  Finally, a covered institution must have a sound written cash management plan and a sound written business operating plan (commensurate with the entity’s complexity) that ensures normal business operations.

The financial condition standards do not apply to servicers that solely own or conduct servicing on reverse annuity mortgage loans, or to a covered institution’s  reverse annuity mortgage loan portfolio.

Corporate Governance:

The Iowa Law also requires a covered institution to comply with enumerated corporate governance requirements. First, a covered institution must establish and maintain a board of directors (or equivalent body).  The board’s responsibilities include: (a) establishing a written corporate governance framework that includes appropriate internal controls to monitor and assessing compliance with the corporate governance framework; (b)  monitoring and ensuring that the covered institution complies with the corporate governance framework and with the Iowa Law’s requirements; and (c) ensuring that the covered institution establishes and maintains a risk management program that identifies, measures, monitors, and controls risk commensurate with the covered institution’s size and complexity.

Second, new Section 535B.25 enumerates criteria for a covered institution’s risk management program (to include addressing the potential that a borrower or counterparty fails to perform on an obligation). Third, the Iowa Law requires a covered institution to undergo an annual external audit (including an evaluation of the entity’s internal control structure, a review of the entity’s annual financial statements of the company, and a computation of the entity’s tangible net worth).

Fourth, the Iowa law requires a covered institution to conduct an annual risk management assessment that concludes with a formal report to the board of directors. The risk management assessment must include findings and action taken to address each issue. Additionally, a covered institution must maintain ongoing documentation of risk management activities and include the documentation in its risk management assessment.

What Do I Need to Do?

Mortgage servicers subject to the Iowa Law should review the new standards and ensure that their business practices are compliant.  We will continue to monitor other states for adoption of their own versions of the CSBS Standards.