Alston & Bird Consumer Finance Blog

Forbearance

The COVID-19 National Emergency is Ending: Are mortgage servicers ready?

A&B Abstract:

On January 30, 2023, President Biden informed Congress that the COVID-19 National Emergency (the “COVID Emergency”) will be extended beyond March 1, 2023, but that he anticipates terminating the national emergency on May 11, 2023. The White House Briefing Room reiterated the President’s position on February 10, 2023. Given the significant updates mortgage servicers made to their compliance management systems (“CMS”) to ensure compliance with the myriad of COVID-19-related laws, regulations and guidance issued in response to the pandemic, servicers should begin evaluating their CMS now to determine whether updates are necessary to minimize the risk of non-compliance and consumer harm as the COVID Emergency comes to an end. Set forth below, we discuss some of the key areas on which servicers should focus as they develop a plan for winding down COVID-19 protections.

Background

The COVID-19 pandemic created unprecedented operational challenges for mortgage servicers – challenges servicers sought to overcome through significant actions that were taken at the outset of the pandemic and over the last three years to implement the myriad of federal and state laws, regulations, and guidance that were enacted or promulgated in response to the pandemic.

Indeed, in response to the pandemic, the US Congress passed the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, Sections 4021 and 4022 of which provided certain borrowers impacted by the pandemic with certain credit reporting and mortgage-related protections.

Section 4021 of the CARES Act amended the Fair Credit Reporting Act by adding a new section providing special instructions for reporting consumer credit information to credit reporting agencies when a creditor or other furnisher offers an “accommodation” to a consumer affected by the pandemic during the “covered period,” which ends 120 days after the COVID Emergency terminates.

Section 4022 of the CARES Act granted forbearance rights and protection against foreclosure to certain borrowers with a “federally backed mortgage loan.” Specifically, during the “covered period,” a borrower with a federally backed mortgage loan who is experiencing a financial hardship that is due, directly or indirectly, to the COVID Emergency may request forbearance on their loan, regardless of delinquency status, by submitting a request to their servicer during and affirming that they are experiencing a financial hardship during the COVID Emergency. When the CARES Act was enacted, there was uncertainty in the industry as to how to define the “covered period” as the term was undefined. However, because the borrower must attest to a financial hardship during the COVID Emergency, the industry came to understand the “covered period” to be synonymous with the COVID Emergency, such that borrower requests received outside the COVID Emergency need not be granted.

Additionally, under Section 4022, a servicer of a federally backed mortgage loan were prohibited from initiating any judicial or nonjudicial foreclosure process, moving for a foreclosure judgment or order of sale, or executing a foreclosure-related eviction or foreclosure sale (except with respect to vacant and abandoned properties) through May 16, 2020.

In response to the CARES Act, mortgage servicers were inundated with directives issued by the US Department of Housing and Urban Development (“HUD”), the US Department of Veterans Affairs (“VA”), the US Department of Agriculture (“USDA”), the Consumer Financial Protection Bureau (“CFPB”), as well as the guidelines published by Fannie Mae and Freddie Mac (collectively, the “Agencies”), as the Agencies (other than the CFPB) were tasked with implementing the protections afforded by the CARES Act.  As result of these directives, servicers were required to quickly implement changes to their servicing operations, while ensuring accurate communication of such changes to its customers. For example, HUD alone issued over 20 mortgagee letters since the outset of the pandemic that were directly related to the operations of HUD-approved servicers.

In addition to the Agencies, several states either passed legislation, promulgated regulations or issued directives that mortgage servicers were required to implement. Servicers were also required to respond to the CFPB’s Prioritized Assessments, inquiries from Congress, and requests from the Agencies. Accordingly, servicers devoted substantial legal, compliance, and training resources to ensure compliance with applicable laws and requirements.

In implementing the foregoing laws and regulations, servicers made significant updates to their CMS and the various components that support an effective CMS, including, among others, policies, procedures, training, scripting, correspondence, system updates, and vendor management. Similarly, now that the COVID Emergency appears to be nearing an end, servicers should reevaluate what updates are necessary to effectively wind-down COVID-19 protections while minimizing regulatory risk and consumer harm.

Below we discuss several issues servicers should be particularly mindful of in developing a plan for winding down COVID-19 protections.

Key Areas of Focus for Servicers

Agency/GSE Guidelines: The myriad of Agency guidance issued in response to the pandemic included new and evolving requirements regarding the offering of COVID-19 Forbearance Plans, COVID-19-specific loss mitigation options, and other COVID-19-related borrower protections. For example, HUD, VA, and USDA have largely tied a borrower’s ability to request an initial COVID-19 Forbearance to the expiration of the COVID Emergency. HUD has indicated that a borrower may only request an additional forbearance extension of up to six months if the initial forbearance will be exhausted and expires during the COVID Emergency. On the other hand, Fannie Mae and Freddie Mac have previously informally indicated that servicers should continue to process borrower requests for COVID-19 Forbearances until the GSEs announce otherwise. Moreover, there is the possibility that all or some of the Agencies will expand post-forbearance COVID-19 protections to a broader class of borrowers given the apparent success of the streamlined options. On January 30, 2023, HUD issued a mortgagee letter (which was corrected and reissued on February 13th) extending its COVID-19 Recovery Loss Mitigation Options to include additional eligible borrowers, increase its COVID-19 Recovery Partial Claims, and add incentive payments to servicers. Notably, the mortgagee letter does not appear to update HUD’s existing guidance on the availability of COVID-19 Forbearance Plans, and it temporarily suspends several of HUD’s non-COVID-19 loss mitigation options, such as all FHA-HAMP options. In preparing for the end of the COVID Emergency, servicers should ensure that they identify and carefully review applicable Agency guidelines to determine what, if any, updates to existing processes are necessary.

Policies, Procedures, and Training: Whether a servicer created a specific COVID-19/CARES Act policy and/or updated its existing policies to reflect applicable COVID-19 protections, servicers must now review and update those policies to ensure they do not inaccurately reflect requirements no longer in effect as a result of the termination of the COVID Emergency. As a reminder, Regulation X requires servicers to maintain policies and procedures that are reasonably designed to achieve the objectives in 12 C.F.R. § 1024.38. Commentary to Regulation X clarifies that “procedures” refers to the actual practices followed by the servicer. Thus, servicers should ensure that its procedures reflect its policies. It is also important that updated and accurate training and job aids are provided to servicing employees, particularly to consumer service representatives, to ensure clear, accurate, and up to date information is communicated to consumers. It’s also a good time to ensure that policies, procedures, and training reflect the expiration of certain CFPB COVID-19-related measures. For example, the enhanced live contact requirements for borrowers experiencing COVID-19 related hardships were in effect from August 31, 2021 through October 1, 2022.

Scripts, Letters and Agreements: The CFPB called for mortgage servicers to take proactive steps to assist borrowers impacted by COVID-19 including prioritizing clear communications and proactive outreach to borrowers. In response, servicers updated communications through emails, texts, letters, loss mitigation agreements, buck slips, periodic statements, and other standard communications alerting borrowers of requirements for accepting and processing requests for forbearance, approving forbearance requests, providing credit reporting accommodations, and providing information on post-forbearance loss mitigation options and foreclosure. One of the standards the CFPB uses in assessing whether an unfair, deceptive, or abusive act or practice (“UDAAP”) occurred is whether a representation, omission, act or practice is deceptive, meaning that it misleads or is likely to mislead the consumer, the consumer’s interpretation of the representation is reasonable under the circumstances, and the misleading representation, omission, act or practice is material. Thus, it is important for servicers to review their communication library to make sure outdated CARES Act and other COVID-19-related information is not included in borrower communications.

System Updates: Throughout the last three years servicers were required to implement substantial system enhancements to ensure compliance with the myriad of requirements that arose in response to the pandemic. These enhancements included, among others, stop codes to ensure compliance with applicable foreclosure moratoria; changes to loss mitigation decisioning systems to reflect new and revised loss mitigation waterfalls; updates to borrower-facing websites and interactive voice response (“IVR”) systems to provide borrowers with information on available COVID-19 protections and to facilitate a borrower’s ability to self-serve when requesting a COVID-19 Forbearance; enhancing credit reporting systems to ensure accurate credit reporting for borrowers who are provided an accommodation under the CARES Act; and implementing system updates to ensure compliance with applicable fee restrictions. Given the significant time, effort, and resources required to implement the foregoing enhancements, servicers should begin evaluating their systems now to determine what changes are necessary to reflect that some or all of these protections will no longer be in effect.

State Law: In response to the COVID-19 pandemic, several states (including but not limited to California, the District of Columbia, Maryland, Massachusetts, New York, and Oregon) enacted their own protections, most of which have since expired. Now is the time for servicers to ensure that their CMS is updated to reflect that these laws are no longer in effect.

Instructions to Service Providers: Many servicers rely on third-party service providers to provide certain support functions. During the pandemic, reliance on such service providers was even more critical as servicers worked to implement the above-referenced requirements. Such service providers include, among others, print/mail vendors, foreclosure counsel, and third-party customer support representatives. In preparing for the end of the COVID Emergency, servicers should ensure accurate and consistent instructions are provided to, and appropriate oversight is exercised over, service providers to ensure compliance with applicable law and to minimize UDAAP risk.

Takeaway

The implementation of federal and state COVID-19 protections required that servicers devote substantial time, effort, and resources to ensure consumers could avail themselves of available protections and to minimize the risk of harm. Unfortunately, when the pandemic first began, servicers did not have the luxury of time when implementing these measures. However, given that the end of the COVID Emergency is not until May 11th, servicers should utilize this time to think through what impact the termination of the emergency will have on their current processes and controls, and begin making necessary updates.

CFPB Publishes Fall 2022 Supervisory Highlights

A&B ABstract:

On November 16, 2022, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) released its Fall 2022 Supervisory Highlights (Issue 28) (the “Supervisory Highlights”), which, among other things, announces the creation of a Repeat Offender Unit and highlights supervisory observations from examinations conducted by the Bureau in the first half of 2022.  Below we discuss some of the key takeaways from the Supervisory Highlights.

The Supervisory Highlights

CFPB’s New Repeat Offender Unit

The CFPB announced the creation a Repeat Offender Unit (“ROU”) to focus its supervision on repeat offenders with the intent to recommend specific corrective actions to stop recidivist behavior. The ROU intends to engage in closer scrutiny of repeat offenders’ compliance with certain orders, along with the following activities:

  • Reviewing and monitoring the activities of repeat offenders;
  • Identifying the root cause of recurring violations;
  • Pursuing and recommending solutions and remedies that hold entities accountable for failing to consistently comply with federal consumer financial law; and
  • Designing a model for review of orders and monitoring that reduces the occurrences of repeat offenders.

The creation of the ROU is not surprising given Director Chopra’s prior statements signaling that the Bureau would focus its efforts on reining in corporate recidivism in the financial services industry. For example, in March 2022, Director Chopra delivered a speech to the University of Pennsylvania Law School, entitled Reining in Repeat Offenders, in which the Director noted that “[a]t the CFPB, we have plans to establish dedicated units in our supervision and enforcement divisions to enhance the detection of repeat offenses and corporate recidivists and to better hold them accountable…[and that] for serial offenders of federal law, the CFPB will be looking at remedies that are more structural in nature, with lower enforcement and monitoring costs…[including] seek[ing] ‘limits on the activities or functions’ of a firm for violations of laws, regulations, and orders.”

Supervisory Observations

The Supervisory Highlights identifies numerous supervisory observations pertaining to consumer reporting, debt collection, mortgage origination, mortgage servicing, and payday lending, among other topics. We discuss several of the Bureau’s notable observations below.

Consumer Reporting

With respect to credit reporting, the CFPB found violations of the Fair Credit Reporting Act and/or Regulation V involving the following issues:

  • Certain nationwide consumer reporting agencies failed to provide reports to the CFPB regarding consumer complaints received from consumers that the Bureau transmits to the credit reporting agency if those complaints are about “incomplete or inaccurate information” that a consumer “appears to have disputed” with the agency;
  • Some furnishers, including third-party debt collection furnishers, continue to: (1) inaccurately report information despite actual knowledge of errors; (2) fail to correct and update furnished information after determining such information is not complete or accurate; and (3) fail to establish and follow reasonable procedures to report the appropriate date of first delinquency on applicable accounts; and
  • Some furnishers also continue to fail to establish and implement reasonable written policies and procedures regarding the accuracy and integrity of furnished information, such as by verifying random samples of furnished information, and fail to conduct reasonable investigations of direct disputes by neglecting to review relevant information and documentation.

Debt Collection

In recent examination activity, the CFPB has identified certain violations of the Fair Debt Collection Practices Act, such as:

  • Examiners found that certain larger participant debt collectors engaged in conduct intended to harass, oppress, or abuse consumers during telephone calls by continuing to engage in conversation even after consumers stated that the communication was causing them to feel annoyed, harassed, or abused.
  • Examiners found that debt collectors engaged in improper communication with third parties about a consumer’s debt when communicating with a person who had a similar or identical name to the consumer.

Mortgage Origination

Regarding mortgage origination, the CFPB found violations of Regulation Z and deceptive acts or practices prohibited by the Consumer Financial Protection Act (“CFPA”), such as:

  • Examiners found that certain entities improperly reduced loan origination compensation based on a term of a transaction by failing to use actual costs and fee amounts that were accurate and known to loan originators at the time initial disclosures were provided to consumers. Subsequently at closing, consumers were provided a lender credit when the actual costs of certain fees exceeded the applicable tolerance thresholds, which led entities to reduce loan originator compensation after loan consummation by the amount provided in order to cure the tolerance violation. Notably, the Bureau found that in each instance, the settlement service had been performed and the loan originator knew the actual costs of those services. The loan originators, however, entered a cost that was completely unrelated to the actual charges that the loan originator knew had been incurred, resulting in information being entered that was not consistent with the best information reasonably available. Thus, examiners found that the unforeseen increase exception permitted by Regulation Z did not apply to these situations.
  • Examiners also identified a waiver provision in a loan security agreement, which was used by certain entities in one state, that was determined to be deceptive in violation of the CFPA. The waiver provided that borrowers who signed the agreement waived their right to initiate or participate in a class action. The language was found to be misleading because a reasonable consumer could understand the provision to waive their right to bring a class action on any claim, including federal claims, in federal court, which is expressly prohibited by Regulation Z.

Mortgage Servicing

The Bureau indicated that its mortgage servicing examinations focused on servicers’ actions as consumers experienced financial distress related to COVID-19. Mortgage servicing findings by the CFPB included the following:

  • Servicers engaged in abusive acts or practices by charging sizable phone payments fees when consumers were unaware of the fees’ existence and, if disclosures were provided, providing general disclosures indicating that consumers “may” incur a fee did not sufficiently inform consumers of the material costs;
  • Servicers engaged in unfair acts or practices by:
    • charging consumers fees during a CARES Act forbearance plan, in violation of the CARES Act’s prohibition on the imposition of “fees, penalties, or interest beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the terms of the mortgage contract”; and
    • failing to timely honor requests for forbearance from consumers;
  • Servicers engaged in deceptive acts or practices by misrepresenting that certain payment amounts were sufficient for consumers to accept a deferral offer at the end of their forbearance period, when in fact, they were not due to updated escrow payments; and
  • Servicers violated Regulation X by failing to maintain policies and procedures reasonably designed to:
    • inform consumers of all available loss mitigation options, which resulted in some consumers not receiving information about options, such as deferral, when exiting forbearances; and
    • properly evaluate consumers for all available loss mitigation options, resulting in improper denial of deferral options.

Payday Lending

Regarding payday lending, examiners found that some lenders failed to maintain records of call recordings that were necessary to demonstrate compliance with certain conduct provisions in consent orders, e.g., prohibiting certain misrepresentations. The consent order provisions required creation and retention of all documents and records necessary to demonstrate full compliance with all provisions of the consent orders. The Bureau determined that the failure to maintain the call recordings violated the consent orders and federal consumer financial law.

Although this finding was specific to payday lenders, it may have broader implications for entities subject to an active CFPB consent order, as the provision relied upon by the Bureau in making its finding is routinely found in CFPB orders.

Takeaway

The compliance issues noted in the Supervisory Highlights emphasize the importance of maintaining a strong and continually updated compliance management system. Entities should review the Bureau’s supervisory observations against their current policies, procedures, and processes to ensure consistency with the Bureau’s compliance expectations, and to determine whether enhancements and/or proactive consumer remediation may be appropriate. Finally, entities subject to active CFPB consent orders should pay particular attention to whether their current policies, procedures, and processes are sufficient to ensure compliance with applicable law and the terms of the consent order, in order to mitigate against the risk of being deemed a repeat offender and potentially subject to increased penalties or broader structural remedies such as “seek[ing] ‘limits on the activities or functions’ of a firm for violations of laws, regulations, and orders.”

Biden-Harris Administration Announces Extension of COVID-19 Foreclosure Moratorium

A&B Abstract:

Today, the Biden Administration announced an extension of the foreclosure moratorium for federally-backed mortgage loans (the “Presidential Announcement”). To implement the Presidential Announcement, the federal agencies (i.e., HUD/FHA, USDA, and VA) and GSEs (i.e., Fannie Mae and Freddie Mac) have announced (or are anticipated to announce) extensions of the foreclosure moratorium until July 31, 2021.

Presidential Announcement

According to the Presidential Announcement, the three federal agencies that back mortgages – the Department of Housing and Urban Development (HUD), Department of Veterans Affairs (VA), and Department of Agriculture (USDA) – will extend their respective foreclosure moratorium for one, final month, until July 31, 2021. Similarly, the Federal Housing Finance Agency (FHFA) will announce that it has extended the foreclosure moratorium for mortgages backed by Fannie Mae and Freddie Mac until July 31, 2021.

The Presidential Announcement goes on to provide that once the moratoria end, HUD, VA, and USDA will take additional steps to prevent foreclosures on mortgages backed by those agencies until borrowers are reviewed for COVID-19 streamlined loss mitigation options that are affordable, while FHFA will continue to work with Fannie Mae and Freddie Mac to ensure that borrowers are evaluated for home retention solutions prior to any referral to foreclosure.

In addition, the Presidential Announcement notes that HUD, VA, and USDA will also continue to allow homeowners who have not taken advantage of forbearance to date to enter into COVID-related forbearance through September 30, 2021, while homeowners with Fannie Mae or Freddie Mac-backed mortgages who have COVID-related hardships will also continue to be eligible for COVID-related forbearance.

Finally, the Presidential Announcement indicates that HUD, VA, and USDA will be announcing additional steps in July to offer borrowers payment reduction options that will enable more homeowners to stay in their homes.

Federal Agency and GSE Announcements

In addition to the foregoing, the USDA and the GSEs issued the following guidance today implementing the Presidential Announcement:

  • USDA:  Today, the USDA issued a brief press release announcing a one-month extension, through July 31, 2021, of the moratorium on foreclosure from properties financed by USDA Single-Family Housing Direct and Guaranteed loans. Beyond July 31, 2021, the USDA indicated that it would continue to support homeowners experiencing financial hardship due to the pandemic by making loss mitigation options available to help keep them in their homes.
  • Fannie Mae LL-2021-02:  Today, Fannie Mae updated LL-2021-02 to extend the moratorium on foreclosures with respect to Fannie Mae loans through July 31, 2021.  Specifically, servicers must continue the suspension of the following foreclosure-related activities through July 31, 2021. Servicers may not, except with respect to a vacant or abandoned property: (1) initiate any judicial or non-judicial foreclosure process, (2) move for a foreclosure judgment or order of sale, or (3) execute a foreclosure sale.  All other guidance set forth in LL-2021-02 remains the same.
  • Freddie Mac Guide Bulletin 2021-23:  Similarly, today Freddie Mac issued Guide Bulletin 2021-23, which announces an extended effective date for the COVID-19 foreclosure moratorium.  Specifically, Freddie Mac is extending the foreclosure moratorium last announced in Guide Bulletin 2021-8. Servicers must suspend all foreclosure actions, including foreclosure sales, through July 31, 2021. This includes initiation of any judicial or non-judicial foreclosure process, motion for foreclosure judgment or order of sale. This foreclosure suspension does not apply to mortgages on properties that have been determined to be vacant or abandoned.

As of today, we are not aware of any formal announcement by HUD or VA regarding the implementation of the Presidential Announcement. However, we anticipate that both HUD and VA will issue guidance consistent with the above announcement in short order.

Takeaway 

The takeaway from today’s announcements is that, except with respect to vacant and abandoned properties, all foreclosure-related activities that could constitute the initiation of any judicial or non-judicial foreclosure process, movement for a foreclosure judgement or order of sale, or execution of a foreclosure sale should continue to be paused until the expiration of the extended foreclosure moratorium.  Moreover, the Presidential Announcement suggests that additional guidance will be issued by the federal agencies permitting borrowers who have not yet taken advantage of a COVID-19 forbearance to do so through September 30, 2021 and announcing additional steps in July to offer borrowers additional payment reduction options to enable more homeowners to stay in their homes. Accordingly, servicers should continue to monitor for any additional guidance from the federal agencies and GSEs regarding the foreclosure moratorium or other COVID-19-related borrower relief.

CFPB Issues Warning to Mortgage Servicing Industry

A&B ABstract: On April 1, 2021, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) issued a Compliance Bulletin and Policy Guidance (the “Bulletin”) on the Bureau’s supervision and enforcement priorities with regard to housing insecurity in light of heightened risks to consumers needing loss mitigation assistance once COVID-19 foreclosure moratoriums and forbearances end.  The Bulletin warns mortgage servicers to begin taking appropriate steps now to prevent “a wave of avoidable foreclosures” once borrowers begin exiting COVID-19 forbearance plans later this Fall, and also highlights the areas on which the CFPB will focus in assessing a mortgage servicer’s compliance with applicable consumer financial laws and regulations.

The Bulletin

The Bulletin warns mortgage servicers of the Bureau’s “commit[ment] to using its authorities, including its authority under Regulation X mortgage servicing requirements and under the Consumer Financial Protection Act” to ensure borrowers impacted by the COVID-19 pandemic “receive the benefits of critical legal protections and that avoidable foreclosures are avoided.”

Specifically, the Bureau highlighted two populations of borrowers as being at heightened risk of referral to foreclosure following the expiration of the foreclosure moratoriums if they do not resolve their delinquency or enter into a loss mitigation option, namely, borrowers in a COVID-19-related forbearance and delinquent borrowers who are not in forbearance programs.

As consumers near the end of their forbearance plans, the CFPB expects “an extraordinarily high volume of loans needing loss mitigation assistance at relatively the same time.” The Bureau specifically expressed its concern that some borrowers may not receive effective communication from their servicers and that some borrowers may be at an increased risk of not having their loss mitigation applications adequately processed. To that end, the Bureau plans to monitor servicer engagement with borrowers “at all stages in the process” and prioritize its oversight of mortgage servicers in deploying its enforcement and supervision resources over the next year.

Servicers are expected to plan for the anticipated increase in loans exiting forbearance programs and related loss mitigation applications, as well as applications from borrowers who are delinquent but not in forbearance. Specifically, the Bureau expects servicers to devote sufficient resources and staff to ensure they are able to clearly communicate with affected borrowers and effectively manage borrower requests for assistance in order to reduce foreclosures. To that end, the Bureau intends to assess servicers’ overall effectiveness in assisting consumers to manage loss mitigation, and other relevant factors, in using its discretion to address potential violations of Federal consumer financial law.

In light of the foregoing, the Bureau plans to focus its attention on how well servicers are:

  • Being proactive. Servicers should contact borrowers in forbearance before the end of the forbearance period, so they have time to apply for help.
  • Working with borrowers. Servicers should work to ensure borrowers have all necessary information and should help borrowers in obtaining documents and other information needed to evaluate the borrowers for assistance.
  • Addressing language access. The CFPB will look carefully at how servicers manage communications with borrowers with limited English proficiency (LEP) and maintain compliance with the Equal Credit Opportunity Act (ECOA) and other laws. It is worth noting that the Bureau issued a notice in January 2021 encouraging financial institutions to better serve LEP borrowers in a language other than English and providing key considerations and guidelines.
  • Evaluating income fairly. Where servicers use income in determining eligibility for loss mitigation options, servicers should evaluate borrowers’ income from public assistance, child-support, alimony or other sources in accordance with the ECOA’s anti-discrimination protections.
  • Handling inquiries promptly. The CFPB will closely examine servicer conduct where hold times are longer than industry averages.
  • Preventing avoidable foreclosures. The CFPB will expect servicers to comply with foreclosure restrictions in Regulation X and other federal and state restrictions in order to ensure that all homeowners have an opportunity to save their homes before foreclosure is initiated.

Takeaway

As more and more borrowers begin to near the end of their COVID-19-related forbearance plans, and as applicable foreclosure moratoriums near their anticipated expiration dates, mortgage servicers should consider evaluating their mortgage servicing operations, including applicable policies, procedures, controls, staffing and other resources, to ensure impacted loans are handled in accordance with applicable Federal and state servicing laws and regulations.

Maryland Issues Executive Order Restricting Foreclosure Actions and Prohibiting Evictions During COVID-19 Emergency

A&B ABstract: Maryland’s Governor has issued an Executive Order providing that until the COVID-19 state of emergency is terminated: (1) foreclosure sales will only be valid if the servicer had notified the borrower of their rights to request a forbearance, and (2) residential and commercial evictions are prohibited if the tenant can show they suffered a “Substantial Loss of Income.” Similar to Section 4022 of the CARES Act, this Executive Order grants borrowers a right to request a forbearance if they are experiencing a financial hardship due, directly or indirectly, to the COVID-19 emergency. Additionally, until January 4, 2021, the Maryland Commissioner of Financial Regulation must discontinue acceptance of Notices of Intent to Foreclose, which effectively prohibits new foreclosure initiations until that date. Moreover, effective January 4, 2021 and until the COVID-19 state of emergency is terminated, Notices of Foreclosure will only be accepted if the lender or servicer certifies that they notified the borrower of their right to request a forbearance.

 

On October 16, 2020, the Governor of Maryland issued an Executive Order (No. 20-10-16-01), which amends and restates a previous Executive Order providing certain relief to tenants and homeowners impacted by the COVID-19 pandemic. This Executive order imposes restrictions on servicers’ ability to conduct foreclosure proceedings, and prohibits evictions where the tenant can show a “substantial loss of income,” during the COVID-19 state of emergency.

Restrictions on Residential Foreclosures

The Executive Order provides that “until the state of emergency is terminated and the catastrophic health emergency is rescinded,” foreclosures sales of “Residential Property” (defined as “real property improved by four or fewer single family dwelling units that are designed principally and are intended for human habitation”) under Maryland’s Real Property law will not be considered a valid transfer of title in the property unless certain requirements are met, depending on the type of loan secured by the property:

  • With respect to a property securing a Federal Mortgage Loan:
    1. at least 30 days prior to sending a notice of intent to foreclose to a borrower, the servicer must send a written notice to the borrower stating the borrower’s right to request a forbearance on the loan under Section 4022(b) of the CARES Act; and
    2. the servicer must comply with all of its obligations with respect to the loan owed to the borrower under the CARES Act or otherwise imposed by the federal government or a government sponsored enterprise.
  • With respect to a property securing a Non-Federal Mortgage Loan:
    1. the servicer must have notified the borrower, in writing, that if the borrower is experiencing a financial hardship due, directly or indirectly, to the COVID-19 emergency, the borrower may request a forbearance on the loan, regardless of delinquency status, for a period up to 180 days, which may be extended for an additional period up to 180 days at the request of the borrower;
    2. if the borrower did request a forbearance on the loan, the servicer must have provided such forbearance without requiring the borrower to provide additional documentation other than the borrower’s attestation to a financial hardship caused by COVID-19, and without requiring any additional fees, penalties, or interest; and
    3. during the forbearance period, the servicer must not have accrued on the borrower’s account any fees, penalties, or interest beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the terms of the loan.

Notably, as discussed in the next section, these requirements appear applicable only to foreclosure proceedings already in progress prior to January 4, 2021 (because the Executive Order effectively prohibits the initiation of new foreclosure actions until that date), and to those initiated between January 4, 2021 and the termination of the COVID-19 state of emergency.

Directives to the Maryland Commissioner of Financial Regulation

The Executive Order also directs Maryland’s Commissioner of Financial Regulation to alter certain practices regarding its processing of residential foreclosures.

Specifically, as of the date of the Executive Order, and until January 4, 2021, the Commissioner is directed to suspend the operation of the Commissioner’s Notice of Intent to Foreclose Electronic System, and to discontinue acceptance of Notices of Intent to Foreclose. This effectively imposes a moratorium on the initiation of new foreclosure actions. Under Section 7-105.1(c) of the Real Property Article of the Maryland Code, as the first step in the foreclosure process, a Notice of Intent to Foreclose is required to be sent to the borrower at least 45 days before an action to foreclose a mortgage can be filed, and a copy of that notice must be submitted to the Commissioner within 5 business days thereafter via the Commissioner’s Notice of Intent to Foreclose Electronic System. (COMAR 09.03.12.02(E)). Citing the Executive Order, the Notice of Intent to Foreclose Electronic System website currently states that “no new [Notice of Intent] submissions will be accepted until January 4, 2021.” As such, this directive effectively prohibits the initiation of new foreclosure proceedings until December 28, 2020 (the earliest date a Notice of Intent can be mailed to the borrower and then submitted to the Commissioner within 5 business days).

Moreover, the Executive Order provides that effective January 4, 2021, and until the state of emergency is terminated and the catastrophic health emergency is rescinded, when a servicer submits to the Commissioner the Notice of Foreclosure required under Section 7-105.2(b) of the Real Property Article of the Maryland Code, the Commissioner must obtain a “certification” from the servicer or secured party that the servicer complied with the Executive Order’s requirement that the borrower be informed of their right to request a forbearance, as discussed above.

Prohibition on Residential and Commercial Evictions

The Executive Order provides that until the state of emergency is terminated and the catastrophic health emergency is rescinded, Maryland courts shall not effect any evictions by giving any judgment for possession or repossession on residential, commercial, or industrial real property, if the tenant can demonstrate to the court, through documentation or other objectively verifiable means, that the tenant suffered a “Substantial Loss of Income.”

The Executive Order defines “Substantial Loss of Income” as follows:

  1. with respect to an individual, a substantial loss of income resulting from COVID-19 or the related proclamation of a state of emergency and catastrophic health emergency, including, without limitation, due to job loss, reduction in compensated hours of work, closure of place of employment, or the need to miss work to care for a home-bound school-age child; and
  2. with respect to an entity, a substantial loss of income resulting from COVID-19 or the related proclamation of a state of emergency and catastrophic health emergency, including, without limitation, due to lost or reduced business, required closure, or temporary or permanent loss of employees.

This prohibition applies to evictions for failure to pay rent under Section 8-401 of the Real Property Article of the Maryland Code, as well as evictions based on a tenant’s breach of the lease under Section 8-402.1 of the Real Property Article of the Maryland Code.

Takeaways

Notably, the forbearances that servicers are required to offer with respect to non-federally backed loans under this Executive Order present forbearance terms and conditions that substantially parallel those offered for federally backed loans under the CARES Act. It is possible that other states will follow suit with Maryland and create similar state mandates effectively applying to non-federally backed mortgages the forbearance rights available for federally backed mortgages under the CARES Act, in addition to state-mandated foreclosure restrictions. We will continue to monitor for such state requirements.