A&B ABstract:

Recently, the Consumer Financial Protection Bureau (“CFPB”) brought its first ever redlining case against a non-depository institution. While the CFPB has yet to issue guidance regarding how it would evaluate a non-bank lender’s activities for potential redlining, the CFPB’s allegations in this case provide some insight to mortgage lenders regarding compliance expectations.

Discussion

On July 15, 2020, the CFPB filed a complaint in the U.S. District Court for the Northern District of Illinois against Townstone Financial, Inc. (“Townstone”), alleging that the mortgage lender engaged in the redlining of African-American neighborhoods in the Chicago Metropolitan Statistical Area (“MSA”) in violation of the Equal Credit Opportunity Act (“ECOA”) and, in turn, the Consumer Financial Protection Act (“CFPA”).

The complaint does not assert any claims under the Fair Housing Act (“FHA”), as that fair lending statute is enforced by the U.S. Department of Housing and Urban Development (“HUD”) and the U.S. Department of Justice (“DOJ”). Typically, “redlining” refers to a specific form of discrimination whereby the lender provides unequal access to, or unequal terms of, credit because of the prohibited basis characteristics of the residents of the area in which the loan applicant resides or in which the residential property to be mortgaged is located.

The Complaint

According to the complaint, during the January 1, 2014 to December 31, 2017 time period, Townstone “engaged in unlawful redlining and acts or practices directed at prospective applicants that would discourage prospective applicants, on the basis of race, from applying for credit in the Chicago MSA.” In support of this claim, the CFPB asserts that Townstone’s weekly marketing radio shows and podcasts included statements about African Americans and predominantly African-American neighborhoods (using terms such as “scary” and “jungle”) that would discourage African-American prospective applicants from applying to Townstone for mortgage loans.

Lack of Direct Marketing

Apart from the allegations regarding Townstone’s radio shows and podcasts, the complaint does not point to any intentional conduct or effort by Townstone to discriminate against African Americans or African-American neighborhoods. Rather, the complaint arrives at a general conclusion that Townstone “made no effort to market directly to African Americans.” In support of this statement, the CFPB notes that Townstone did not specifically target any marketing toward African-Americans and did not employ an African-American loan officer among its 17 loan officers in the Chicago MSA. As a result, Townstone received few applications from African-Americans and only a handful of applications from residents of majority African-American neighborhoods.

However, with respect to the allegation that Townstone did not specifically target any marketing toward African-Americans, the CFPB concedes that Townstone generated 90% of its applications from radio advertising on an AM radio station that “reached the entire Chicago MSA” and thus included residents of majority African-American neighborhoods. Further, with respect to the allegation that Townstone did not employ any African-American loan officers, it is unclear how the CFPB expects that the race of a particular loan officer would have increased the number of applications from members from the same racial group, since Townstone’s business model relied upon leads received through radio advertising rather than referrals.

Redlining

HUD and DOJ brought early redlining cases under a disparate treatment theory of discrimination, which requires evidence of a lender’s discriminatory motive or intent. More recently, federal regulatory agencies have based redlining claims on statistical evidence that demonstrates a lender’s failure to market to, and infiltrate, geographic areas that have a strong minority presence.

Data Support

As further support for its claim against Townstone, the CFPB cites to data comparing the loan applications received by Townstone with those of its peer mortgage lenders. While only 1.4% of the loan applications received by Townstone were from African Americans, the average among peer lenders was 9.8%. Similarly, only between 1.4% and 2.3% of Townstone’s loan applications came from majority African-American neighborhoods, while the average among peer lenders was between 7.6% and 8.2%. In further support of its claim, the CFPB argues that African Americans make up approximately 30% of the population of Chicago, though fails to note the Chicago MSA’s African-American population of approximately 16%.

Given this data, the complaint asserts that Townstone acted to meet the credit needs of majority-white neighborhoods in the Chicago MSA while avoiding the credit needs of majority African-American neighborhoods. As a result, the CFPB alleges that Townstone thereby discouraged prospective applicants from applying to Townstone for mortgage loans in those neighborhoods.

Townstone’s Response

In response to the allegations, Townstone has published a fact sheet defending itself against the CFPB’s claim and noting its efforts to “reach as broad a geographic area as possible” by considering legitimate, non-discriminatory factors such as signal strength, and referencing other marketing measures specifically targeted at the African-American community. Further, Townstone has hired a third-party expert to help demonstrate how Townstone is not an outlier among its peers.

Takeaways

The complaint illustrates the CFPB’s position that non-bank lenders can be held liable for redlining even though they are not subject to Community Reinvestment Act requirements regarding meeting the needs of an entire assessment area. Further, the complaint reminds lenders that their performance – measured primarily by number of loan applications received – will be compared against that of other lenders with similar size and loan origination volume. As such, lenders seeking to mitigate fair lending risk should evaluate the geographic distribution of their lending activity to determine whether, during a particular time period, they were significantly less likely to take loan applications from minority areas than non-minority areas.

CFPB’s Pursuit of Redlining Claim

More importantly, the complaint demonstrates the CFPB’s willingness to pursue a redlining claim absent the traditional allegation that the lender sought to draw a “red line” around a particular demographic group or geographic area. Townstone’s radio advertising was not restricted to a particular demographic group or geographic area, nor could Townstone have altered the radio signals somehow to include or exclude particular groups or geographic areas. Further, Townstone had no control over the demographics of the AM radio station’s audience or that of particular radio shows.

Rather than alleging a traditional claim of redlining (i.e., actively avoiding a particular demographic group or geographic area), the CFPB seeks to hold Townstone liable for failing to conduct affirmative outreach and marketing to African-Americans. For example, the CFPB points out that Townstone had no African-American loan officers. Yet a lender’s failure to perform affirmative outreach to certain demographic groups or geographic areas, including by hiring loan officers of a particular demographic group, does not constitute redlining – nor are such actions required by ECOA.

The only allegation that Townstone redlined, in the traditional sense, is that its employees made statements that may have been intended to discourage African-American consumers from seeking a loan from Townstone. It is unclear whether these statements were intended to be commercial speech or merely ad hoc commentary regarding local current events.

ECOA Claim

Finally, it is worth noting that ECOA prohibits a creditor from discriminating against any “applicant,” which Regulation B clarifies to include prospective applicants. While the complaint alleges that Townstone discriminated against both prospective applicants and applicants, the CFPB makes no claim that Townstone’s actions had any effect on consumers who already had applied for a loan.

Ultimately, the complaint appears to signal the CFPB’s return to more aggressive and creative redlining enforcement under ECOA, and the mortgage industry may need to consider a more comprehensive approach to compliance to avoid regulatory risk.

Source:https://www.jdsupra.com/legalnews/cfpb-institutes-redlining-action-34563/

Lenders approve qualified mortgages (QM), knowing Fannie or Freddie will buy them – but they could buy “seasoned QM loans” if lenders hold them for a period of time.

WASHINGTON, D.C. – The Consumer Financial Protection Bureau (CFPB) issued a notice of proposed rulemaking (NPRM) to create a new category of “seasoned qualified “mortgages. CFPB says the new loan category should encourage innovation and help ensure access to responsible affordability in the mortgage credit market.

A seasoned loan under the proposal is held by lenders for a while. During that time, the buyers prove that they can handle it and, under the proposed lending criteria, Fannie Mae or Freddie Mac will then buy the loan, just as it does now for qualified mortgages (QM). CFPB is calling them a Seasoned QM. In general, the new loan category would lower the risk for banks to approve less qualified borrowers.

Seasoned QMs under the proposal would have to be first-lien, fixed-rate transactions that have met certain performance requirements over a 36-month seasoning period. They’d have to be held in the lender’s portfolio during the seasoning period, comply with general restrictions on product features and points and fees, and meet some underwriting requirements.

To be a Seasoned QM, the proposal also requires the creditor to consider and verify the consumer’s debt-to-income ratio (DTI) or residual income at origination.

To become a Seasoned QM, a loan could have no more than two 30-day delinquencies and no delinquencies of 60 or more days at the end of the seasoning period. A disaster or pandemic-related national emergency, under certain conditions, would not necessarily disqualify a loan from becoming a Seasoned QM if the consumer receives a temporary payment accommodation.

“Today’s proposal continues the (CFPB’s) work to encourage safe and responsible innovation in the mortgage origination market,” says CFPB Director Kathleen L. Kraninger. “Our goal through our very deliberative rulemaking process is to protect, promote and preserve the financial well-being of American consumers, while at the same time offering access to responsible, affordable mortgage credit.”

The announcement follows two NPRMs from June. The first proposes to amend the General QM definition in Regulation Z to replace the debt-to-income limit with a price-based approach.

The second NPRM proposes to amend Regulation Z to extend a temporary QM definition known as the Government-Sponsored Enterprise Patch to expire upon the effective date of the final rule proposed in the first NPRM.

Source:https://www.floridarealtors.org/news-media/news-articles/2020/08/new-cfpb-loan-should-help-lower-income-homebuyers

The Consumer Financial Protection Bureau issued consent orders against Sovereign Lending Group Inc. and Prime Choice Funding Inc. The bureau found that the companies mailed consumers advertisements for VA-guaranteed mortgages that contained false, misleading, and inaccurate statements or lacked required disclosures

According to a CFPB announcement, the consent order against Sovereign requires it to pay a civil penalty of $460,000. The consent order against Prime Choice requires Prime Choice to pay a civil penalty of $645,000.

The bureau found that Sovereign and Prime disseminated advertisements that contained false, misleading, and inaccurate statements or that failed to include required disclosures. For example, Sovereign and Prime Choice advertisements misrepresented the credit terms of the advertised mortgage loan by stating credit terms that the company was not actually prepared to offer to the consumer.

Sovereign and Prime Choice advertisements misleadingly described an advertised introductory interest rate as a “fixed” rate, when in fact the rate was adjustable and could increase over time. Sovereign and Prime Choice advertisements also created the false impression that they were affiliated with the government by using words, phrases, images, or designs that are associated with the VA or the Internal Revenue Service.

Sovereign is a California corporation that is licensed as a mortgage broker or lender in about 44 states and the District of Columbia. Prime Choice is a California corporation that is licensed as a mortgage broker or lender in about 35 states and the District of Columbia. Both companies offer and provide mortgage loans guaranteed by the U.S. Department of Veterans Affairs. Their principal means of advertising VA-guaranteed loans is through direct-mail advertisements sent primarily to United States military servicemembers and veterans.

The actions stem from a bureau sweep of investigations of multiple mortgage companies that use deceptive mailers to advertise VA-guaranteed mortgages. The bureau commenced this sweep in response to concerns about potentially unlawful advertising in the market that the Department of Veterans Affairs identified.

The bureau also found that both Sovereign and Prime Choice advertisements used the name of the consumer’s lender in a misleading way by not adequately disclosing their own names and the fact that they were not associated with, or acting on behalf of, the consumer’s current lender, as required by Regulation Z. Sovereign advertisements made false claims about consumer’s existing loans, and falsely implied that the consumer could address these problems by obtaining a loan from Sovereign.

Sovereign and Prime Choice advertisements also failed to properly disclose, when required by Regulation Z, credit terms for the advertised mortgage, such as the consumer’s repayment obligations over the full term of the loan and the period during which certain interest rates would apply. Further, Prime Choice advertisements created the false impression that they contained a property assessment as well as misleading comparisons between hypothetical credit terms and the terms of the advertised product.

The consent orders also impose injunctive relief to prevent future violations, including requiring the companies to bolster their compliance functions by designating an advertising compliance official who must review their mortgage advertisements for compliance with mortgage advertising laws prior to their use; prohibiting misrepresentations similar to those identified by the Bureau; and requiring the companies to comply with certain enhanced disclosure requirements to prevent them from making future misrepresentations.

By consenting to the orders, neither Sovereign or Prime Choice admit or deny any of the findings of fact or conclusions of law, except that they the facts necessary to establish the Bureau’s jurisdiction over them and the subject matter of this action.

Source:https://nationalmortgageprofessional.com/news/75609/mortgage-companies-over-fines-cfpb

The Consumer Financial Protection Bureau announced Monday two notices of proposed rulemaking surrounding what’s commonly known as the QM Patch. One of those rulemakings would remove the debt-to-income requirement from qualified mortgages.

Back in January, CFPB Director Kathy Kraninger sent a letter to several prominent members of Congress, saying the bureau has decided to propose an amendment to the QM Rule that would “move away” from DTI as a factor in mortgage underwriting.

Specifically, Kraninger said at the time that the CFPB has decided to shift from the DTI standard and move to an “alternative, such as a pricing threshold (i.e., the difference between the loan’s annual percentage rate and the average prime offer rate for a comparable transaction.)”

Now, Kraninger is following through on that plan.

In the first notice of proposed rulemaking, the bureau wants to amend the qualified mortgage definition in Regulation Z to replace the DTI limit with a price-based approach, saying it preliminarily concludes that a loan’s price, as measured by comparing a loan’s annual percentage rate to the average prime offer rate for a comparable transaction, is a more holistic and flexible measure of a consumer’s ability to repay than DTI alone.

For eligibility for QM status under the General QM definition, the bureau is proposing a price threshold for most loans as well as higher price thresholds for smaller loans, which is particularly important for manufactured housing and for minority consumers. The NPRM also proposes that lenders take into account a consumer’s income, debt and DTI ratio or residual income and verify the consumer’s income and debts.

The Ability to Repay/Qualified Mortgage rule was enacted by the CFPB after the financial crisis and requires lenders to verify a borrower’s ability to repay the mortgage before lending them money. This includes a review of a borrower’s debts and assets to ensure they have the ability to repay the loan, with a stipulation that their DTI ratio does not exceed 43%.

But Fannie Mae and Freddie Mac are not bound to this requirement, a condition known as the QM Patch. Under the QM Patch, loans sold to Fannie Mae or Freddie Mac are allowed to exceed to the 43% DTI ratio.

“The GSE patch’s expiration will facilitate a more transparent, level playing field that ultimately benefits consumers through promoting more vigorous competition in mortgage markets,” Kraninger said. “The bureau is proposing to replace the patch with a price-based approach to QM loans to preserve consumer access to mortgage loans while also making sure consumers have the ability to repay them. The bureau is committed to ensuring a smooth and orderly mortgage market throughout its consideration of these issues and any resulting transition away from the GSE Patch.”

The QM Patch is due to expire in January 2021, and last year the CFPB moved to officially do away with the QM Patch on its stated expiration date, however the second notice of proposed rulemaking from the CFPB Monday would move that date to ensure a smooth transition.

The bureau proposed to amend Regulation Z to extend the QM Patch to expire upon the effective date of a final rule regarding the first notice’s proposed amendments to the General QM loan definition in Regulation Z.

“The bureau is proposing to take this action to ensure that responsible, affordable credit remains available to consumers who may be affected if the GSE Patch expires before the amendments take effect as defined in the first NPRM,” the CFPB stated.

This could come as welcome news to the housing industry, which has long been calling for an end to the QM Patch.

“America’s Realtors applaud the CFPB’s action to provide a temporary QM patch extension, and commend the bureau and Director Kraninger for acting on behalf of our nation’s consumers and homebuyers at a time when market stability is so critical,” National Association of Realtors President Vince Malta said. “Perhaps most importantly, we appreciate the Bureau’s decision to eliminate a hard DTI standard, and we look forward to more closely examining the proposed replacements and their impact on homebuyers over the coming months.”

Source:https://www.housingwire.com/articles/cfpb-to-eliminate-dti-requirement-from-qualified-mortgage/

On July 25, 2000, the first paperless real estate transaction took place in Broward County in Florida. That transaction involved a home purchase and financing and took less than five minutes to record. Immediately, recorded documents were returned to the settlement agent via email and images of the documents were available on the county’s website.

Two decades later and despite the threat of the novel coronavirus pandemic, many real estate transactions are still being conducted the old-fashioned, high-contact way. Home buyers, sellers and real estate agents meet at the settlement attorney’s office at the same time, provide government-issued photo identification and sign legally binding documents under oath before a notary public. The notary then signs those documents and affixes a seal on dozens of separate legal documents. The live notarization requirement has, until recently, prevented end-to-end digital transactions, but that rule is rapidly evolving.

More options for finding a notary during the pandemic

The coronavirus has forced county recording clerks, mortgage lenders and the title insurance industry to expedite rules to permit remote online notarization (RON) closings under strict guidelines. RON closings no longer require the signer and the notary to be in the same room — they could be anywhere on the planet. Home buyers, sellers, lenders, real estate agents and settlement attorneys no longer need to gather in the same room. Buyers and sellers can take more time to review and sign settlement documents. Another benefit is that the actual closing document signing is recorded using encrypted, tamper-evident, audio and video technology. This record will then be stored and retrievable in electronic format for at least seven years.

As of mid-June, 26 states allow RON closings, including Virginia. The District and Maryland allow RON closings on a temporary, emergency basis. According to Diane Tomb, chief executive of the American Land Title Association (ALTA), nearly 30 percent of title and settlement companies are offering some type of digital closing to meet social distancing requirements. This is up from 17 percent of companies offering digital closings in 2019.

In March, the Senate and House introduced bills to authorize all U.S. notaries to perform RON. The bills would require that RON notaries use tamper-evident technologies, prevent fraud by using multifactor authentication for identity proofing, and make and retain audiovisual recordings of the transaction. It would allow signers outside the United States, such as military personnel, to securely notarize documents. It would also permit states to customize their own statutes and to recognize RON between states. The National Association of Realtors, the Mortgage Bankers Association and ALTA all support the bills. “Protecting consumers remains the title insurance industry’s top priority,” Tomb said.

Despite this regulatory groundswell, unless all parties agree, closings cannot be conducted using RON. To help lenders make decisions about allowing RON, the Mortgage Industry Standards Maintenance Organization created standards to certify technology providers that use consistent and best practices to secure confidential data. “Expanding the availability of RON is a priority” for the standards organization, said its president, Mike Fratantoni.

The National Notary Association identifies seven technology providers who are servicing the burgeoning RON industry. RON laws require tamper-evident technology, meaning that the settlement is recorded by an encrypted audiovisual record, where the notary and the signers can see, hear and communicate with each other in real time.

A notary’s main role is to identify the signers. With RON, signers must correctly answer computer-based questions about their life, credit or financial history. Signers scan credentials, and the technology provider analyzes if a credential is counterfeit, altered or expired. The notary must view the signer’s credential on camera and compare the information and image on that credential to the signer’s visual appearance, just as a face-to-face notary would examine a signer’s physical driver’s license.

Fannie Mae and Freddie Mac, which buy more than 40 percent of residential mortgage loans, have modified their single-family seller guidelines to permit RON closings in 43 states. Freddie Mac has specific temporary regulations regarding RON for closing documents, powers of attorney and electronic promissory notes.

Harvey S. Jacobs is a real estate lawyer with Jacobs & Associates Attorneys at Law LLC in Washington. He is an active real estate attorney, investor, landlord, lender and settlement attorney. This column is not legal advice and should not be acted upon without obtaining your own legal counsel. Contact him at jacobs@jacobs-associates.com, www.jacobs-associates.com, ask@thehouselawyer.com, or call 301-417-4144.

Source:https://www.washingtonpost.com/business/2020/06/22/changing-laws-remote-online-notarization/

On June 4 the Consumer Financial Protection Bureau (CFPB) issued proposals to address issues arising from the required transition away from the London Interbank Offered Rate (LIBOR) scheduled for the end of 2021. LIBOR has been widely used as a benchmark in consumer financial products such as adjustable rate mortgage loans, home equity lines of credit (HELOCs), student loans and credit cards. The CFPB released a more than 200 page rulemaking proposal calling for changes to its truth-in-lending regulations relating to the LIBOR transition. The CFPB also simultaneously issued guidance in the form of Frequently Asked Questions (FAQ) This blog will emphasize the proposal’s and the FAQ’s impact on adjustable rate mortgage loans and HELOCs.

Adjustable rate mortgage loans

Under Regulation Z as currently written, if the existing index used to calculate a mortgage loan’s interest rate is replaced and the new index is not a “comparable index,” the index change may constitute a refinancing. The proposed rule would provide an example of an index that is a “comparable index” to LIBOR – an index based on the Secured Overnight Financing Rate. This index has been endorsed by the Alternative Reference Rates Committee, a public-private LIBOR transition working group in the United States. It is worth noting that not everyone favors this index as a replacement for LIBOR, as some say it is subject to rate spikes that have not been historically present in LIBOR.

The CFPB is proposing a revamped Consumer Handbook on Adjustable Rate Mortgages, commonly known as the CHARM booklet. The proposed new CHARM booklet would remove all references to LIBOR and reduce the number of pages by half.

Per the FAQ, the proposed changes will affect ARM loan program origination disclosures for some loan programs, as the new index and formula used to calculate the interest rate will need to be identified, the explanation as to how the interest rate and payment will be determined will need to be modified, and rules relating to changes in the index or interest rate, such as an explanation of interest rate limitations, may need to be modified. The historical example and initial and maximum examples will also need to be modified. If the new index has not been in existence for fifteen years (the term of the historical example), then the proposal would require the historical example to cover the period in which the new index has been in existence.

The LIBOR transition is not expected to trigger ARM interest rate adjustment notices, because those notices are only required in connection with a monthly payment change. If the servicer chooses to notify the borrower of the pending index replacement when delivering an ARM interest rate adjustment notice, the servicer is prohibited from adding additional information to the notice, but may include a separate statement with the notice advising of the impending change in the index. The servicer may, however, add information to the monthly periodic statement delivered to the borrower, as long as the added information does not “overwhelm or obscure” the required disclosures.

The FAQ also advises that creditors offering adjustable rate mortgage loans must determine that the replacement index complies with the requirements of Regulation D, the rules for alternative mortgage transactions. Regulation D requires that if an index is used in connection with the calculation of the interest rate, the index used for closed-end mortgages must be readily available and verifiable by the borrower and beyond the control of the creditor. Hopefully the final amendment to Regulation Z will make clear that any index recommended as a replacement index in Regulation Z will satisfy the requirements of Regulation D.

HELOCs

The proposed rule would amend the open-end change-in-terms notice provisions to ensure that for the LIBOR transition, creditors are required to include in the change-in-terms notice the replacement index and any adjusted margin, regardless of whether the margin is being reduced or increased. The proposal would allow creditors to optionally comply with this provision between the issuance of the final rule and the provision effective date, October 1, 2021.

In order to change the index for HELOC accounts, the current rule requires that a) the original index be no longer available, and b) the replacement index meet certain requirements. The proposed rule would add a LIBOR-specific provision that would allow the LIBOR transition to occur on or after March 15, 2021 (instead of using the no longer available standard).

Additionally, the proposed LIBOR-specific provisions would retain similar replacement index requirements to the current rule, including that the replacement index has historical fluctuations that are substantially similar and that the new rate selected is substantially similar. The proposed rule would identify December 31, 2020 as the date used for selecting the index values for the LIBOR index and the replacement index to compare the rates, rather than using the rates on the date that the original index becomes unavailable. The proposed rule identifies two example replacement indices for LIBOR that meet the proposed exception requirements – the prime rate published in The Wall Street Journal, and a spread-adjusted version of the Secured Overnight Financing Rate recommended by the Alternative Reference Rates Committee. While the prime rate is currently significantly higher than LIBOR, existing law requires the interest rate resulting from the use of a replacement index to have an annual percentage rate that is substantially similar to the APR with the old index, so replacing LIBOR with the prime rate could well result in the HELOC’s margin being substantially decreased.

Per the FAQ, the proposed changes will affect ARM loan program origination disclosures for some loan programs for HELOCs. Regulation Z generally requires that creditors provide certain disclosures about the plan at the time consumers are provided a HELOC application. Like other loan origination disclosures required by Regulation Z, the requirements include disclosures, as applicable, about the security interest, payment terms, variable rate information, fees and other key plan terms. Some of these disclosures may need to be revised. The disclosure is also required to include a historical example. Based on a $10,000 extension of credit, illustrating how the annual percentage rate and payments would have been affected by index value changes over the last fifteen years. This example will also need to be modified. If the new index has not been in existence for fifteen years (the term of the historical example), then the proposal would require the historical example to cover the period in which the new index has been in existence.

The CFPB will be accepting comments on the proposed rule through August 4.

Source:https://www.jdsupra.com/legalnews/cfpb-issues-proposed-amendment-to-44773/

To help make things easier on both mortgage lenders and borrowers during this time of crisis, the Consumer Financial Protection Bureau (CFPB) is loosening some of its regulations under the TILA-RESPA Integrated Disclosures (TRID) rule.

The goal of the new “interpretive rule,” the bureau explains, is to make it “easier for consumers with urgent financial needs to obtain access to mortgage credit more quickly in the middle of the COVID-19 pandemic.”

“The bureau concludes in this interpretive rule that if a consumer determines that his or her need to obtain funds due to the COVID-19 pandemic 1) necessitates consummating the credit transaction before the end of the TRID Rule waiting periods or 2) must be met before the end of the Regulation Z Rescission Rules waiting period, then the consumer has a bona fide personal financial emergency that would permit the consumer to utilize the modification and waiver provisions, subject to the applicable procedures set forth in the TRID Rule and Regulation Z Rescission Rules,” the interpretive rule states.

“The bureau also concludes in this interpretive rule that the COVID-19 pandemic is a ‘changed circumstance’ for purposes of certain TRID rule provisions, allowing creditors to use revised estimates reflecting changes in settlement charges for purposes of determining good faith. This interpretive rule will help expedite consumers’ access to credit under the TRID rule and Regulation Z Rescission Rules.”

“The steps we are taking today will help consumers facing financial emergencies obtain access to mortgage credit faster,” says Kathleen L. Kraninger, director of the CFPB, in a statement. “The pandemic is resulting in consumers facing various challenges, and our temporary and targeted solutions are intended to ensure that consumers receive the credit they need in a timely manner.”

The CFPB says rule change will “also reduce regulatory uncertainty and allow creditors to focus their resources on meeting consumers’ needs.”

Source: https://mortgageorb.com/cfpb-relaxes-trid-rule-to-help-lenders-during-crisis

Federal and state regulators and Congress continue to release new guidance and requirements to assist mortgage borrowers facing economic hardships resulting from the coronavirus (COVID-19) pandemic. Due to the high volume of borrower requests, the associated burden on servicers, and the unknown duration of the COVID-19 pandemic, it is critical for servicers to be in compliance with all forbearance-related requirements and to be responsive to borrower communications and inquiries.

We provide here a comprehensive summary of all the key servicing-related requirements that have been issued in response to the COVID-19 pandemic so that servicers may properly adapt to the numerous requirements. Now is the time to start planning and preparing for post-forbearance options.

CARES ACT REQUIREMENTS AND RELATED FEDERAL GUIDANCE

CARES Act

The CARES Act, which took effect March 27, contains a number of federal law requirements applicable to mortgages and leases. These requirements, by their express terms, do not apply to all mortgages and leases, but rather are limited to properties that are subject to federally-backed mortgage loans or borrowers that participate in certain federal housing and urban development programs. The one exception is with respect to credit reporting, for which the new requirements apply to all consumers, not just borrowers under federal programs. Federally-backed mortgage loans include both residential and multifamily properties insured, guaranteed, supplemented, or assisted pursuant to various federal housing and urban development programs, or purchased or securitized by Fannie Mae or Freddie Mac. Individual condominium or cooperative units are included among the covered properties. Construction loans and “other temporary financings” are excluded.

A borrower with a federally-backed one- to four-family residential mortgage loan experiencing financial hardship due to the COVID-19 pandemic may request forbearance, regardless of delinquency status. Upon receipt of a borrower’s request for forbearance, the forbearance must be granted for up to 180 days, and must be extended for a further 180 days at the request of the borrower. The servicer is not required to obtain documentary evidence in support of the borrower’s request and, moreover, is not permitted to require that a borrower submit documentation as a condition of obtaining relief. During the forbearance period, no additional fees, penalties, or interest may be accrued, but the unpaid principal balance will continue to be due.

Multifamily loan borrowers also are entitled to forbearance, but to a more limited extent. The borrower must have been current on his or her payments as of February 1, 2020. Upon receipt of a request for forbearance (which may be oral or written) the servicer must provide forbearance for up to 30 days, and upon request of the borrower, extend the forbearance period for up to two additional 30-day periods. The servicer is not required to obtain documentary evidence in support of the borrower’s request (but is not expressly prohibited from doing so). A multifamily borrower who receives forbearance may not issue a notice to vacate a residential unit during the forbearance period, and in any event may not require a tenant to vacate before the date that is 30 days after the date on which the tenant is given a notice to vacate.

Irrespective of loan type, furnishers of credit information to credit reporting agencies must report consumers as “current” for the duration of the forbearance period, unless the borrower was already being reported as behind on payments, in which case delinquency reporting must be frozen as of the date of the forbearance. This requirement is not limited to federally-backed mortgages, but extends to all loss mitigation relief offered on all forms of credit “to a consumer who is affected by the [COVID-19] pandemic” during the period between January 31, 2020 and 120 days after the expiration of the current national emergency declaration. If the owner/borrower of a multifamily property is a natural person, he/she is deemed a “consumer” for these purposes, and gets the benefit of these credit reporting provisions.

Servicers of covered one- to four-family residential loans also are prohibited from initiating foreclosure actions for the 60-day period beginning March 18, 2020. These foreclosure restrictions do not apply to vacant or abandoned properties.

FHFA Initiatives

Shortly before the enactment of the CARES Act, the Federal Housing Finance Agency (FHFA) had already directed Fannie Mae and Freddie Mac (the government-sponsored enterprises, or GSEs) to suspend foreclosures and evictions for at least 60 days due to the COVID-19 pandemic. The foreclosure and eviction suspension applies to homeowners with a GSE–backed single family mortgage.

FHFA also announced that the GSEs will provide payment forbearance to single-family borrowers, which will allow mortgage payments to be suspended for up to 12 months due to hardship caused by the coronavirus. The GSEs also have offered multifamily property owners mortgage forbearance, subject to the condition that borrowers suspend all evictions for renters unable to pay rent due to the impact of COVID-19.

The FHFA announced on April 21 that servicers’ obligations to advance scheduled monthly payments for the GSE-backed single-family mortgage loans in forbearance will be limited to four months. After the four-month period, the GSEs will stand ready to take over advancing payments to investors in mortgage-backed securities (MBS). Previously, only Freddie Mac servicers, which generally are responsible for advancing scheduled interest, were limited in that obligation to four months of missed borrower interest payments. Fannie Mae servicers, by contrast, generally are obligated to advance both scheduled principal and interest payments that a borrower does not make, and Fannie Mae policy could have obligated servicers to do so indefinitely. Rising forbearances—mandated by the FHFA and state and federal actions in response to the COVID-19 pandemic—highlighted this significant difference between the two GSEs’ servicing policies. The FHFA announcement now largely aligns the two GSEs’ policies. The announcement appears to leave intact the disparity that Fannie Mae servicers must advance both principal and interest for the four-month period, while Freddie Mac servicers need only advance interest.

According to FHFA Director Mark Calabria, this change will allow all GSE servicers, regardless of type or size, to plan for exactly how long they will need to advance principal and interest payments on loans for which borrowers have not made their monthly payments. Mortgage loans that are delinquent for more than four months historically were purchased by the GSEs out of MBS pools. This FHFA action clarifies that mortgage loans with COVID-19 payment forbearances will be treated similarly to a natural disaster event and will remain in their MBS pools. This effort puts a four-month cap on servicer liability for advancing, which is significant because forbearances could last up to a year under the CARES Act (as described above). However, the announcement fails to address when servicers will be reimbursed for their advances, and raises questions about the sufficiency of liquidity across the market.

On April 22, the FHFA announced that it is allowing certain single-family loans in forbearance to be purchased and securitized through the GSEs. Mortgage loans either in forbearance or delinquent generally are ineligible for delivery under GSE requirements. However, the FHFA’s action lifts that restriction for a limited period of time and only for mortgages meeting certain eligibility criteria. Eligible loans will also be priced to mitigate the heightened risk of loss to the GSEs from these loans.

On April 27, Mr. Calabria reiterated that borrowers in forbearance with a Fannie Mae- or Freddie Mac-backed mortgage are not required to repay the missed payments in one lump sum. While his statement only covers Fannie Mae and Freddie Mac mortgages, he encouraged all mortgage lenders and servicers to adopt a similar approach.

Related Federal Guidance

On April 3, federal financial regulatory agencies, including the Board of Governors of the Federal Reserve System (Federal Reserve), the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Consumer Financial Protection Bureau (CFPB), and state financial regulators issued a joint policy statement providing needed regulatory flexibility to enable mortgage servicers to work with struggling consumers affected by the COVID-19 pandemic. The statement informs servicers of the agencies’ flexible supervisory and enforcement approach during the COVID-19 pandemic regarding certain communications to consumers required by the mortgage servicing rules.

The policy statement was designed to make it easier for mortgage servicers to place consumers in short-term payment forbearance programs such as the one required by the CARES Act. The policy statement clarifies that the agencies do not intend to take supervisory or enforcement action against mortgage servicers for delays in sending certain early intervention and loss mitigation notices and taking certain actions relating to loss mitigation set out in the CFPB’s mortgage servicing rules, provided that servicers are making good-faith efforts to provide these notices and take these actions within a reasonable time. The statement does not purport to impose any limitations on consumer claims premised on servicers failing to abide by federal guidance.

On April 7, federal financial institution regulatory agencies (including the CFPB), in consultation with state financial regulators, issued a revised interagency statement encouraging financial institutions to work constructively with borrowers affected by COVID-19 and providing additional information regarding loan modifications. The revised statement also provides the agencies’ views on consumer protection considerations. The agencies encourage financial institutions to work with borrowers and will not criticize institutions for doing so in a safe and sound manner. The agencies view prudent loan modification programs offered to financial institution customers affected by COVID-19 as positive and proactive actions that can manage or mitigate adverse impacts on borrowers, and lead to improved loan performance and reduced credit risk. Agency examiners will not criticize prudent efforts to modify terms on existing loans for affected customers.

With regard to loans not otherwise reportable as past due, the revised statement makes clear that financial institutions are expected to not designate loans with deferrals granted due to COVID-19 as past due because of the deferral. Since a loan’s payment date is governed by the due date stipulated in the legal agreement, then a financial institution’s agreement to a payment deferral may result in no contractual payments being past due, and these loans are not considered past due during the period of the deferral.

STATE/LOCAL JURISDICTION APPROACHES

District of Columbia

On April 7, the DC Council unanimously approved an emergency bill extending additional relief to residents and businesses impacted by the COVID-19 pandemic. The bill freezes residential rent increases throughout the public health emergency, and 30 days beyond its end. It also creates a mandatory 90-day mortgage deferment program for residential and commercial mortgage holders who request one (the bill’s language is limited to mortgage companies regulated by the city, which means the payment deferrals do not apply to property owners who borrowed money from national banks, for example). No late fees or penalties would accrue and repayment of the deferred amount may be done via a repayment plan, but not through a required balloon lump payment (subject to investor guidelines).

New York

Governor Cuomo’s Executive Orders

In response to the COVID-19 crisis, New York Governor Andrew Cuomo issued two executive orders that place temporary restraints on the ability of banks, residential mortgage servicers, and landlords to exercise remedies under certain agreements, mortgages, and leases. On March 20, Governor Cuomo issued Executive Order 202.8, which includes a statement that “there shall be no enforcement of either an eviction of any tenant residential or commercial, or a foreclosure of any residential or commercial property for a period of ninety days.” As such, landlords cannot seek to evict any tenants in New York State for a 90-day period, and lenders cannot proceed with foreclosure on residential or commercial mortgages on New York properties for a 90-day period.

On March 21, this action was followed by Executive Order 202.9, which includes two major actions. First, Order 202.9 temporarily modifies Section 39 of the New York Banking Law from March 21, 2020 to April 20, 2020, to provide that “it shall be deemed an unsafe and unsound business practice if, in response to the COVID-19 pandemic, any bank which is subject to the jurisdiction of the Department shall not grant a forbearance to any person or business who has a financial hardship as a result of the COVID-19 pandemic for a period of ninety days.” The provision applies to banks subject to New York Department of Financial Services (DFS) jurisdiction. In general, these include banks organized under or subject to the New York Banking Law. The provision is inapplicable to national banks, federal savings banks, and nonbank lenders. Second, Order 202.9 directed the DFS superintendent to promulgate emergency regulations concerning forbearance on mortgage payments and certain banking fees for consumers facing financial hardships relating to the COVID-19 pandemic.

New York Department of Financial Services Regulations

On March 24, DFS issued emergency regulations (the NY Regulations), adopted pursuant to Executive Order 202.9, to address these two areas. The NY Regulations require that, through April 20, 2020, DFS-regulated banks (that is, state banks chartered under New York law) and DFS-licensed residential mortgage servicers grant 90-day forbearances on certain residential mortgages on property located in New York to any New York consumer who applies and demonstrates financial hardship as a result of the COVID-19 pandemic. The NY Regulations provide that the obligation to grant a forbearance is subject to the safety and soundness requirements of the regulated institutions. The NY Regulations expressly exclude from their coverage any commercial mortgage loans, federally-insured loans, and loans “made, insured, or securitized by” Fannie Mae, Freddie Mac, Ginnie Mae, or the Federal Home Loan Banks. Many of these excluded residential mortgage loans are, in practice, already covered by previously-announced broader forbearance relief.

For the residential mortgage servicers to which the NY Regulations apply, compliance with the forbearance provisions becomes a matter of de facto federal law by virtue of the loss mitigation regulations in the mortgage servicing rules in the CFPB’s Regulation X, 12 CFR § 1024.38.

The NY Regulations clarify that, with respect to residential mortgage loans, DFS-regulated banks’ compliance with the NY Regulations satisfies their obligations under the temporary modification of Section 39 of the New York Banking Law that the first part of Order 202.9 addresses.

New York Attorney General Servicer Letters

On April 22, New York Attorney General (NYAG) Letitia James sent letters to 35 of New York’s major servicers, calling on them to provide immediate and long-term relief to all New York homeowners struggling to pay mortgages amidst the COVID-19 pandemic. According to Attorney General James, the letters “emphasize the responsibility of mortgage servicers to do more to ensure that COVID-19 does not cause unnecessary foreclosures or increase homelessness in New York State.”

While Attorney General James acknowledges that servicers have taken some key first steps, both voluntarily and in response to government action, to help homeowners adversely impacted by COVID-19, her letters outline additional steps servicers should implement to avoid a foreclosure crisis when the New York State-mandated mortgage forbearance agreements (as described above) have terminated. Attorney General James requested the following of servicers:

Automatically waive late fees and place homeowners in a three-month forbearance as soon as a payment is missed, whether or not this action requested by the homeowner;

Permit homeowners to renew their 90-day forbearance agreements for up to one year, and provide these extensions based on a verbal or written affirmation that a homeowner’s hardship is COVID-19 related without requiring additional documentation;

Provide a complete and accurate description of post-forbearance options when placing homeowners into a forbearance plan or responding to homeowners’ requests;

Ensure adequate staffing and resources to process homeowners’ questions and requests; and Develop and be prepared to implement long-term solutions that ensure affected homeowners can easily resume payments at the end of these forbearance periods.

The NYAG also expressly encouraged servicers to take steps necessary to communicate effectively with customers who have limited English proficiency, for example by translating standard written solicitations and sections of their websites describing COVID-19-related forbearance programs.

With investors like Fannie Mae and Freddie Mac already requiring servicers to find an affordable solution at the end of the forbearance period, including by placing arrears at the end of the mortgage as additional monthly payments (which may be functionally equivalent to converting the forbearance into a deferment), Attorney General James is calling for all mortgage servicers to provide similar long-term relief to all New York homeowners in order to stave off a future foreclosure crisis.

Massachusetts

Massachusetts Governor Charlie Baker signed emergency legislation on April 20 limiting evictions for residential and small business properties, and limiting foreclosures and requiring forbearance for residential properties. This legislation follows a number of actions by Governor Baker and the City of Boston to protect renters, homeowners, and small businesses during the COVID-19 pandemic.

Except for properties that are vacant or abandoned, lenders holding mortgages on residential properties are prohibited from foreclosing. Mortgage lenders are required to grant forbearance to residential borrowers for a 180-day period if, prior to the expiration of the statutory forbearance period, the borrower submits a request to the mortgage servicer affirming that the borrower has experienced financial impact from COVID-19. Lenders are not permitted to charge fees or penalties or interest beyond the amounts scheduled and calculated as if the borrower has made all scheduled payments in full and on time. Missed payments are to be added at the end of the term of the loan, unless the parties agree to an alternative arrangement.

Other States

Voluntary Partnerships

A handful of other states, including California, Connecticut, Michigan, New Jersey, and Pennsylvania, have established voluntary programs whereby state residents who are struggling financially as a result of COVID-19 may, upon contacting their servicer, be eligible for a 90-day grace period for mortgage payments. Financial institutions will offer, consistent with applicable guidelines, residential mortgage payment forbearances of up to 90 days to borrowers economically impacted by COVID-19. In addition, those institutions will provide borrowers a streamlined process to request a forbearance for COVID-19-related reasons, supported with available documentation; confirm approval of and terms of the forbearance program; and provide borrowers the opportunity to request additional relief, as practicable, upon continued showing of hardship due to COVID-19. For at least 90 days, financial institutions will waive or refund at least mortgage-related late fees and certain other fees for customers who have requested assistance.

With respect to credit reporting, participating financial institutions will not report derogatory tradelines (e.g., late or missed payments) to credit reporting agencies for borrowers taking advantage of COVID-19-related relief, but they may report a forbearance, which typically does not alone negatively affect a credit score. In practice, these credit reporting provisions are likely supplanted by the CARES Act amendments to the federal Fair Credit Reporting Act. As discussed above, the CARES Act amendments require, during the period they are effective, all creditors to freeze credit reporting as of the date of the accommodation for any consumer affected by the COVID-19 pandemic.

Nonbinding Guidance

A small collection of additional states have provided nonbinding guidance with respect to requesting or urging servicers to proactively work with borrowers impacted by the COVID-19 pandemic.

Arizona: On March 19, the Arizona Attorney General requested that lending companies defer payments (without lump sum or balloon payments), cease foreclosures, waive late fees and default interest for late payments, and cease negative reporting to credit reporting agencies for 90 days.

California: On March 22, the California Department of Business Oversight issued an advisory encouraging financial institutions to adopt certain practices during the COVID-19 pandemic, including offering payment accommodations, such as allowing borrowers to defer or skip some payments or extending the payment due date, which would avoid delinquencies and the furnishing of negative payment information to credit reporting agencies.

Connecticut: The Department of Banking encouraged servicers and other financial institutions to work with borrowers whose ability to make loan repayments may be impacted by COVID-19. Efforts may include waiving late fees, offering forbearance plans or other deferment options and having adequate staff available to work proactively with borrowers facing hardship. The Department also encouraged servicers to consider providing guidance to their internal and external collection teams regarding the servicer’s policies at this time.

Illinois: The Illinois Division of Financial Institutions urged all servicers to: (i) forbear mortgage payments for at least 90 days without incurring additional interest or fees; (ii) refrain from reporting late payments to credit reporting agencies, and when payments are modified, coding those payments as deferred with the applicable disaster code; (iii) offer mortgage borrowers an additional 90-day grace period to complete trial loan modifications, and ensuring that late payments during the COVID-19 pandemic do not affect a borrower’s ability to obtain permanent loan modifications; (iv) offer other loss mitigation options to mortgage borrowers, including those that help borrowers stay in their homes at affordable payments; (v) waive late payment fees and online payment fees for a period of at least 90 days and, for mortgage borrowers in a forbearance plan, during the period of forbearance; (vi) postpone foreclosures and evictions for at least 90 days; and (vii) contact mortgage borrowers on automatic payment plans to see if they need to temporarily suspend those payments and, if so, grant any such requests without delay and place the mortgage borrower in a forbearance program.

Maine: Governor Janet Mills urged all Maine banks and credit unions to work proactively with Maine homeowners and small businesses experiencing financial hardship from COVID-19. Governor Mills discouraged Maine banks and credit unions from initiating residential and commercial foreclosures and asked them to pause any foreclosures in progress. She also urged Maine banks and credit unions to refrain from mailing “notices to cure” to Maine residents and businesses as long as the current federal moratorium or successive moratoria remain in effect, and to continue to work with all borrowers in a proactive way.

Maryland: The Commissioner of Financial Regulation urged all mortgage servicers to take reasonable steps in an attempt to offer assistance affected by the COVID-19 pandemic. Such steps include waiving fees, forgoing the reporting of payment information, offering forbearance, extending loan modification trial periods, proactively communicate with borrowers, and training all staff of assistance options available to a borrower.

Nebraska: The Nebraska Department of Banking and Finance encouraged financial institutions to work with affected customers and communities. Efforts may include payment accommodations such as allowing borrowers to defer or skip some payments or extending the payment due date by up to 90 days.

Oregon: The Oregon Division of Financial Regulation encouraged all Oregon-regulated lenders and loan servicers to take active measures to help borrowers economically affected by the COVID-19 pandemic. This includes offering loan forbearance plans, fee waivers, and other deferred payment options.

Vermont: The Vermont Department of Financial Regulation encouraged licensees to communicate and work closely with affected customers by waiving certain fees, easing restrictions, and even offering payment accommodations.

Washington: Governor Jay Inslee and the Washington State Department of Financial Institutions urged servicers to work with homeowners adversely impacted by COVID-19, including payment forbearance for those who need it.

KEY TAKEAWAYS

When working with borrowers, servicers should adhere to state and federal consumer protection requirements, including fair lending laws. Federal and state financial regulators have provided guidance indicating that they will take into account the unique circumstances impacting borrowers and institutions resulting from the COVID-19 pandemic when exercising supervisory and enforcement responsibilities. However, servicers should, at the very least, be able to demonstrate good-faith efforts designed to support consumers and comply with consumer protection laws. Servicers who can proactively identify issues, correct deficiencies, and ensure appropriate remediation to consumers are not only improving efficiency, but also taking important steps to limit future claims premised on standards embodied by these recent government actions. The signatories to the April 3 and April 7 interagency guidance (as discussed above) state that they do not expect to take a consumer compliance public enforcement action against an institution, provided that the circumstances were related to the COVID-19 pandemic and that the institution made good faith efforts to support borrowers and comply with the consumer protection requirements, as well as responded to any needed corrective action. Because state attorneys general did not sign onto this guidance, the possibility remains of state investigations or enforcement matters (and the substance and tone of the NYAG letters indicates that strong possibility). Servicers should keep careful watch over these and future developments to also ensure compliance with the CFPB’s Regulation X servicing rules and U.S. Department of Housing & Urban Development’s complex loss mitigation requirements. Servicers also should be aware of any potential risks related to engaging in unfair or deceptive or abusive business acts or practices (UDAPs/UDAAPs). Certain state and federal regulations require servicers to act in good faith and deal fairly with borrowers, including by structuring any necessary loan modifications to result in payments that are reasonably affordable and sustainable for the borrower at the time the modification is made.

Be mindful of the myriad of federal and state laws, regulations, and guidance, and exercise careful diligence in ensuring compliance with the various tenets of these government actions. As described above, the non-uniform federal and state requirements with respect to the treatment and handling of mortgage loan forbearances related to the COVID-19 pandemic create a patchwork of different requirements, including with respect to how to handle a borrower’s missed payments at the end of a forbearance period. This complexity creates compliance challenges, particularly for those servicers with national servicing platforms. For example, per FHFA guidance, borrowers in forbearance with a GSE-backed mortgage are not required to repay the missed payments in one lump sum (and such repayment options could include setting up a repayment plan; modifying the loan so the borrower’s payments are added to the end of the mortgage; or setting up a modification that reduces the borrower’s monthly mortgage payment). The state-specific approaches generally apply to loans without regard to GSE or private funding. Massachusetts requires a borrower’s missed payments to be added at the end of the term of the loan, unless the parties agree to an alternative arrangement. The District of Columbia allows for a borrower’s payment of the deferred amount to be completed via a repayment plan, but not through a required balloon lump payment. The New York DFS emergency regulations do not stipulate how missed payments should be repaid. With respect to the voluntary programs available in California, Connecticut, Michigan, New Jersey, and Pennsylvania, the onus is on the part of financial institutions to work constructively with consumers. For example, the programs allow for the terms of a forbearance to be agreed upon between the borrower and the servicer, with servicers confirming approval of and terms of the forbearance program. Servicers also should closely monitor any additional developments at both the federal level and within the states in which they do business, including at the local level.

Be transparent and responsive to borrower inquiries and communications, and ensure appropriate staffing. Although there is widespread recognition that servicers are experiencing high volumes of inquiries, servicers should strive to be communicative and cooperative with, and responsive to, consumers. Some states have explicitly directed consumers to file a complaint against uncooperative and uncommunicative mortgage servicers with the relevant state authority. While many servicers are facing their own challenges as more and more of their employees must work from home, at least some state regulators have publicly stated that this does not excuse servicers from meeting their obligations to consumers, and that servicers must implement alternative measures. These include taking steps to eliminate long hold times, allowing borrowers to request relief via e-mail or via website in addition to by phone, and ensuring that calls are not being dropped. A number of individual and class claims filed in the aftermath of the 2008 financial crisis were premised explicitly on undue delays alleged to flow from inadequate staffing and training.

Be aware of federal and state regulatory “requests” and guidance that contain veiled enforcement threats. For example, on the one hand, the NYAG servicer letters, while presented in the context of making certain “requests” to servicers, make clear that the NYAG intends to hold the servicing industry accountable for meeting its obligations to homeowners during this crisis. The letters state they will be monitoring compliance with emergency laws and regulations, evaluating servicers’ performance at implementing COVID-19 relief programs, and determining which servicers are working most effectively to protect the long-term financial health of New York’s homeowners and communities. The NYAG further states that it has already received complaints from borrowers who have had difficulty contacting their servicer and who have highlighted that their economic hardship is likely long-term. According to the NYAG letters, servicers who are unable to meet the demand from consumers who are struggling and need help “will face additional scrutiny” and “will be held accountable for harm caused to consumers.” Even where the NYAG or other regulators decline to act, the standards set out by these recent pronouncements are likely to be adopted by consumer plaintiffs in their own individual or class actions alleging servicing failures. On the other hand, the NYAG letters, in their current form, are not “law.”

Start planning and preparing for post-forbearance options. Since it remains unclear how severe the effects of the COVID-19 pandemic will be and how long the pandemic will last, servicers should consider committing to both providing consumer relief and assessing the ongoing conditions and necessity of continuing relief. Servicers may wish to consider taking steps now, consistent with contractual obligations to loan owners (including securitization vehicles) and a myriad of federal and state regulations and guidance, to implement loan modification options to be offered to borrowers at least 30 days prior to the conclusion of a forbearance plan. Such steps align with the requirements pertaining to borrowers in forbearance with a Fannie Mae- or Freddie Mac-backed mortgage (for which their servicer will contact them about 30 days before the end of the forbearance plan to see if the temporary hardship has been resolved and discuss a forbearance extension or repayment options), and help ease the burden on servicers when the COVID-19-related forbearance periods terminate.

Aim to work with borrowers on their specific needs or concerns. Consistent with contractual obligations to loan owners (including securitization vehicles) and a myriad of federal and state regulations and guidance, a servicer who works with a borrower to address specific borrower requests, concerns, or individual financial health would likely curry regulatory favor. In particular, issues surrounding escrow and tax and insurance payments may require more individualized and customized assistance.

Source: https://www.jdsupra.com/legalnews/covid-19-what-servicers-should-know-68430/

The sudden financial impact of the COVID-19 pandemic on consumers has led to calls for loan servicers and other interested parties to provide temporary or permanent relief for borrowers who are unable to continue making loan payments. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), guidance in the mortgage world from Government Sponsored Entities (GSEs), and emergency regulations issued by the federal government and by state governments have mandated certain forms of relief to impacted consumers. These actors, in turn, have provided some flexibility to facilitate that relief. Many lenders and servicers have answered the call by implementing mandated options and often voluntarily creating programs for borrower relief. But the volume of consumer demand for hardship relief and the speed with which these programs have been implemented may give rise to concerns about fair lending compliance, and whether the monitoring necessary for such compliance can be implemented in a timely and effective manner.

This is the second article of a series of highlighting fair lending issues that may arise in this rapidly changing business and compliance environment. This alert focuses on fair lending issues that may arise in connection with consumer loan and asset servicing during the pandemic, and provides practical advice on things to consider in mitigating those risks in real time.

Government and GSE Response: A Refresher

Congress, federal regulators, and GSEs have provided temporary relief measures for a considerable number of borrowers. The CARES Act mortgage servicers and other interested parties to provide temporary forbearance for all loans that are federally insured, federally guaranteed, or purchased or securitized by Fannie Mae and Freddie Mac. GSEs, including Fannie Mae and Freddie Mac, have issued a variety of mortgage servicing guidelines for processing requests arising from a COVID-19-caused hardship for loans they have purchased or securitized. More generally, the Federal Reserve, FDIC, NCUA, OCC, and CFPB issued (Federal Inter-Agency Guidance) urging lenders, servicers, and others “to consider prudent arrangements that can help ease cash flow pressures on affected borrowers, improve their capacity to service debt, [and] increase the potential for financially stressed borrowers to keep their homes.”

Many states have also implemented temporary measures to protect consumers affected by the pandemic. Early measures included moratoriums on mortgage foreclosures and residential evictions; and temporary limitations on bank account and wage garnishment, debt collection, and communication with delinquent borrowers. Although many of these measures are temporarily effective only for the duration of the respective states of emergency, some regulators, such as the have already begun looking beyond the horizon and have called on mortgage lenders to consider longer-term solutions.

Some servicers and other interested parties have voluntarily offered discretionary programs for hardship relief, such as fee waivers and loan modifications, and have even applied CARES Act standards to mortgage loans not covered by the law. The situation is fluid, as market participants respond, and consumer needs and desires become clearer.

Fair Servicing Risks of Providing COVID-19 Relief and Strategies for Mitigation
The unprecedented and unexpected demand for relief, and the speed with which lenders and servicers are required to or choose to implement new regulatory requirements and deliver relief, challenge many participants in their ability to implement a comprehensive protocol of controls and processes that ensure and document compliance with existing legal requirements, internal policies and processes, regulator expectations, and best practices. One of many compliance issues that may be implicated are fair lending rules and standards. Fair lending risk is perhaps compounded by the Federal Inter-Agency Guidance’s warning that, while regulators will not criticize lenders, servicers, and others for deviations from pre-pandemic standards in the course of prudently delivering borrower relief, such leeway may result in discretionary and differential treatment of borrowers. Despite expressing some degree of understanding and lenience for the “unique circumstances” posed by the COVID-19 crisis, the Federal Inter-Agency Guidance states that, in providing consumer relief, lenders and servicers are expected to “adhere to consumer protection requirements, including fair lending laws.” Similarly, in a recent blog post, the CFPB that it would “not hesitate to take public enforcement action” for fair lending issues that arise from the ongoing pandemic.

The magnitude of fair lending risks posed by aspects of crisis consumer relief are far from clear. The law is itself unsettled as to whether, and how, fair lending legal requirements might even apply to primarily loan servicing activities. This is true even in the business of home mortgage loan servicing, for which so-called “fair servicing” has been a topic of servicer and regulatory scrutiny. Aspects of loan servicing that redefine the debt relationship, such as loan modifications, might be considered as either extensions of credit or an aspect of a credit transaction that may be subject to the Fair Housing Act (FHA), the Equal Credit Opportunity Act (ECOA), and Regulation B, as well as equivalent state and municipal anti-discrimination laws. While there is legitimate debate over whether the FHA applies to loan servicing — since the statute applies only to the “sale or rental of a dwelling” or lending in connection therewith1 — the CFPB has taken the view that ECOA extends fair lending obligations to fair servicing (as made apparent in the and provisions of the Examination Manual). The application of ECOA to mere forbearances, especially those that are involuntary from the standpoint of the servicer, is yet to be resolved, as is the application of ECOA to other forms of consumer debt and crisis relief that is not granted by an ECOA-covered “creditor.”

Whatever the legal reach of fair lending requirements, there are considerations that may counsel lenders, servicers, and others to be mindful of ensuring that similarly situated consumers are treated equally, that decisions to grant relief are based on legitimate business considerations, and that fair lending-type concerns are evaluated as part of a larger program and response. If nothing else, the language of the Federal Inter-Agency Guidance and the CFPB blog post suggests that regulators (and those that follow their lead) likely will be looking at ”fair servicing.”

If your institution decides to engage in fair servicing analyses for crisis-era relief programs, the following strategies for mitigating risk are worthy of close consideration:

1. Develop Uniform Relief Programs

Emergency orders, regulations, and guidance issued in response to the COVID-19 pandemic mandate specific relief for certain types of loans, such as federally backed mortgages and student loans, but allow some discretion in providing borrower relief. The exercise of employee discretion and the assistance of consumers on a case-by-case basis are often appropriate but, because the relief would be selectively offered or tailored, inadvertently disparate results for similarly situated consumers can occur. As a result, it is prudent as a general matter to assist consumers by developing and implementing standardized relief options that can be offered uniformly, and at scale, to meet the large demand for relief. The program features and their eligibility criteria should be clear and consistently applied. Limit the ability of employees to exercise discretion in making decisions to grant hardship relief. If discretion to deviate from uniform standards is necessary for certain cases, those exceptions (and the reasons for the exceptions) should be well documented.

2. Tailor Communications Practices

Consistent with being objective and even handed, it can be useful to proactively communicate with consumers to ensure that each of them have access to the same information about the availability of relief. Information about relief programs (or directions for requesting relief) should be publicly posted on the lender or servicer’s website, or communicated to all potentially eligible consumers. (However, in doing so, be mindful of existing law, as well as emergency orders and regulations adopted by some states and municipalities, which limit the servicer’s ability to communicate with consumers who are more than 30 days delinquent, or in bankruptcy, or who have asked to have no communication with the servicer.) Early communication with consumers is crucial to ensuring that they have the information necessary to seek relief before they are seriously delinquent.

3. Carefully Draft Application Questions

Some relief programs offered to borrowers during the COVID-19 pandemic are available only if the consumer can demonstrate financial hardship as a result of the pandemic. The process of demonstrating a pandemic-related hardship may reveal information bearing on a prohibited basis, such as the fact that the borrower is caring for a sick spouse, has medical debt from seeking hospitalization for COVID-19, or is receiving public assistance. ECOA prohibits the request of information about a borrower’s membership in a prohibited basis group, and the use of such information in making a credit decision, except in very limited circumstances.2 Lenders and servicers should develop a standard application or telephone script used to collect information from consumers seeking relief to ensure that their employees do not ask for prohibited basis information unless required. If such information is nonetheless volunteered by the consumer, such information cannot be considered in the credit decision, except as expressly permitted by law.

4. Sensitively Handle Medical Information

Due to the fact that COVID-19 is a medical crisis, the process of servicing loans and evaluating borrower requests for loan modifications and other relief may inadvertently reveal sensitive medical information about the consumer. The Fair Credit Reporting Act (FCRA) and Regulation V prohibit creditors and servicers from requesting, obtaining, or using medical information in a credit decision or an evaluation of the borrower’s continued eligibility for credit.3 But a credit report or the consumer’s statement of hardship may inadvertently reveal medical information, such as the existence of overdue medical debt incurred in connection with a hospitalization for COVID-19, or the mere fact that a forbearance of debt payments has been granted. Use of unsolicited medical information in making a credit decision is permissible only if: (a) the information is the type of information routinely used in making credit eligibility determinations (such as a delinquency); (b) the creditor uses the medical information in a manner and to an extent that is no less favorable than it would use comparable information that is not medical information in a credit transaction (e.g. delinquent medical debt is treated the same as other delinquencies); and (c) the creditor does not take the consumer’s physical, mental, or behavioral health, condition or history, type of treatment, or prognosis into account as part of any such determination.4 FCRA also requires lenders and servicers that obtain a credit report containing medical information to keep that information confidential.

5. Consider the Effect of Social Distancing on Repayment Options

Consider whether stay-at-home orders and social distancing may disadvantage persons who happen to be in a protected class from making payments. For example, a lender or servicer may reduce its physical footprint by closing down retail branches or other locations where payments are accepted. If elderly or minority consumers are more likely to make payments at a physical location, servicers should consider how best to serve those populations to prevent a disparate impact. For example, communicating location closures, providing multiple payment options, waiving fees for live customer service, or allowing a one-time late fee waiver for consumers who make payments at physical locations, may mitigate the risk of disparately impacting members of certain communities.

6. Training and Vendor Management is Paramount

The most well-laid plans still have a risk of leaving a considerable impact on a prohibited basis group if the employees and vendors implementing those plans are not well-prepared. Employees and vendors should be trained on new programs, and be given clear and consistent instructions, telephone scripts, and job aids to ensure that the plans are implemented consistently across the board. This is obviously challenging in the current remote working environment. Companies should consider how they will evaluate performance and adherence to such policies and procedures in this environment, and provide and document feedback or corrective action when necessary.

7. Document Decisions and Deviation from Standard Practice

Although the Federal Inter-Agency Guidance provides some leniency to facilitate good-faith efforts to assist borrowers, that leniency does not extend to violations of fair lending laws. The industry should prepare for regulators to examine compliance and fair lending issues that arose during the pandemic. In particular, regulators are expected to focus on whether the process used by a lender or servicer to provide consumer relief (or deviate from standard practice and underwriting criteria) was fair and consistent. Any exceptions should be commensurate with the circumstances presented, and documented in a way that enables the regulators to understand that the response was fair, reasonable, and in the best interest of consumers in the larger context of business requirements.

1 42 U.S.C. §§ 3604(b), 36052

12 C.F.R. §§ 1002.5, 1002.6

3 15 U.S.C. § 1681b(g); 12 C.F.R. tit. 12, ch. X, pt. 1022.

4 12 C.F.R. § 1022.30.

Source:https://iclg.com/briefing/12636-fair-lending-considerations-in-a-covid-19-world-fair-servicing-and-consumer-relief-in-the-u-s

Okay, so here we are… we have worked together to secure financing for your mortgage. You are getting a great rate, favourable terms that meet your mortgage goals, the lender is satisfied with all the supporting documents, we are broker complete, and the only thing left to do is wait for the day the lawyers advance the funds for the mortgage. Here is a list of things you should NEVER do in the time between your financing complete date (when everything is setup and looks good) and your closing date (the day the lender actually advances funds).

Never make changes to your financial situation without first consulting me. Changes to your financial situation before your mortgage closes could actually cause your mortgage to be declined.

So without delay, here are the 10 Don’ts of Mortgage Closing… inspired by real life situations.

1: Don’t quit your job.

This might sound obvious, but if you quit your job we will have to report this change in employment status to the lender. From there you will be required to support your mortgage application with your new employment details. Even if you have taken on a new job that pays twice as much in the same industry, there still might be a probationary period and the lender might not feel comfortable with proceeding. If you are thinking of making changes to your employment status… contact me first, it might be alright to proceed, but then again it might just be best to wait until your mortgage closes! Let’s talk it out.

2: Don’t do anything that would reduce your income.

Kinda like point one, don’t change your status at your existing employer. Getting a raise is fine, but dropping from Full Time to Part Time status is not a good idea. The reduced income will change your debt services ratios on your application and you might not qualify.

3: Don’t apply for new credit.

I realize that you are excited to get your new house, especially if this is your first house, however now is not the time to go shopping on credit or take out new credit cards. So if you find yourself at the Brick, shopping for new furniture and they want you to finance your purchase right now… don’t. By applying for new credit and taking out new credit, you can jeopardize your mortgage.

4: Don’t get rid of existing credit.

Okay, in the same way that it’s not a good idea to take on new credit, it’s best not to close any existing credit either. The lender has agreed to lend you the money for a mortgage based on your current financial situation and this includes the strength of your credit profile. Mortgage lenders and insurers have a minimum credit profile required to lend you money, if you close active accounts, you could fall into an unacceptable credit situation.

5: Don’t co-sign for a loan or mortgage for someone else.

You may have the best intentions in the world, but if you co-sign for any type of debt for someone else, you are 100% responsible for the full payments incurred on that loan. This extra debt is added to your expenses and may throw your ratios out of line.

6: Don’t stop paying your bills.

Although this is still good advice for people purchasing homes, it is more often an issue in a refinance situation. If we are just waiting on the proceeds of a refinance in order to consolidate some of your debts, you must continue making your payments as scheduled. If you choose not to make your payments, it will reflect on your credit bureau and it could impact your ability to get your mortgage. Best advice is to continue making all your payments until the refinance has gone through and your balances have been brought to zero.

7: Don’t spend your closing costs.

Typically the lender wants to see you with 1.5% saved up to cover closing costs… this money is used to cover the expense of closing your mortgage, like paying your lawyer for their services. So you might think that because you shouldn’t take out new credit to buy furniture, you can use this money instead. Bad idea. If you don’t pay the lawyer… you aren’t getting your house, and the furniture will have to be delivered curb side. And it’s cold in Canada. You get the picture. However just in case you don’t, I included it below.

8: Don’t change your real estate purchase contract.

Often times when you are purchasing a property there will be things that show up after the fact on an inspection and you might want to make changes to the contract. Although not a huge deal, it can make a difference for financing. So if financing is complete, it is best practice to check with me before you go and make any changes to the purchase contract.

9: Don’t list your property for sale.

If we have set up a refinance for your property and your goal is to eventually sell it… wait until the funds have been advanced before listing it. Why would a lender want to lend you money on a mortgage when you are clearly going to sell it right away (even if we arranged a short term).

10: Don’t accept unsolicited mortgage advice from unlicensed or unqualified individuals.

Although this point is least likely to impact the approval of your mortgage status, it is frustrating when people who don’t have the first clue about your unique situation give you unsolicited advice about what you should do with your mortgage, making you second guess yourself. Now, if you have any questions at all, I am more than happy to discuss them with you. I am a mortgage professional and I help clients finance property everyday, I know the unique in’s and out’s, do’s and don’ts of mortgages. Placing a lot of value on unsolicited mortgage advice from a non-licensed person doesn’t make a lot of sense and might lead you to make some of the mistakes as listed in the 9 previous points!

So in summary, the only thing you should do while you are waiting for the advance of your mortgage funds is to continue living your life like you have been living it! Keep going to work and paying your bills on time!

Now… what about after your mortgage has funded? You are now free to do whatever you like! Go ahead… quit your job, go to part time status, apply for new credit to buy a couch and 78″ TV, close your credit cards, co-sign for a mortgage, sell your place, or soak in as much unsolicited advice as you want! It’s up to you! But just make sure your mortgage has funded first. Also it is good to note, if you do quit your job, make sure you have enough cash on hand to continue making your mortgage payments! The funny thing about mortgages is if you don’t make your payments, the lender will take your property and sell it to someone else and you will be left on that curbside couch (as pictured above). Obviously, if you have any questions, I would love to answer them for you, feel free to contact me anytime!

Source: https://www.christinebuemann.ca/the-10-donts-of-mortgage-closing1