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House Financial Services Committee Subcommittee on Oversight and Investigations Holds Hearing on Mortgage Servicers and CARES Act Implementation

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A&B Abstract:

 On July 16, 2020, the U.S. House Committee on Financial Services’ (the “Committee”) Subcommittee on Oversight and Investigations (the “Subcommittee”) held a hearing to discuss mortgage servicers and their implementation of the Coronavirus Aid, Relief, and Economic Stability Act (“CARES Act”). On May 4, 2020, Chairwoman of the Committee, Maxine Waters, sent a request for information (“RFI”) to eleven servicers, requesting information on their forbearance procedures and overall compliance with the CARES Act. The hearing focused on the data received through the RFI, as well as questions directed to witnesses regarding how COVID-19 has affected vulnerable communities and what additional steps Congress should take to provide borrowers with further relief.

Implementation of the CARES Act

 Subcommittee Chairman, Al Green, opened the hearing by noting that the information received from the eleven servicers in response to the Committee’s RFI indicated that over two million forbearance requests had been received since March 27, 2020.  However, Subcommittee Chairman Green raised concerns that some borrowers may not have been made aware of their right to the full 180 days (plus an additional 180 days) of forbearance provided under the CARES Act. Ranking Member Andy Barr acknowledged that mortgage servicers experienced “hiccups” in implementing the CARES Act’s forbearance and foreclosure provisions, but noted that the data received from the eleven servicers suggested that servicers were generally doing a “good job” in implementing and complying with the CARES Act.

Committee Chairwoman Waters and Subcommittee Chairman Al Green identified areas where servicers struggled to effectively implement the CARES Act’s protections. Specifically, both the Committee’s majority staff memorandum and Subcommittee Chairman Green noted that, in some cases, servicers failed to properly offer or inform borrowers about the full 180-day initial forbearance period available to borrowers under the CARES Act and only offered initial forbearance of 90-days.

Subcommittee Chairman Green noted that he believed the intent of the CARES Act was to ensure borrowers receive the full 180-day initial forbearance period, with the right to shorten forbearance upon request. Additionally, Chairman Green noted that in certain cases servicers advised borrowers that a lump sum repayment would be required at the end of the forbearance period, which could discourage borrowers from taking advantage of the CARES Act’s forbearance protections, and is inconsistent with federal agency guidance prohibiting servicers from requiring a lump sum repayment. That said, Representative Nydia Velazquez acknowledged that a HUD Office of Inspector General report found that the FHA may have provided incomplete, inconsistent data and suggested that additional guidance from the FHA is needed.  A similar sentiment was echoed in the Committee’s majority staff memorandum, wherein the majority staff noted that “Fannie Mae and Freddie Mac have at times provided inconsistent and potentially confusing guidance regarding the CARES Act forbearance protections.”

Witnesses Marcia Griffin, founder and president of Homefree USA, and Donnell Williams, President of the National Association of Real Estate Brokers, acknowledged that servicers’ implementation of the CARES Act has improved since the start of the pandemic, but also noted certain areas for improvement.  For example,  Ms. Griffin and Mr. Williams both noted that servicers experienced a delay in implementing the CARES Act and in providing appropriate training to employees regarding the CARES Act’s protections as well as the post-forbearance loss mitigation options that would be available to impacted borrowers exiting forbearance. Furthermore, Ms. Griffin and Mr. Williams advocated for better training for customer service employees, more support for housing counselors, and more extensive borrower outreach.

Post Forbearance Measures and the Health Economic Recovery Omnibus Emergency Solutions (“HEROES”) Act

Members of the Subcommittee also questioned witnesses regarding what further measures should be taken by Congress to provide additional relief to impacted borrowers to ensure they can remain in their homes after their forbearance ends. Ranking Member Andy Barr noted that the HEROES Act, recently passed by the House, would require automatic forbearance and mandate certain post-forbearance loss mitigation options.  However, both he and Representative Lee Zeldin cautioned that mandating certain loss mitigation options may impact servicers’ ability to work effectively with impacted borrowers, and that it is best for servicers to speak with borrowers to determine the best option available for each borrower. Representative Rashida Tlaib and Subcommittee Chairman Green also indicated that Congress is considering whether to provide additional direct payments to borrowers.  Representative Zeldin noted that while mortgage servicers have a vital role to play in helping impacted borrowers, they cannot shoulder all of the associated financial burden without increased liquidity.

Alys Cohen, Staff Attorney for the National Consumer Law Center, supported providing protections similar to the CARES Act for borrowers with non-federally backed mortgages, including a requirement to provide automatic forbearance.  However, Dr. DeMarco cautioned that automatic forbearance may not be an appropriate tool. Dr. DeMarco indicated that rather than automatic forbearance, borrowers should communicate with their servicers before being put into forbearance so that the servicer and borrower can work together to determine the best path forward. While Ms. Cohen agreed that borrowers should try to speak with their servicers, she noted that more borrowers are missing payments than requesting forbearance.

Representative William Timmons asked witnesses to comment on whether certain temporary policies adopted in response to COVID-19, such as remote online notarization and additional flexibility regarding appraisals, should be made permanent.  Mr. Williams indicated, without specificity, that some of these temporary policies should be made permanent. Dr. Demarco supported extending the temporary flexibility around remote online notarization. Finally, Ms. Cohen noted that there was room for these temporary polices to be made permanent, but that appraisals should remain accurate.

Addressing Racial Disparities

Certain members of the Subcommittee’s majority caucus, including Subcommittee Chairman Green, Committee Chairwoman Waters, and Representative Velazquez highlighted the fact that COVID-19 has had a disproportionate impact on Black and Latinx communities. Of the witnesses, Ms. Cohen and Mr. Williams, in particular, suggested that people of color were less likely to receive a forbearance than their white counterparts. For example, Mr. Williams noted that there is currently a 13% gap between Black and White homeowners who receive forbearance. Ms. Cohen, Ms. Griffin, and Mr. Williams all noted that more communication from the federal government regarding forbearance protections, and additional funding to support Black and Latinx communities, such as funding for legal aid and housing counseling services, would help mitigate some of this apparent disparity.

Takeaway

The Subcommittee hearing suggested that servicers have been largely effective in implementing the CARES Act and communicating with borrowers, but that additional work is still needed.  Subcommittee Chairman Green, in particular, noted that additional legislation as well as further communication by servicers is needed to ensure all borrowers receive clear and consistent guidance regarding available relief options. As the COVID-19 pandemic continues, it will be interesting to see what further legislation is promulgated to provide additional relief to borrowers facing financial hardship due to COVID-19.

State Courts Require Strict Compliance with Foreclosure Procedures

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A&B ABstract: In response to the economic fallout of the COVID-19 pandemic, state executives and legislatures have seriously restricted residential foreclosures and evictions.  These restrictions have included requiring forbearance for private mortgage loans and placing moratoria on foreclosures.

While these restrictions generally apply to residential mortgages lapsed in the wake of the global pandemic, they do not protect consumers who were facing foreclosure prior to the crisis.  To pick up the slack in this area, various state judiciaries are tightening the reigns on mortgage servicers, demanding servicers’ strict compliance with the notice provisions of mortgage agreements and state foreclosure procedures.  Courts have even gone so far as to void foreclosure actions where the breach notices sent to consumers were technically deficient but substantively sound.

Alabama Court of Civil Appeals Decision

In June 2020, the Alabama Court of Civil Appeals voided a foreclosure sale because of a servicer’s failure to strictly comply with the notice provision in the mortgage agreement.  In Barnes v. U.S. Bank N.A., as Trustee for NRZ Pass-Through Trust V, No. CV-17-901127, the mortgage agreement required any notice of default to inform the borrower of “the right to bring a court action to assert the non-existence of a default or any other defense of Borrower to acceleration and sale” of the mortgaged property.

The servicer’s notice, however, employed equivocal language concerning the borrower’s rights, informing the borrower only that they “may have the right” to challenge the default.  As a result, the court found the foreclosure sale was void, cementing the law in Alabama that a defect in the form of a default notice vitiates the legality of an ensuing foreclosure.

Rhode Island Supreme Court Decision:

Similarly in June 2020, in a matter of first impression, the Rhode Island Supreme Court vacated a foreclosure because the notice of default did not strictly comply with the requirements set forth in the mortgage agreement.  In Woel v. Christiana Trust, as Trustee for Stanwhich Mortgage Loan Trust Series 2017-17, et al., No. 2018-347-Appeal (PM 16-921), the mortgage agreement contained a nonuniform covenant developed for Rhode Island mortgages.  According to the covenant, in the event of a default, the mortgagee must provide a notice of default informing the borrower of “the right to reinstate after acceleration.”

The borrower defaulted and received a notice of default informing the borrower that they had “the right to cure the default after acceleration,” not the specific right to reinstate.  Based on this minor discrepancy in language, the Rhode Island Court concluded that there had not been strict compliance with the covenant’s notice requirements, rendering the foreclosure a nullity.

New York Appellate Division Decision:

Finally, in July 2020, the Second Department of the New York Appellate Division reversed a judgment of foreclosure and sale because the notice the borrowers received did not strictly comply with New York’s Real Property Actions and Proceeds Law (“RPAPL”).  The version of RPAPL at issue required notices to provide a list of five housing counseling agencies serving the region where the borrowers reside.  The notice to the borrower, however, included three agencies serving the region and two agencies serving different regions.

Even though there was no evidence that any of the three compliant agencies denied the borrowers service, the Appellate Division held that under a strict compliance standard, a technical deficiency in the notice was dispositive, regardless of its substantive effect.

Takeaway:

These decisions are not necessarily groundbreaking, as courts have generally required strict compliance in the foreclosure context.  However, the above decisions indicate a growing willingness among the judiciary to prevent foreclosure on even the narrowest technical grounds.  As such, servicers should ensure that any notice of default sent to a borrower strictly complies with the terms of the mortgage agreement and state foreclosure proceedings because in a post-COVID-19 world, any technical deficiency will likely be fatal to a servicer’s efforts.

Fannie Mae Updates COVID-19 FAQ’s Related to Servicing

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A&B ABstract: On June 30, Fannie Mae updated its “COVID-19 Frequently Asked Questions” as part of an ongoing effort to provide guidance to lenders and servicers in connection with the ongoing COVID-19 national emergency.

The updates address retention workout options and incentive fees, among other topics.

Foreclosure Suspension

Fannie Mae has updated Question 3 to reflect the extension of the foreclosure moratorium through August 31, 2020, in accordance with Lender Letter 2020-02, as well as the COVID-19 payment deferral retention workout option (recently announced in Lender Letter 2020-07).  The payment deferral option would permit a forbearance of up to 12 months.

Payment Deferral

Fannie Mae has added new Question 30 to discuss the requirements for the new COVID-19 payment deferral option, including the application of additional principal payments.

The question clarifies that a servicer  must apply curtailment to the interest-bearing unpaid principal balance (UPB) if the curtailment is less than the interest-bearing UPB.  If a principal curtailment is greater than or equal to the interest-bearing UPB, the servicer must apply the curtailment to the non-interest-bearing balance, if any; and then to the interest-bearing UPB.

Claims

 Fannie Mae has added new Question 30 to clarify that a servicer can submit request for expense reimbursement through a 571 claim as soon as an expense is incurred. Although Fannie Mae does not limit the number of supplemental claims, it recommends that servicers consult the Servicing Guide E-5-01, Requesting Reimbursement for Expenses prior to submitting any request for expense reimbursement.

Incentive Fees

Addressing incentive fees, Fannie Mae has added new Questions 39 and 40.

 Question 39 addresses the eligibility of a servicer to receive incentive fees if it receives a mortgage loan from a transferor servicer.  Because incentive fees are tied to the mortgage loan (rather than the servicer), if the transferor servicer has met the cumulative cap for receiving such fees, the transferee is not eligible to receive any additional incentive fees.

Question 40 makes clear that the cap on incentive fees does not apply in connection with a servicer’s completion of a Fannie Mae Extend Modification for Disaster Relief or a Fannie Mae Cap and Extend Modification for Disaster Relief.

Takeaway

These updates to the FAQs reflect Fannie Mae’s ongoing efforts to provide needed clarification and guidance to servicers in light of the ongoing COVID-19 pandemic.  Servicers should continue to monitor Fannie Mae guidance for further updates.

Louisiana Enacts Virtual Currency Company Law

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A&B ABstract:  On June 13, Louisiana enacted a comprehensive new law imposing a licensing obligation on entities that engage in virtual currency business activity.

Effective August 1, 2020, House Bill 701 (the “Law”) will require the licensure of entities that engage in virtual currency business activity in Louisiana with Louisiana residents. The Law provides that an application will be provided through the Nationwide Mortgage Licensing System and Registry (“NMLS”), and we have confirmed with the regulator that the application will become live on the NMLS on August 1.

A New Licensing Obligation

The Law provides that “[a] person shall not engage in virtual currency business activity, or hold itself out as being able to engage in virtual currency business activity, with or on behalf of a resident…”

What is Virtual Currency Business Activity?

“Virtual currency business activity” means:

  1. “Exchanging, transferring, or storing virtual currency or engaging in virtual currency administration, whether directly through an agreement with a virtual currency control services vendor.
  2. Holding electronic precious metals or electronic certificates representing interests in precious metals on behalf of another person or issuing shares or electronic certificates representing interests in precious metals.
  3. Exchanging one or more digital representations of value used within one or more online games, game platforms, or family of games for either of the following:
    1. Virtual currency offered by or on behalf of the same publisher from which the original digital representation of value was received.
    2. Legal tender or bank credit outside the online game, game platform, or family of games offered by or on behalf of the same publisher from which the original digital representation of value was received.”

Exemptions/Applicability

Notably, the licensure provision excludes activity governed by the Electronic Fund Transfer Act, the Securities Exchange Act, the Commodities Exchange Act, and the Louisiana securities laws. Regulated financial institutions, attorneys providing escrow services, and title insurance companies providing escrow services are among the entities exempt from licensure.

Additionally, we note that not every virtual currency business may have to obtain a licensure under the Law. A person whose volume of virtual currency business activity in the United States dollar equivalent of virtual currency will not exceed $35,000 annually may engage in business without a license provided that they meet the statutory requirements and notify the Louisiana Office of Financial Institutions.

Enforcement/Violations

The Law grants the Office of Financial Institutions (“Office”) enforcement authority against licensees, registrants, and unlicensed persons.

First, the Office may bring an enforcement action against any such person who “materially violates any provision of this [Law], a rule adopted pursuant to the [Law], or any other law of [Louisiana] which applies to virtual currency business activity of a violator with, or on behalf of, a resident.”

Second, the Office may bring an enforcement action against such a person who “does not cooperate substantially with an investigation by the [Office], fails to pay a fee, or fails to submit a report or documentation.”

Third, the Office may bring an enforcement action against any such person who “in the conduct of its virtual currency business activity with, or on behalf, of a resident” engages in an unsafe or unsound act or practice, an unfair or deceptive act or practice, fraud or intentional misrepresentation, or misappropriation of legal tender, virtual currency, or other value held by a fiduciary, among other conduct.

Fourth, the Office may take enforcement action if a federal or state agency takes an action against the licensee, registrant, or person that would constitute an enforcement measure if the Office had taken the action.

Finally, a licensee. registrant, or unlicensed person may be subject to enforcement action for being “convicted of a crime related to its virtual currency business activity with, or on behalf of, a resident or involving fraud or felonious activity that, as determined by [the Office], makes the licensee, registrant, or person unsuitable to engage in virtual currency business activity.”

We do not note any private right of action under the Law or any remedies for consumers for a licensee that has violated any provisions of the Law.

Takeaway:

Louisiana’s passage of the Law is a state’s latest foray into cryptocurrency licensing, and signals the state’s willingness to continue to regulate cryptocurrency businesses.

Entities that will be required to obtain a license under the Law should be ready to apply on August 1, 2020, when the application becomes live on the NMLS.

An Open Letter from Richard Hays, Chairman and Managing Partner, Alston & Bird

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As Alston & Bird is pausing today for a “Day of Learning and Reflection” in observation of Juneteenth, Chairman and Managing Partner Richard Hays posted an open letter regarding recent events, and how Alston & Bird can spur lasting and meaningful change in both the firm and the communities we serve:

“As a firm with its roots in Atlanta, the cradle of the civil rights movement, we have a long history of involvement in the advancement of civil and human rights and liberties for all. We especially have a focus on supporting and promoting justice, equality, and inclusion. We are committed to do more, to be leaders through action and endurance, and to act by example, not rhetoric.”