Mortgage Servicers Must Provide Substantial Forbearance Relief to COVID-19 Affected Borrowers of Federally Backed Loans

With the federal government's $2 trillion emergency relief bill passed by the Senate and expected to be speedily approved by the House and signed by the President, mortgage servicers already inundated with borrower requests for relief related to COVID-19 will soon be flooded with more.

While details regarding implementation and handling of forborne payments are still emerging, Fannie Mae and Freddie Mac just released new payment deferral post-forbearance relief programs. Our prior advisory on federal and state agency guidance to mortgage servicers, including the 60-day foreclosure moratoria for certain mortgages, can be found here.

With so many borrowers expected to have need for long mortgage payment forbearance periods, the Conference of State Bank Supervisors (CSBS) has urged the U.S. Department of the Treasury and the Board of Governors of the Federal Reserve System to ensure that emergency funds are made available to the mortgage servicing industry so that servicers can continue to advance payments to loan investors while providing prolonged forbearance relief to borrowers.

Forbearance for Federally-Backed Mortgage Loans

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) just passed by the Senate directs mortgage servicers to offer up to 12 months of forbearance, in up to 180-day increments, to COVID-19-affected borrowers.

Detailed in Section 4022, the relief must be made available for all "federally backed mortgage loans" - which include Federal Housing Administration (FHA), Department of Veterans Affairs (VA), Department of Agriculture, Home Equity Conversion Mortgages (reverse mortgages), Native American and Hawaiian home lands loans, HECM/reverse mortgage loans and Fannie Mae and Freddie Mac loans.

Other key provisions include:

• No fees, penalties, or interest beyond interest already scheduled may accrue on borrower accounts during the forbearance period.
• Servicers must grant forbearance without requiring any documentation other than the borrower's "attestation to a financial hardship caused by the COVID-19 emergency."
• Except for vacant and abandoned properties, servicers many not initiate or move foreclosures forward for 60 days – starting from March 18, 2020.
• Negative credit reporting for all COVID-19-related consumer credit accommodations, except for charged-off accounts, is also prohibited (per Section 4021).
• Servicers must also offer up to 90 days of forbearance relief for federally-backed multifamily mortgage loans, provided the landlord-borrower extends renter protections to tenants (Section 4023).

Loan servicers should also be prepared to address potential customer confusion regarding bank and private investor-owned loans that are not subject to CARES Act-mandated relief, to the extent servicers do not or cannot extend broad forbearance uniformly across their portfolios.

However, as we reported in our prior advisory on the New York Department of Financial Services' Executive Order 202.9, states are already filling the gap for non-federally-backed mortgage loans. Pursuant to the Executive Order, on March 24, 2020, the NYDFS issued an emergency regulation requiring regulated financial institutions to set up an application process for borrowers to request a 90-day COVID-19-related mortgage forbearance, and "subject to the safety and soundness requirements of the regulated institution, grant such forbearance." The regulation applies to all residential mortgage loans except for the federally-backed loans covered by CARES Act relief.

Fannie Mae and Freddie Mac Hasten Availability of Payment Deferral Loss Mitigation Option

Just as the Senate took up the CARES Act, Fannie Mae and Freddie Mac announced that their servicers may offer the GSEs' new payment deferral loss mitigation option beginning July 1, 2020 (it had originally been slated to roll out by January 1, 2021).

• For borrowers who experience a temporary financial hardship – whether COVID-19-related or otherwise – and have taken advantage of loan payment forbearance but cannot fully reinstate their loans when the forbearance period ends, or afford to repay the forborne amounts alongside their usual monthly mortgage payments, servicers may offer to defer up to two months of forborne payments as a non-interest-bearing balance to be repaid when the loan matures or is otherwise paid off.

Fannie's program is described in Lender Letter 2020-05 (issued March 25, 2020), and Freddie's is described in Bulletin 2020-06 (also issued March 25, 2020). Freddie Mac also issued Bulletin 2020-07, containing additional COVID-19-related guidance, including, among other reminders: updated reporting and property inspection and preservation requirements; clarified requirements for streamlined Flex Modifications; and outreach and collection techniques. Fannie Mae similarly updated its earlier Lender Letter 2020-02.

The Fannie and Freddie payment deferral program's limit to two months' worth of forborne payments may seem somewhat out of synch with the up to 12 months of forbearance that the federal government will now require servicers to offer to COVID-19-affected borrowers.

However, the GSEs had planned to add these payment deferral programs to their suite of loss mitigation offerings before the COVID-19 crisis began. It is possible that the programs will evolve based on federally-mandated relief, and of course both GSEs have a variety of other loss mitigation options available, including options specific to disaster relief situations.

State Banking and Financial Regulators Urge Fed to Provide Liquidity to Mortgage Servicers

On March 25, 2020, the Conference of State Bank Supervisors urged the Fed, in consultation with the Treasury Department, to create a "liquidity facility" to support mortgage servicers. The CSBS cited the unprecedented volume of forbearance relief that mortgage servicers anticipate offering to borrowers in the wake of COVID-19 and the federal and moral mandate to offer that relief.

Further, CSCB noted their concern that "a severe liquidity shortage will threaten both the ability of mortgage servicers to serve their customers and the health of the nation's housing finance market."

Explaining that servicers will still need to advance monthly principal and interest and regular insurance and tax payments to investors, insurers and tax authorities during forbearance periods, the CSBS expressed concern that servicers, particularly non-bank servicers, would experience unmanageable liquidity stress in order to do so. Government-backed loan borrowers are more likely to be "vulnerable, credit strained and prone to suffer loss of employment" during a time of widespread economic and social crisis, and are thus more likely to take advantage of forbearance relief. In turn, according to the CSBS's letter, nonbank servicers without access to the sort of low-cost funding that banks have access to handle 69 percent of government-backed FHA and VA loan servicing.

The CSBS also stressed that providing liquidity to mortgage servicers "does not obviate the need for state regulators, along with our federal counterparts, to adopt prudential standards that will enhance the safety and soundness of the nonbank mortgage industry." But the CSBS acknowledged that, particularly for nonbank loan servicers, "it is unlikely that even the most stringent prudential standards would enable a monoline nonbank servicer to weather the widespread forbearance that will be faced in the near term."

During a March 26, 2020 meeting of the Financial Stability Oversight Council, Treasury Secretary Steven Mnuchin stated that he formed a task force to address the issue.

Federal Agencies, Including the CFPB, Encourage Loan Modifications and Working With Customers Affected by COVID-19, and Offer Flexibility to Financial Institutions

By joint statement issued on March 22, 2020, the FDIC, the Board of Governors of the Federal Reserve System (FRB), the Office of the Comptroller of the Currency, the National Credit Union Administration, the state banking regulators, and the Consumer Financial Protection Bureau "[e]ncourage[d] financial institutions to work constructively with borrowers affected by COVID-19."

Among other things, the agencies promised not to "criticize institutions for prudent loan modifications," and confirmed that short-term modifications "made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief" need not be automatically categorized as troubled debt restructurings (TDRs), and that similar modifications of residential mortgages "do not result in loans being considered restructured or modified for the purpose of respective risk-based capital rules."

On March 26, 2020, the CFPB issued several statements in furtherance of its and the other agencies' encouragement of financial institutions "to work constructively with borrowers and other customers affected by COVID-19 to meet their financial needs," as well as their assurance that "[p]rudent efforts that are consistent with safe and sound lending practices should not be subject to examiner criticism," and that "regulators also will work with affected financial institutions in scheduling examinations or inspections to minimize disruption and burden."

CFBP Guidance to Financial Institutions

• First, the CFPB will not require quarterly Home Mortgage Disclosure Act (HMDA) and Regulation C reporting from mortgage lenders. Rather, lenders should continue to collect the data and await further instruction regarding when to commence new quarterly submissions.
• Second, the CFPB is also postponing reporting of certain information related to credit card and prepaid accounts under the Truth in Lending Act, Regulation Z, and Regulation E, as well as data collection regarding certain pending rulemakings.
• Finally, the CFPB will, when conducting examinations and considering enforcement actions, "be sensitive to good-faith efforts demonstrably designed to assist consumers" affected by the COVID-19 pandemic.

DWT continues to monitor breaking guidance in the consumer financial services and mortgage space, and we are prepared to assist.

The facts, laws, and regulations regarding COVID-19 are developing rapidly. Since the date of publication, there may be new or additional information not referenced in this advisory. Please consult with your legal counsel for guidance.

DWT will continue to provide up-to-date insights and virtual events regarding COVID-19 concerns. Our most recent insights, as well as information about recorded and upcoming virtual events, are available at www.dwt.com/COVID-19.