As the COVID-19 pandemic unfolds, new emergency measures and policies to deal with the economic repercussions are being proposed, announced and implemented on a daily, if not hourly, basis. The guidance and directives to mortgage servicers: be flexible, be compassionate, and slow down.
Foreclosure and Eviction Moratoria
On Wednesday March 18, 2020, the Department of Housing and Urban Development (HUD) and the Federal Housing Finance Agency (FHFA) each announced a 60-day moratorium on evictions and foreclosure for Federal Housing Administration (FHA ) and Fannie Mae and Freddie Mac mortgage loans. HUD followed up by issuing Mortgagee Letter 2020-04. The moratoria apply to both pending and not-yet-instituted foreclosure and eviction proceedings.
Many in the industry are following suit, given borrower expectations prompted by the federal government’s actions. Cities, states, and courts across the country had already taken action to stall evictions and foreclosures or to urge loan servicers to do so, and the nationwide effort to stem the spread of coronavirus has led to widespread court closures that, as a practical matter, would produce the same delay.
However, loan servicers should be prepared to address potential customer confusion regarding bank and private investor-owned loans that are not subject to HUD’s and Federal Housing Finance Agency (FHFA) mandates – to the extent the moratorium is not applied uniformly across a servicer’s portfolio.
Encouraging Borrower Assistance
Last week, the FHA and FHFA reminded mortgage servicers and mortgagees/lenders that GSE (Fannie Mae and Freddie Mac) and FHA borrowers financially impacted by COVID-19 would be eligible for payment relief under either FHA or Fannie Mae and Freddie Mac servicing guidelines. FHFA Director Mark Calabria reminded servicers of Fannie’s and Freddie’s forbearance options, and Fannie Mae and Freddie Mac asked servicers to be responsive to potential requests for assistance from borrowers, and reminded servicers that they must have business continuity plans (BCPs) in place to ensure that critical business functions will be available to customers in times of national disasters and emergencies.
The FHA similarly reminded FHA-approved mortgagees and servicers that FHA’s loss mitigation options should be offered to borrowers impacted by the novel coronavirus, while at the same time cautioning that unlawful discrimination under the Fair Housing Act would not be excused in mortgage industry stakeholders’ responses to “[e]xigencies associated with important and timely response to issues surrounding COVID-19.”
On March 18, Freddie Mac followed up with Bulletin 2020-4, and Fannie Mae with Lender Letter LL-2020-02, clarifying how servicers should handle COVID-19-related credit reporting, forbearances, loan modifications and the COVID-19 foreclosure moratorium. Servicers are not to report borrowers to credit repositories if the borrower is participating in COVID-19-related loss mitigation. The Bulletin and Lender Letter also clarify that the foreclosure moratorium does not apply to vacant and abandoned properties.
By joint statement, federal and state financial institution regulators, including the Federal Reserve Board, CFPB (Consumer Financial Protection Bureau), the FDIC (Federal Deposit Insurance Corporation, the OCC (Office of the Comptroller of the Currency) and the CSBS (Conference of State Bank Supervisors) encouraged financial institutions to “meet the financial needs of customers and members affected by the coronavirus,” and to “work constructively with borrowers,” while assuring financial institutions that “[p]rudent efforts that are consistent with safe and sound lending practices should not be subject to examiner criticism.”
In their statement, the regulators also recognized the “staffing and other challenges” (including operational challenges) that loan servicers are already facing in attempting to respond to the increasing volume of borrower requests for assistance with reduced or relocated customer service teams, and promised to “expedite, as appropriate, any request to provide more convenient availability of services in affected communities.”
Although Democratic lawmakers criticized CFPB Director Kathy Kraninger last week during a hearing on the CFPB’s semi-annual report to Congress for not taking quick enough action in the face of the COVID-19 pandemic, and urged her to use the CFPB’s authority to encourage lenders to provide assistance, the CFPB has not yet taken any independent action beyond echoing support for HUD’s and FHFA’s actions.
On March 19, the Federal Reserve Board, the FDIC, and the OCC released a joint statement encouraging financial institutions to work with affected customers and communities, particularly those that are low- and moderate-income. The agencies stated that they will, pursuant to the Community Reinvestment Act (CRA), provide “favorable consideration of certain retail banking services, retail lending activities, and community development activities” related to the COVID-19 crisis.
The agencies emphasized that “prudent efforts to modify the terms on new or existing loans” for affected low- and moderate-income customers and small businesses “will receive CRA consideration and [will also] not be subject to examiner criticism.” And the NYDFS added its additional guidance for mortgage servicers on March 19 as well, in urging them to “to do their part,” and assuring regulated institutions that “[t]he Department believes that reasonable and prudent efforts by your institutions during this outbreak to assist these mortgagors under these unusual and extreme circumstances are consistent with safe and sound banking practices as well as in the public interest and will not be subject to examiner criticism.” The NYDFS urges a longer moratorium on foreclosures and evictions – ninety days.
Despite these blanket calls for servicers to assist customers, it is unclear how eligibility for relief will be determined and confirmed (although Fannie Mae and Freddie Mac’s Bulletin and Letter provide some guidance, including that “[t]he Servicer is not required to obtain documentation to verify the borrower’s hardship.” Unlike mortgage relief offered to those affected by natural disasters like hurricanes, COVID-19 impacted borrowers are not confined to any particular geographic area. And since FHA and GSE loss mitigation guidelines do not apply uniformly to bank and private investor-owned loans, servicers should also be prepared to address potential customer confusion regarding which widely-reported loss mitigation options non-GSE or federal government-backed borrowers may be eligible for.
Moreover, because so much is still unknown regarding how long the country’s battle to stem the spread of COVID-19 will last, the efficacy of a 60 day foreclosure moratorium for loans that are not yet in the foreclosure process, or of a forbearance plan that allows borrowers to miss payments but does not forgive payments or otherwise reduce or extend the repayment term for debt owed, is also unclear. If lessons are to be learned from the 2008 foreclosure crisis, more extensive loss mitigation options, including loan modifications, might be needed.
No federal loan modification programs, such as the Home Affordable Modification Program (HAMP) have been announced yet, and the administration’s plan to send checks directly to those in financial need may be intended to obviate a wide-ranging, compliance-heavy program like HAMP and the other Making Home Affordable (MHA) programs.
Regulator Flexibility; NYDFS Compliance Deadline Extensions, Including for New Business Conduct Rules for Mortgage Servicers
On the flip side, certain emergency economic measures like the Fed’s near-zero rate cuts have created booming demand for mortgage refinances and new mortgage loans, as mortgage rates briefly dropped to record lows and are predicted to stay low. The origination side of mortgage industry operations may be overwhelmed by handling applications and underwriting just as their servicing counterparts are overwhelmed by requests for borrower assistance – presenting operational and compliance challenges and tensions, many related to large segments of the workforce now needing to work from home.
Many states have provided interim guidance clarifying that mortgage loan originators, servicers, and other regulated financial services providers may work from home within the confines of their licenses. Though as the New York Department of Financial Services (NYDFS) has made clear, regulated providers must still maintain “appropriate safeguards and controls,” including related to data protection and cybersecurity”.
Per a March 12, 2020 emergency order, the NYDFS has also extended a number of deadlines for regulated entities, many of which will apply to mortgage loan originators and servicers, including:
- Certifications of compliance with cybersecurity requirements and transaction monitoring and filtering programs;
- Annual Reports and Comparative Statements of commercial banks, trust companies, stock-form savings bank and stock-form savings and loan associations;
- Annual Reports of licensed lenders, sales finance companies and money transmitters;
- Quarterly Reports of budget planners;
- Audited Financial Statements of budget planners;
- Annual Reports and Audited Financial Statements of check cashers;
- Volume of Operation Reports of mortgage bankers and brokers;
- Volume of Servicing Reports of mortgage loan servicers;
- Quarterly Financial Statements of virtual currency licensees; and
- Annual Reports of student loan servicers
However, the emergency order made clear that the NYDFS was not extending deadlines related to providing notice of a cybersecurity event, or submission of LIBOR cessation and transition risk plans, which are due March 23, 2020.
In a separate action on March 13, 2020, the NYDFS also extended the deadline for compliance with New York’s new Business Conduct Rules for servicing mortgage loans, which were adopted in final form in December 2019, and otherwise would have required compliance by March 17, 2020. The DFS explained that it was extending the deadline not only because “[t]he business continuity and pandemic planning around the Coronavirus . . . is diverting the limited resources of smaller financial institutions,” but because of “[t]he volume and complexity of the changes required by the new regulation.”
In particular, the NYDFS noted that “computer programing required to address the new reporting, notice and disclosure requirements for the home equity line of credit (“HELOC”) product, is creating the biggest issue for servicers” because “[t]his programing work is largely performed by third party vendors, and the financial institutions cannot fully control the timing of their work.” The NYDFS recognized that “[r]egulated institutions also need additional time to revise procedures, train compliance staff and provide information to consumers.” Servicers now have an additional ninety days to comply.
DWT continues to monitor the guidance as it emerges.