Nearing Three Months In – More Updates on Mortgage Relief Efforts, Regulatory Guidance, and Emerging Areas of Concern

For the second week in a row since the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law, the number of borrowers in COVID-19 related mortgage forbearance plans has decreased. As of June 9, 2020, 8.8 percent of all U.S. mortgage loans (4.66 million homeowners) were in forbearance. This represents a 77,000 decrease in the number of active forbearance plans from the prior week and a 112,000 decrease from the peak week of May 22.

Referencing concerns at the start of the crisis that mortgage forbearance rates could rise as high as 25-50 percent, Federal Housing Finance Agency (FHFA) Director Mark Calabria, in his June 9, 2020 testimony to the Senate Banking Committee, concluded that in contrast with that prediction, forbearance rates “remain manageable.” While a decline is good news, this statistic still represents about $1 trillion in unpaid principal across the mortgage market.

And although the forbearance rate has dropped, the delinquency rate appears to be on the rise. By the end of April 2020, 46 percent of the homeowners who had requested forbearance still made their payments. However, as of May 26, 2020, only 22 percent made payments.

With the initial rush of forbearance requests over, but the specter of dealing with the missed payments once forbearance periods end remaining, areas where government scrutiny will likely focus are becoming clearer. Below we cover:

• Updates on post-COVID-19 forbearance options from Fannie Mae, Freddie Mac, and the Department of Housing and Urban Development (HUD);
• Emerging areas of concern, including recent guidance from regulators in connection with COVID-19-related mortgage relief; and
• Updates on New York’s and California’s pending mortgage payment relief bills.

Our prior advisories covering COVID-19-related mortgage relief issues and government action and guidance, including the Consumer Financial Protection Bureau ’s (CFPB) recent encouragement of innovation in mortgage relief, can be found here, here, here and here.

Updates on Post-COVID-19 Forbearance Options for Federally-Backed Loans

Fannie Mae and Freddie Mac greatly simplified the post-CARES Act forbearance loss mitigation landscape when they introduced the “COVID-19 Payment Deferral” option with Lender Letter (LL-2020-07) and Bulletin 2020-15. The COVID-19 Payment Deferral is designed to allow all forborne payments (up to 12 months) to move into a non-interest bearing balance to be paid back at the end of the loan term. The COVID-19 Payment Deferral brought Fannie Mae and Freddie Mac in line with HUD’s COVID-19 National Emergency Standalone Partial Claim option, which provides borrowers with a junior mortgage (zero additional interest, no fees) not payable until the mortgage is paid off, comprised of the total amount of payments missed during a CARES Act forbearance period.

On May 12, 2020, HUD, along with the CFPB and the FHFA, launched a website to “ensure homeowners and renters have the most up-to-date and accurate housing assistance information.” As described by the FHFA Director, the website is a “one-stop shop for information about the housing protections and assistance available.”

The website provides information on both CARES Act forbearance, and the post-forbearance loss mitigation options offered by Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), and United States Department of Agriculture (USDA). The site was launched alongside the CFPB’s and Conference of State Bank Supervisors’ (CSBS) “Consumer Relief Guide,” covering payment forbearance and foreclosure protection under the CARES Act, and the CSBS state tracker covering mortgage relief, stays on eviction and foreclosure moratoria, and other information regarding borrower relief.

To continue promoting liquidity in the mortgage market, both HUD and FHFA will now allow loans that entered COVID-19 forbearance shortly after origination to be eligible for FHA insurance endorsement and to be purchased by Freddie Mac and Fannie Mae. FHFA extended Fannie Mae’s and Freddie Mac’s authority to purchase mortgage loans in forbearance until at least July 31, 2020.

Notably, however, in Mortgagee Letter 2020-16, HUD requires mortgagees who seek HUD endorsements of loans in forbearance to:

• (i) Execute a two-year partial indemnification agreement, indemnifying HUD for 20 percent of the initial loan amount; and
• (ii) Ensure that already-provided forbearance complies with or is converted to comply with FHA requirements for CARES Act forbearance.

On June 17, 2020, FHFA announced that Fannie Mae and Freddie Mac’s eviction and foreclosure moratorium would be extended through at least August 31, 2020. The FHA made a similar announcement for homeowners with FHA-insured Single Family mortgages.

Emerging Areas of Concern

There have been some bumps along the way to implementing required and needed relief. HUD’s Office of Inspector General (OIG) conducted a study of the top 30 mortgage servicers 22 days after the CARES Act was enacted. The study focused on the information that servicers were providing to borrowers regarding forbearance. HUD OIG ultimately concluded that information from servicers was “incomplete, inconsistent, dated, and unclear.”

In summary:

• (i) Not all servicer websites provided readily accessible information;
• (ii) The information about the duration of forbearance was inconsistent;
• (iii) The information was not brought up to date to meet the mandates of the final CARES Act; and/or
• (iv) The servicer “gave the impression” that a lump sum payment was necessary at the end of the forbearance. 

Shortly thereafter, on May 5, 2020, Congresswoman Maxine Waters (D-CA), Chairwoman of the House Financial Services Committee, and the subcommittee chairs sent letters to the nation’s 11 largest servicers regarding their information on housing assistance. The letter reminded servicers of the protections afforded to borrowers via the CARES Act and stressed that they must not only “communicate consistent and accurate information regarding the options available to borrowers,” but make “customer service representative[s] [available] without excessive wait times or other delays.” Most notably and pursuant to the committee’s oversight authority, the letter requested that these servicers produce documentation and information such as their policies and procedures, training materials, communications sent to borrowers, and records to showcase forbearance requests, complaints, and the like.

The CFPB’s May 2020 Complaint Bulletin, covering complaints mentioning coronavirus keywords, echoed HUD OIG findings and the House Financial Services Committee’s criticisms, observing, among common complaints, that consumers were unable to reach customer service representatives and faced long hold times, and were informed by their mortgage servicers that they would have to repay 90-day forbearances in a lump sum at the end of the 90-day period.

Coming into June, the ripple effects of HUD OIG’s study and the CFPB’s complaint database analysis can be seen. On June 4, 2020, the CFPB along with the CSBS issued guidance to servicers that provided a statutory overview of the CARES Act protections, a round-up of relevant rules and guidelines, and a Q&A based on “observed or anticipated actions by mortgage servicers.” The Q&As are meaningful when read in parallel with the HUD OIG’s findings and the CFPB’s May 2020 Complaint Bulletin, focusing on observations such as servicers:

• (i) Providing inconsistent information about forbearance periods;
• (ii) Requesting documentation or information supporting the need for forbearance or proving hardship (which is inconsistent with the CARES Act); and
• (iii) Discouraging borrowers from requesting forbearance. 

In contrast to previous assurances that regulators would be flexible in their enforcement of servicing regulations for mortgage servicers providing COVID-19-related relief, the CFPB’s and CSBS’s recent guidance takes a more strident tone, specifically warning, for instance, that “[a] servicer that offers very limited repayment options when others are reasonably available could depending on the facts and circumstances, be at risk of legal violation or causing consumer harm,” and that “[e]xaminers will evaluate originator communications with borrowers for legal compliance or causing consumer harm.”

And even though CFPB Director Kathleen Kraninger has explicitly repudiated former Director Cordray’s “regulation by enforcement” approach, the CFPB’s May settlement with a mortgage loan servicer does seem pointedly timed. The servicer was alleged to have violated Regulation X’s required foreclosure protections and loss mitigation evaluation notice requirements, conduct that all occurred during the last deluge of mortgage loss mitigation requests following the 2008 financial crisis.

Servicers should accordingly be prepared for scrutiny of their COVID-19 loss mitigation practices and procedures. This includes taking care that call center scripts, policies and procedures, as well as the timing and content of communications with consumers related to COVID-19 forbearance and post-forbearance loss mitigation options, do not run afoul of the CFPB’s and CSBS’s warnings regarding what might constitute consumer harm despite earlier pledges of regulatory flexibility.

Update on State Efforts – New York and California

States also continue efforts to expand protections to homeowners not covered under the CARES Act.

New York

Two New York bills (Senate Bill S8243C, as amended by Senate Bill S8428) awaiting Governor Andrew M Cuomo’s signature seem intended to mirror CARES Act relief and the post-forbearance options offered by Fannie Mae, Freddie Mac and HUD, but for non-federally-backed loans. The bills would require 180 days of forbearance (plus an additional 180 if needed) for non-federally-backed borrowers who demonstrate financial hardship during the NY on PAUSE period.

Under this legislation, borrowers granted forbearance could resolve the forbearance by:

• (i) Extending the loan term for the length of the forbearance,
• (ii) Agreeing to a monthly repayment plan to pay off the arrears accumulated during the forbearance period during the remaining term of the loan,
• (iii) Deferring the arrears to a balloon payment payable at the maturity of the loan; or
• (iv) Agreeing to a loan modification.

For all four options, interest may not be charged on the forborne amounts, and late fees and negative credit-reporting are prohibited. Senate Bill S8428 clarified that servicers would not need to “waive interest on the principal for the term of the forbearance,” as Senate Bill S8243C appeared to require, and that servicers or state-chartered banks with liquidity or soundness concerns could seek an exemption from providing the relief.

With New York’s Business Conduct Rules for Servicing Mortgage Loans having come into effect this week (except for the periodic statement requirement, that compliance deadline was just extended to August 14, 2020), servicers will need to ensure that their loss mitigation programs comply with those rules (which largely mirror Regulation X requirements, but with some key differences) when offering any newly-required mortgage relief options.

California

A proposed piece of California legislation goes even farther than the pending New York bills, and could have significant implications for servicers if enacted in its present form. Assembly Bill 2501, the “COVID-19 Homeowner, Tenant, and Consumer Relief Law of 2020” (most recently amended in assembly on June 10, 2020), provides forbearance to borrowers for 180 days, subject to extension for another 180 days.

In line with the theme of consistent and accurate information, among the requirements for servicers is that they must provide a “complete and accurate description of the loss mitigation and reinstatement options that will be available to the borrower at the end of the forbearance period based on the borrower’s specific loan.” The bill also specifically prohibits certain actions, such as requiring borrowers to make a “lump-sum” reinstatement payment prior to the mortgage loan’s original maturity date, or “claim[ing]” that “investor guidelines or any applicable law prohibits the mortgage servicer from implementing” certain post-forbearance options, unless the borrower and the California Commissioner of Business Oversight is notified of the “claim” when the forbearance is first offered.

Earlier drafts of the California bill were criticized for providing that a violation of the bill’s requirements would result in the servicer forfeiting any rights to commence foreclosure against a borrower that is harmed by the violation, and it also would be considered an unfair and deceptive business practice. While those specific provisions have been removed from the current draft of the bill, many more detailed requirements have been added in their place, including a lengthy and broadly applicable foreclosure moratorium, other provisions that may conflict with or go beyond what is already mandated by California’s Homeowner Bill of Rights, and broad civil liability for “misrepresentations” regarding loss mitigation options. Industry trade groups have voiced their opposition.

As the landscape continues to change, DWT follows the trends and developments affecting the mortgage lending and servicing industry. If you need information or assistance with federal requirements and guidance or specific state relief measures, DWT’s mortgage and home lending practice is here to help.

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.