Alston & Bird Consumer Finance Blog

Servicing

CFPB Issues Warning to Mortgage Servicing Industry

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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.

NYDFS Issues Guidance to Mortgage Servicers Regarding Assessment of Registration Fees

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A&B ABstract:

On September 1, 2020, the Deputy Superintendent of the New York Department of Financial Services (“NYDFS”), issued guidance (the “Guidance”) to New York State regulated mortgage lenders and servicers (collectively referred to as “Servicers”) regarding fees paid to register mortgages in default. The Guidance reminds Servicers of the restrictions on fees and charges set forth under Part 419 of the Superintendent of Financial Services Regulations (“Part 419”) and directs Servicers to reverse and/or refund and credit registration fees impermissibly charged to New York borrowers and to create a log of all borrowers who were either charged, or paid any registration fee to a Servicer.

Part 419 Fee Restrictions

In December 2019, the NYDFS finalized amendments to Part 419, nearly 10 years after its initial adoption. Part 419, which sets forth business conduct requirements for mortgage loan servicers operating in the state, was amended to include expansive obligations that, in certain instances, exceed obligations under the Consumer Financial Protection Bureau’s mortgage servicing rules.

Under Section 419.5 of the amended regulations, servicers may only collect certain specified types of fees from a borrower, subject to certain conditions.  Such fees include attorney’s fees, late and delinquency fees, and property valuation fees.  In addition, a servicer may collect a fee if it is for a service that is actually rendered to the borrower, reasonably related to the cost of rendering that service, and is: (1) expressly authorized and clearly and conspicuously disclosed by the loan instruments and not prohibited by law; (2) expressly permitted by law and not prohibited by the loan instruments; or (3) not prohibited by law or the loan instruments and is for a specific service requested by the borrower that is assessed only after disclosure of the fee is provided and the borrower expressly consents to pay the fee in exchange for the service.

NYDFS Guidance

The Guidance indicates that the NYDFS has become aware that “certain counties, cities and other municipalities in New York State, by ordinance or otherwise, are requiring mortgage lenders and servicers…to register mortgages declared to be in default…with the county, city or other municipality in which the real property is situated” and that some Servicers have charged borrowers, or collected from their account, the fee for such registrations.

The Guidance reminds Servicers that Section 419.5 of Part 419 “only permits [a servicer] to collect certain specified types of fees from a [borrower], consisting of attorney’s fees, late and delinquency fees, property valuation fees, and fees for services actually rendered to a mortgagor when such fees are reasonably related to the cost of rendering the service to the borrower.” Because a “[r]egistration [f]ee is neither an attorney fee, late or delinquency fee, property valuation fee, or fee for a service rendered to a [borrower],” Servicers are prohibited from charging or collecting such a fee from a borrower under Part 419.

Servicers subject to the requirements of Part 419 who, at any time, collected any registration fees from a borrower, are directed to refund and credit the full amount of such registration fees to the account of the borrower. If the registration fee was charged to a borrower’s account, but was not collected, the Servicer must remove and reverse any and all registration fees charged to the borrower’s account.

Finally, Servicers are directed to create a log of all borrowers that were either charged, or paid any registration fee to the servicer “at any time.” The log must contain details of the full amounts of the registration fees, whether such fees were collected or charged, and the date(s) the full amounts of collected registration fees were refunded and credited to or, in instances where the fee was charged but not collected, removed and reversed from borrowers’ accounts.  The Guidance indicates that the NYDFS plans to inspect the log during its next examination of Servicers.

 Takeaway

The Guidance is a reminder to Servicers to ensure compliance with the fee restrictions under the amended Part 419 regulations.  Servicers should review their portfolio of New York loans to ensure borrowers who paid, or were charged, a registration fee are provided appropriate remediation, as the NYDFS has already flagged this as an issue that will be scrutinized in upcoming servicing examinations.

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.

Delaware Governor Issues Order Modifying Restrictions on Residential Foreclosures and Evictions

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A&B Abstract:

On June 30, 2020, Delaware Governor, John Carney, issued a Twenty-Third Modification (the “Order”) to the Declaration of a State of Emergency (the “State of Emergency”), initially issued on March 12, 2020. The Order became fully effective July 1, 2020. The Order addresses a number of issues that impact residential mortgage loan servicers, including restrictions on residential foreclosure and evictions and certain fees or charges, which modifies guidance issued under the Sixth Modification of the State of Emergency (the “Sixth Modification”), which we previously discussed.

Restrictions on Late Fees and Excess Interest for Missed Payments

Under the Sixth Modification, with respect to any missed payment on a residential mortgage occurring during the State of Emergency, no late fee or excess interest could be charged or accrued on the account for such residential mortgage during the State of Emergency. Under the Order, these provisions have been removed in their entirety.

Foreclosure Restrictions

The Order continues to impose restrictions on a mortgage servicer’s ability to initiate or complete a foreclosure action or sale, however, the Order replaces Paragraph C of the Sixth Modification and makes certain other significant changes thereto.

Notably, the Order lifts the stay of deadlines in any action pursuant to paragraphs C.2, C.3, and C.4 of the Sixth Modification.  Paragraph C.2 of the Sixth Modification had extended all deadlines in residential mortgage foreclosure actions, including those related to the Automatic Residential Mortgage Foreclosure Mediation Program established pursuant to § 5062C of Title 10 of the Delaware Code.  Paragraph C.3 prohibited residential properties subject to a residential mortgage foreclosure action, for which a judgment of foreclosure was issued prior to the State of Emergency, from proceeding to a sheriff’s sale until 31 days after the State of Emergency.  Paragraph C.4 prohibited any residential property that was the subject of a residential mortgage foreclosure action, and which was sold at sheriff’s sale, from being subject to an action of ejectment or write of possession until 31 days following the termination of the State of Emergency. The Order lifts these restrictions, unless a court determines that a longer period is needed in the interest of justice.

With the lift of the stay of deadlines, the Order allows a party to act to remove individuals from residential properties, subject to a residential mortgage foreclosure action, where a judgment of foreclosure was issued prior to the declaration of the State of Emergency. However, individuals still cannot act to, and sheriffs, constables, and their agents, cannot remove individuals from their homes unless a judgment of foreclosure was obtained before March 13, 2020. All other provisions of Chapter 49 of Title 10 of the Delaware Code remain in effect in accordance with their terms.

Restrictions on Evictions

Similarly, with respect to evictions, the Order replaces paragraph B of the Sixth Modification and makes significant additional changes thereto.

The Order now provides that actions for summary possession may be filed with respect to any residential unit located within Delaware, but must be stayed to permit the Justice of the Peace Court to determine whether the parties would benefit from court supervised dispute resolution. Previously, no party could bring an action for summary possession for any residential rental unit located in Delaware. Actions that were brought before the State of Emergency, for which no final judgment had been entered, are further stayed.

Sheriffs, constables, and their agents continue to be prohibited from removing individuals from residential properties during the time the Order is in effect, unless a court determines on its own motion, or upon the motion of the parties, that it is necessary in the interest of justice. Additionally, the Order continues to prohibit the charging late fees or interest with respect to any past due balance for any residential unit during the State of Emergency.

Takeaway

The Order makes significant changes to the Sixth Modification to the Declaration of the State of Emergency, which significantly impacts mortgage servicing in Delaware. Servicers should carefully review the Order to fully determine their rights and obligations with respect to Delaware borrowers.

Attorneys General Urge FHFA and HUD to Take Additional Measures to Protect Borrowers Affected by COVID-19

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A&B Abstract:

On April 23, 2020, the attorneys general of 33 states, the District of Columbia and Puerto Rico (the “Attorneys General”) sent two letters, one to the Federal Housing Finance Agency (“FHFA”) and the other to the U.S. Department of Housing and Urban Development (“HUD” and collectively with FHFA, the “Agencies”), respectively, noting that the “national response must recognize the unique challenges presented by the unprecedented number of homeowners who are affected by COVID-19, including the fact that all of these homeowners need relief at the same time..[and that] [m]eeting this challenge will require straightforward and consistent guidance that can be quickly operationalized.”  As a result, the Attorneys General urged the Agencies to make changes to their respective guidelines addressing COVID-19-related mortgage and foreclosure relief.

Revision of Forbearance Programs

The Attorneys General acknowledged that forbearance plans are a critical first response to borrowers affected by the COVID-19 pandemic.  However, the Attorneys General expressed concern that both the mortgage servicing industry and homeowners will become overwhelmed if changes are not made.   The Attorneys General recommended or encouraged that:

  • the Agencies “issue simple, self-executing guidance that servicers can easily implement to meet demand while providing an immediate, responsive resolution to borrowers.” The Attorneys General specifically expressed concern about HUD guidelines requiring an individualized evaluation for every borrower who receives a CARES Act forbearance, as well as guidelines issued by both of the Agencies requiring an individualized evaluation for borrowers coming out of forbearance, due to “grave doubts about servicers’ abilities to effectively manage the unprecedented number of borrowers who will be emerging from forbearance plans related to COVID-19 if individualized evaluations are required for each borrower.”
  • the Agencies amend their forbearance programs so that the obligation to repay forborne payments is automatically placed at the end of the loan term in the form of additional monthly payments that will follow the current term of the loan.  The Attorneys General noted that “there can be no reasonable expectation that a borrower who has experience a loss of employment or a reduction in income will be able to repay the forborne payments in a lump sum at the end of the forbearance period.” FHFA subsequently clarified its repayment requirements for its forbearance program on April 27, 2020.
  • the Agencies issue guidance allowing these post-forbearance agreements to occur without requiring borrowers to execute any additional documents, such as a loan modification agreement or a promissory note for the forborne payments, or at least waiving or easing those requirements until the pandemic abates.
  • FHFA to clarify that a borrower may receive a forbearance based on the borrower’s verbal attestation of a hardship related to COVID-19, and to encourage servicers to proactively notify borrowers of their right to verbally request a forbearance.

Expanded Eligibility for Disaster Relief-Related Modifications and Loss Mitigation Programs

The Attorneys General urged the Agencies to expand their eligibility standards for post-forbearance loss mitigation programs to enable a greater number of borrowers to qualify.  The Attorneys General urged HUD to reconsider its decision to remove the Disaster Loan Modification option for borrowers affected by COVID-19.  Further, the Attorneys General requested that the Agencies revise their respective loan modification eligibility criteria to ensure these programs have the same reach as the forbearance program mandated by the CARES Act, as the Agencies’ current guidelines impose several delinquency-related eligibility requirements.  For example:

  • Under current Fannie Mae and Freddie Mac guidelines, borrowers affected by COVID-19 are eligible for any one of three modification programs. Currently, however, a borrower is only eligible for such programs if the borrower was current or less than 31 days delinquent as of March 13, 2020. Additional delinquency-related eligibility criteria apply for the Cap and Extend Modification and Flex Modification programs.
  • Under current HUD guidelines, a borrower is only eligible for the COVID-19 Partial Claim if the borrower was current or less than 30 days delinquent as of March 1, 2020 and the partial claim amount does not exceed 30 percent of the unpaid balance. If a borrower is ineligible for the COVID-19 Partial Claim, then the borrower will be reviewed for HUD’s FHA-HAMP program. The Attorneys General noted that the FHA-HAMP program has additional seasoning requirements, such as requiring the borrower to have made at least 4 payments and the loan to have aged at least 12 months.

The Attorneys General urged the Agencies to waive the delinquency status requirements of these modification programs and noted that post-forbearance modification programs should be commensurate with the forbearance plans required by the CARES Act, as the CARES Act requires forbearance for any borrower experiencing a COVID-19 financial hardship regardless of delinquency status.  Moreover, the CARES Act authorizes forbearances of up to 360 days, so many borrowers receiving CARES Act forbearances will be more than 360 days delinquent by the end of the forbearance period.

Eviction and Foreclosure Moratoriums

Finally, the Attorneys General urged the Agencies to “instruct servicers that they also must suspend all foreclosures and evictions currently in process and cannot move forward to complete any step in the judicial or non-judicial foreclosure or eviction process while the moratorium is in place,” to address differences in various states’ foreclosure and eviction processes.

Currently, the CARES Act states that servicers of federally backed mortgages may not initiate any judicial or non-judicial foreclosures process, move for a foreclosure judgment or order of sale, or execute a foreclosure-related eviction or foreclosure sale until at least May 17, 2020. The Attorneys General asserted that advancing any step of the eviction or foreclosure process during a forbearance related to COVID-19 will only lead to borrower confusion and harm.

Takeaway

As the COVID-19 pandemic continues to affect homeowners and the mortgage servicing industry, there will likely be continued political pressure on the Agencies to further revise servicer loss mitigation guidelines. Servicers will need to be vigilant to stay on top of the rapidly evolving market conditions and regulatory environment.