Alston & Bird Consumer Finance Blog

Foreclosure

New York Foreclosure Abuse Prevention Act Curtails Servicers’ Options

By , , ,

A&B ABstract:

Effective on approval by Governor Kathy Hochul on December 30, 2022, New York Assembly Bill 7737b – the Foreclosure Abuse Prevention Act (the “Act”) became law.  The Act is signifcant because it reverses judicial precedent that permitted a lender, after default, to undo the acceleration of a mortgage and stop the running of the statute of limitations in a foreclosure action through voluntary dismissal, discontinuance of foreclosure actions, or de-acceleration letters. Notably, the Act applies both prospectively and to any foreclosure action filed prior to its effective date that had not been resolved through a final judgment and order of sale. Further, unlike other provisions of New York law, the Act applies to all properties (and not only those that are owner-occupied). Public reaction has been mixed as to whether the measure will benefit consumers – but, regardless, it changes the rules of the game for lenders and servicers in New York State.

Background

Existing New York law establishes a six-year statute of limitations for the commencement of a mortgage foreclosure action, triggered when the borrower defaults on the obligation and the lender accelerates the obligation to pay the secured debt. In 2021, the New York Court of Appeals considered whether a lender can de-accelerate a loan and reset the statute of limitations.

The court decided four cases (with the opinion rendered in Freedom Mtge. Corp. v Engel, 37 N.Y.3d 1 (2021)), “each turning on the timeliness of a mortgage foreclosure claim.” The court held that the lender’s voluntary dismissal of a foreclosure suit constituted a revocation of the lender’s election to accelerate. Such revocation returned the parties to their pre-acceleration rights, reinstated the borrower’s right to repay via installments, and established a new statute of limitations period for any future default payments. According to the court, “[w]here the maturity of the debt has been validly accelerated by commencement of a foreclosure action,” the court opined, “the noteholder’s voluntary withdrawal of that action revokes the election to accelerate, absent the noteholder’s contemporaneous statement to the contrary.”

In the course of deciding Engel, the court also considered what constituted an “overt unequivocal act” sufficient to trigger a valid acceleration of debt and the six-year statute of limitations. Here, the court held that neither the issuance of a default letter nor the filing of complaints in prior discontinued foreclosure actions that failed to reference the pertinent modified loan were sufficient methods to validly accelerate debt.

The Act

Since the Engel decision, mortgagees in New York State have relied on their ability to voluntarily discontinue a foreclosure action – and effectively reset the statute of limitations– in order to engage distressed borrowers in loss mitigation efforts. However, the Act appears to eliminate a mortgagee’s ability to unilaterally reset the limitations period by voluntarily discontinuing a foreclosure action and deaccelerating the loan.

With the express intent of overturning the Engel decision, the Act amends provisions of New York’s Real Property Actions and Proceedings Law (“RPAPL,” N.Y. Real Prop. Acts. Law §§ 1301 et seq.), General Obligations Law (“GOL,” N.Y. Gen. Oblig. Law §§ 1-101 et seq.), and Civil Practice Law and Rules (“Rules,” N.Y. C.P.L.R. §§ 101 et seq.) relating to the rights of parties involved in foreclosure actions.

RPAPL:

Under previous law, Section 1301 of the RPAPL prohibited the commencement or maintenance of any action to recover any part of a mortgage debt while another action to recover part of the mortgage debt is already pending or after final judgment has been made for the plaintiff without leave of the court in which the first action was brought. Beyond clarifying that a foreclosure action falls within the scope of that prohibition, the Act provides that procurement of leave from the first court must be a condition precedent to commencing or maintaining the new action. Thus, failure to comply with the leave of court condition precedent may no longer be excused by finding that the prior action was “de facto discontin(ued)” or “effectively abandoned” (see U.S. Bank Trust, N.A. v. Humphrey, 173 AD3d 811, 812 (2d Dept 2019)); or that the defendant was not prejudiced thereby (see Wells Fargo Bank, N.A. v. Irizarry, 142 AD3d 610, 611 (2d Dept 2016)); nor by deeming the pre-action failure a mistake, omission, defect, or irregularity that could be overlooked or disregarded (see id.).

Moreover, failure to obtain leave is a defense to the new action. If a party brings a new action without leave of the court, the section declares that the previous action is deemed discontinued unless prior to the entry of final judgment in the original action the defendant: (a) raises the failure to comply with the condition precedent, or (b) seeks dismissal of the action based upon one of the grounds set forth in Section 3211(a)(4) of the Rules.

Section 1301 of the RPAPL is further amended to provide that if the mortgage securing the bond or note representing the debt so secured by the mortgage is adjudicated as time barred by a court of competent jurisdiction, any other action to recover any part of the same mortgage debt is equally time barred. As a result, if the statute of limitations acts to bar a foreclosure action or any other action to recover on mortgage debt, an investor or servicer cannot bring any other action to recover the same part of the mortgage debt, including another foreclosure action or an action to recover a personal judgment against the borrower on the note.

GOL:

Under Section 17-105 of the GOL, an agreement to waive the statute of limitations to foreclose on a mortgage is effective if expressly set forth in writing and signed by the party to be charged.

The Act amends Section 17-105 by: (1) clarifying that the GOL is the exclusive means by which parties are enabled to postpone, cancel, reset, toll, revive or otherwise effectuate an extension of the limitations period for the commencement of an action or proceeding upon a mortgage instrument; (2) clarifying that unless effectuated in strict accordance with Section 17-105, the discontinuance of an action upon a mortgage instrument, by any means, shall not, in form or effect, function as a waiver, postponement, cancellation, resetting, tolling, or extension of the statute of limitations; and (3) codifying certain judicial rulings holding as much.

While not included or otherwise referenced in the Act, it is also worth noting that Part 419 of the New York Department of Financial Services’ mortgage loan servicer business conduct rules prohibit a mortgage servicer from requiring a homeowner to waive legal claims and defenses as a condition of a loan modification, reinstatement, forbearance or repayment plan. It is unclear whether Part 419 would be interpreted to prohibit servicers from seeking a waiver of the limitations period pursuant to Section 17-105, especially with respect to loans where the limitations period has already run. To further complicate matters, the New York legislature is currently considering a bill that would (1) create an express private right of action for violations of Part 419; (2) make compliance with Part 419’s requirements a condition precedent to commencing a foreclosure action; and (3) render failure to materially comply with Part 419 to be a defense to a foreclosure action or an action on the note, even if servicing of the loan has been transferred to a different servicer when a foreclosure action or action on the note is commenced.

Rules:

The Act amends and adds several provisions of the Rules relating to the application of the statute of limitations in actions relating to mortgage debt.

First, the Act adds Section 203(h) to the Rules, which terminates the ability of a lender or servicer to extend the statute of limitations on a foreclosure action by any form of unilateral action. No voluntary discontinuation of an action to enforce a mortgage may “in form or effect, waive, postpone, cancel, toll, extend, revive or reset the limitations period to commence an action and to interpose a claim, unless expressly prescribed by statute.” In other words, the amended section appears to prohibit a mortgagee from “de-accruing” a cause of action or otherwise effectuating a unilateral extension of the limitations period by suspending a foreclosure action – and providing loss mitigation opportunities to the borrower – once the six-year statute of limitations has begun to run after the loan is accelerated. The methods by which the statute of limitations in a mortgage foreclosure action can be waived or extended are exclusively set forth in Article 17 of the GOL (see GOL 17-105 (express written agreement to extend, waive or not plead as a defense the statute of limitations); 17-107 (unqualified payment on account of mortgage indebtedness effective to revive statute of limitations)). Accordingly, a bare stipulation of discontinuance or a lender’s unilateral decision to revoke its demand for full payment is no longer a permissible method for waiving, extending, or modifying the statute of limitations.

Second, the Act adds Section 205-a to the Rules, limiting reliance on the savings statute for time-barred claims. After termination of an action, the new section permits the original named plaintiff to commence a new action upon the same transaction or occurrence or series of transactions only if: (a) the plaintiff brings the new action within six months of the termination; and (b) the termination of the prior action occurred in any manner other than a voluntary discontinuance, a failure to obtain personal jurisdiction over the defendant, dismissal for any form of neglect, for violation of any court rules or individual part rules, failure to comply with any court scheduling orders, failure to appear for a conference or at a calendar call, failure to timely submit any order or judgment, or a final judgment upon the merits. Further, only one six-month extension will be available to the plaintiff.

Under new Section 205-a, a successor-in-interest or an assignee of the original plaintiff can only commence a new action if such party pleads and proves that the assignee is acting on behalf of the original plaintiff. Further, if the defendant has served an answer and the action has been terminated, in a new action based on the same transaction or occurrence or series of transactions (whether brought by the original plaintiff or a successor-in-interest or assignee thereof) any cause of action or defense that the defendant asserts will be considered timely “if such cause of action or defense was timely asserted in the prior action.” Section 205-a also provides that, where applicable, the original plaintiff (or a successor-in-interest acting on behalf of the original plaintiff) may only receive one six-month extension and no court shall allow the original plaintiff to receive more than one six-month extension.

Third, the Act amends Section 213(4) of the Rules to clarify that in any action where the statute of limitations is raised as a defense – and if that defense is based on a claim that the indebtedness was accelerated prior to or through commencement of a prior action – a plaintiff will be estopped from asserting that a mortgage instrument was not validly accelerated prior to or by way of commencement of a prior action. An exception exists if the prior action “was dismissed based on an expressed judicial determination, made upon a timely interposed defense, that the instrument was not validly accelerated.”

Further, in any quiet title action seeking cancellation and discharge of record of a mortgage instrument, a defendant will be estopped from asserting that the applicable statute of limitations period for commencement of an action has not expired because instrument was not validly accelerated prior to or by way of commencement of a prior action, “unless the prior action was dismissed based on an expressed judicial determination, made upon a timely interposed defense, that the instrument was not validly accelerated.”

Finally, the Act amends Section 3217 of the Rules, by adding a new Subsection (e), which clarifies that if the statute of limitations is raised as a defense in an action, and if the defense rests on a claim that the instrument was accelerated prior to or by virtue of the commencement of a prior action, the plaintiff cannot stop the tolling of the statute of limitations by asserting that the instrument was not validly accelerated unless the prior action was dismissed based on an express judicial determination regarding invalid acceleration.

Takeaway

In light of the Act’s curtailment of a servicer’s or investor’s ability to unilaterally suspend a foreclosure action, we recommend that mortgagees carefully review their pending mortgage foreclosure actions in New York state. At a minimum, the Act removes the ability of a holder or servicer in New York state to voluntarily discontinue a foreclosure action after acceleration of the indebtedness triggers the running of the statute of limitations.

Whether this will interfere with servicers’ contractual rights and ability – and obligations under the CFPB rules and New York Part 419 – to offer meaningful loss mitigation opportunities to borrowers remains to be seen. At least one judge thinks so. In a recent Order to Show Cause, a New York Supreme Court judge concluded that the Act violates the Contracts Clause of the U.S. Constitution and included an invitation for the New York Attorney General to weigh in.

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

By ,

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

By ,

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

By

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.

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

By ,

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.