The COVID-19 pandemic has thrust the world into an unimaginably difficult situation. Though authors of science fiction may try, no one could have fully anticipated the scale and speed with which the pandemic would impact the economy. For mortgage lenders and servicers, the pandemic will prove to be a test of business continuity planning while managing process and regulatory changes in real time, all while maintaining fairness and compliance across all aspects of day-to-day operations.
The CARES Act (Pub. L. No. 116-136; the “Act”) was enacted on March 27, 2020 to provide financial assistance and other types of relief as the negative economic impact of the COVID-19 pandemic set in across the country. The consumer finance provisions under Title IV of the Act directly address helping Americans struggling to make mortgage payments due to the economic slowdown caused by the pandemic. These provisions cover “Federally backed mortgage loans,” which are defined under the Act as any loan which is secured by a first or subordinate lien on residential real property designed principally for the occupancy of from one-to-four families that is:
- Insured by the Federal Housing Administration or under the National Housing Act;
- Guaranteed or insured by the Department of Veterans Affairs or the Department of Agriculture; or
- Purchased or securitized by the Federal Home Loan Mortgage Corporation or the Federal National Mortgage Association.
For servicers of mortgages not covered by the CARES Act, the provisions of the Act serve as guidance applicable to servicers helping millions of borrowers with covered loans. Given the profound impact of the pandemic across all sectors of the economy and its 24-hour coverage in the news, consumers are acutely aware of important elements of the assistance made available by the law. However, awareness of important details is generally lost on the average consumer. Thus, for servicers of non-federally backed mortgages, it is likely that the calls are, and will, come in large volume from borrowers seeking help from loan servicers. Helping borrowers stay in their homes and maintaining their lives generally yields a positive outcome over the long haul for borrowers, lenders, local economies and the government.
Consumer Right to Request Forbearance
Section 4022 of the Act provides that a borrower experiencing financial hardship due to the COVID-19 pandemic can request forbearance for a federally backed mortgage loan regardless of delinquency status. This process occurs through the submission of a request by a borrower to the servicer of his or her mortgage affirming that he or she is experiencing a financial hardship during the COVID–19 emergency. Upon this request by a borrower, the servicer is required to grant forbearance for up to 180 days. The servicer shall extend the duration of the forbearance for an additional period of up to 180 days.
Upon receiving a request for forbearance from a borrower, the law provides that a servicer shall grant the request with no additional documentation required other than the borrower’s attestation to a financial hardship caused by the COVID–19 emergency. The law explicitly provides that during the period of forbearance “no fees, penalties, or interest beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the terms of the mortgage contract” can be assessed on the borrower.
Servicers should be careful to comply with this prohibition. Governance process and system-driven controls must ensure that no fees, penalties, or interest beyond the amounts scheduled or calculated—as if the borrower made all contractual payments on time and in full under the terms of the mortgage contract—are charged. These controls must remain fully established in connection with the 180-day forbearance period, as well as an extension for an additional period of up to 180 days, provided that the request is made during the covered period (although not specifically defined in the law, it presumably means during the original 180-day period) and that at the borrower’s request, either the initial or extended period of forbearance may be shortened.
Foreclosure Moratorium
Section 4022(c)(2) of the Act further provides that servicers of federally backed mortgage loans may not initiate any judicial or non-judicial foreclosure process, move for a foreclosure judgment or order of sale, or execute a foreclosure-related eviction or foreclosure sale for not less than the 60-day period beginning on March 18, 2020. The Act provided an exception for a vacant or abandoned property. While the 60-day period expired on May 17, 2020, it is always prudent to closely monitor foreclosure and collection policies, procedures, and actual practices to ensure fairness and appropriate customer treatment at all times.
Forbearance of Residential Mortgage Loan Payments for Multifamily Properties
Section 4023 of the CARES Act provides that during the covered period, a multifamily borrower with a federally backed multifamily mortgage loan experiencing a financial hardship due, directly or indirectly, to the COVID–19 emergency may request a forbearance. The Act defines a “multifamily borrower” as a borrower of a residential mortgage loan that is secured by a lien against a property comprising five or more dwelling units. Federally backed in the case of multifamily is defined as any loan other than temporary financing (e.g., construction loan) that is made in whole or in part, insured, guaranteed, supplemented, or assisted in any way, by:
- Any officer or agency of the Federal Government or under or in connection with a housing or urban development program administered by the Secretary of Housing and Urban Development; or
- A housing or related program administered by any other such officer or agency, or which is purchased or securitized by the Federal Home Loan Mortgage Corporation or the Federal National Mortgage Association.
The term “covered period” is specifically defined under Section 4023(f)(5) to mean the period beginning on the date of enactment of the CARES Act and ending on the sooner of the termination date of the national emergency concerning the novel coronavirus disease outbreak as declared by the President on March 13, 2020 or December 31, 2020.
Section 4023(b) of the Act provides that a multifamily borrower with a federally backed multifamily mortgage loan that was in a current status as of February 1, 2020 can submit a verbal or written request for forbearance. The borrower must affirm to the servicer that he/she is experiencing a financial hardship during the COVID–19 emergency.
The Act allows for a forbearance period for up to 30 days, with up to two additional 30-day periods. The request for an extension must be made during the covered period, and, at least 15 days prior to the end of the forbearance period. The Act provides that a multifamily borrower shall have the option to discontinue the forbearance at any time. It is also notable that Section 4023(d) provides protections for renters during the forbearance period. Multifamily borrowers who receive a forbearance may not evict or initiate the eviction of a tenant solely for nonpayment of rent or other fees or charges and may not charge any late fees, penalties, or other charges to a tenant for late payment of rent.
The Act prohibits eviction or initiation of eviction during the forbearance solely for nonpayment of rent, fees or other charges. The Act further prohibits any charge to the tenant for any late fees, penalties, or other described charges for late payment of rent. Section 4023(e) provides that a multifamily borrower who receives a forbearance may not require a tenant to vacate prior to the date that is 30 days after the date on which the borrower provides the tenant with a notice to vacate and may not issue a notice to vacate until after the expiration of the forbearance.
Agency Guidance Factors Into the Equation
On April 3rd, 2020, the Joint Statement on Supervisory and Enforcement Practices Regarding the Mortgage Servicing Rules in Response to the COVID-19 Emergency and the CARES Act (“Joint Statement”) was released. This was a joint statement by the Consumer Financial Protection Bureau (“CFPB”), Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, and Conference of State Bank Supervisor (collectively the “agencies”) whereby they formally recognized the serious impact of the COVID-19 emergency on consumers and on the operations of many supervised entities, including mortgage servicers. The agencies stated an understanding that that the COVID-19 crisis could impose temporary business disruptions and staffing challenges, thereby impeding the ability of lenders and servicers to assist consumers.
Moreover, the agencies are emphasizing the potential for consumer confusion about how to access and exercise options offered by mortgage servicers. In issuing the Joint Statement, the agencies clarified the application of the mortgage servicing rules under Regulation X and established expectations for supervision and enforcement relative to the rules on short-term options as the industry works through the covered period.
Coinciding with the release of the Joint Statement, the CFPB issued The Bureau’s Mortgage Servicing Rules FAQs related to the COVID-19 Emergency (“FAQs”). The FAQs support the Joint Statement by addressing common questions and themes. While not a substitute for Regulation X, Regulation Z, or the associated official interpretations, the FAQs provide focus for helping servicers managing burgeoning requests from borrowers for help.
Short-Term Loss Mitigation Options. Regulation X generally requires servicers to obtain a complete loss-mitigation application before evaluating a mortgage borrower for a loss-mitigation option, such as a loan modification or short sale. However, the FAQs stipulate that CARES Act forbearance qualifies as a “short-term repayment forbearance program” under Regulation X. A servicer may offer a short-term payment forbearance program or a short-term repayment plan to a borrower, based upon an evaluation of an incomplete loss mitigation application.
The FAQs go a step further in stating that a servicer may offer any loss-mitigation options to a borrower who has not submitted an application at all. The FAQs address communications requirements associated with short-term payment forbearance. The FAQs provide that “until further notice” servicers will not be cited in an examination or that the agencies intend to take supervisory or enforcement action for failing to provide acknowledgement notice within the five days of application for forbearance. The only qualifier is that servicers should make a good faith effort to provide notices and take the related actions within a reasonable time.
Subsequent notices provided to the borrower provide information detailing the specific payment terms; duration of the program or plan; that the program or plan is based on an evaluation of an incomplete application; that other loss mitigation options may be available, and that the borrower has the option to submit a complete loss mitigation application to receive an evaluation for all available options, regardless of whether the borrower accepts the short-term program or plan.
Servicers are required to provide the second communication in cases where the borrower remains delinquent near the end of the forbearance program or repayment plan. The servicer must contact the borrower prior to the end of the forbearance period and determine whether the borrower needs to complete the loss mitigation application and proceed with a full loss mitigation evaluation. The CFPB allows servicers the flexibility to add language to the subsequent notices to clarify why they are offering short-term options and to help avoid borrower confusion. The FAQs state that servicers are under no requirement to tailor the first or second communications and may use similar content as a means to conserve resources during the pandemic.
Early Intervention Requirements. Four questions relative to early intervention requirements are addressed in the FAQs. The first two questions address whether servicers are required to comply with live contact requirements and early intervention written notice requirements, and they clarify the associated timelines in Regulation X, 12 CFR 1024.39(a) and (b). Similar to the agencies’ position on notifications, compliance with live contact and provision of the 45-day letter is generally expected. The FAQs clarify that the agencies have agreed that they do not intend to cite in an examination or bring an enforcement action against servicers for delays in establishing or making good faith efforts to establish live contact and provide written notice. The focus during the pandemic is on “good faith efforts” which the FAQs clarify consist of “reasonable steps, under the circumstances” that are defined as “calling the borrower on more than one occasion or sending written or electronic communication encouraging the borrower to establish live contact with the servicer.”
The FAQs also contextualize what might constitute good faith, suggesting that the servicer should consider the length of a borrower’s delinquency, as well as a borrower’s failure to respond to a servicer’s repeated attempts at communication. Servicers will be considered in compliance with the early intervention live contact requirements if the servicer has established and is maintaining ongoing contact with a borrower under the loss mitigation procedures. The FAQs remind that live contact requirements are not applicable when a borrower is performing as agreed under a loss mitigation.
The third and fourth questions address whether a servicer has to comply with early intervention, live contact and written notice requirements if the borrower is participating in CARES Act forbearance. The FAQs explain that the answers to these questions depend on circumstances, noting that borrowers can request a CARES Act forbearance regardless of delinquency status. More direct to the point here is that if the borrower is delinquent, the servicer must comply with early intervention requirements.
Continuity of Contact Requirements. The FAQs recognize that servicers may experience customer service call center staffing challenges due to the pandemic. As such, assigning a “single point of contact” to each delinquent borrower may prove difficult. The FAQs grant some flexibility on this requirement, stating that “servicers must maintain policies and procedures reasonably designed to assign personnel to a delinquent borrower that can assist the borrower with loss mitigation options” and that a “servicer has discretion to determine whether to assign a single person or a team of personnel.”
Annual Escrow Statement. The FAQs, in response to the question of whether servicers must conduct the annual escrow analysis and send annual escrow statements required by Regulation X, stipulates that the answer is yes. This response recognizes that escrow statements may generate call volume and contribute to borrower anxiety. Similar to earlier questions, the agencies do not intend to cite in an examination or bring an enforcement action against servicers for delays in sending the annual escrow statement—provided servicers make a good faith effort within a reasonable time.
The agencies suggest that servicers inform the borrower that they are forgoing collection for several months on any shortage or deficiency. The FAQs provide a reminder of the exemption from providing an annual escrow account statement when a borrower is more than 30 days past due. For borrowers who are subsequently reinstated and return to current status, servicers must provide a history of the account since the last annual statement within 90 days of the account’s reinstatement date to current status.
Electronic Communications with Borrowers. The FAQs affirm that servicers may send servicing notices in electronic form and are subject to the requirements of the Electronic Signatures in Global and National Commerce Act.
Payoff Statements. The FAQs address the question of whether servicers can take more than seven business days to provide a payoff statement due to operational challenges brought on by the pandemic. The FAQs state that while the servicer does not need to provide the statement within seven business days, it should be provided within a “reasonable time.”
Exemptions for Small Servicers. To the question of whether small servicers are subject to the requirements, the FAQs provide that small servicers do not have to comply with the early intervention and continuity of contact requirements. Small servicers must comply with the foreclosure restrictions of Regulation X, 12 CFR 1024.41(j), as well as the escrow requirements of Regulation X, 12 CFR 1024.17. With respect to foreclosure restrictions, the FAQs make it clear that small servicers shall not:
- Provide the first notice or filing required to foreclose, unless the:
- Borrower’s mortgage loan obligation is more than 120 days delinquent,
- Foreclosure is based on a borrower’s violation of a due-on-sale clause, or
- Servicer is joining the foreclosure action of a superior or subordinate lienholder;
- Provide the first notice or filing required to foreclose if a borrower is performing pursuant to the terms of a loss mitigation agreement; and
- Move for foreclosure judgment or order of sale or conduct a foreclosure sale in the case of a borrower who is performing pursuant to the terms of a loss mitigation agreement.
The FAQs also remind that small servicers are subject to and must comply with the payoff statement provisions in Regulation Z, 12 CFR 1026.36(c)(3).
Conclusion
These are truly unprecedented times. Consumers are facing difficult choices. As the Joint Statement underscores, mortgage servicers play a vital role in assisting consumers in providing options for paying their mortgages. The current crisis presents potential financial challenges to borrowers; the CARES Act Section 4022 and 4023 are intended to provide some measure of related relief. However, there is a risk of confusion for borrowers, lenders and mortgage servicers.
The flexibility that the agencies are able to offer pursuant to the Joint Statement and as further clarified by the CFPB’s FAQs helps to reduce the immediate regulatory risk and pressure. The focus is on making a good faith effort to respond to the needs of borrowers. However, mortgage servicers must make certain that their existing Regulation X related compliance practices for loss mitigation are appropriately modified in light of the guidance set forth in the Act and the guidance published by the agencies.
Given the stress of the times we’re living through, it is vital to not lose sight of the fact that these efforts must be fulfilled in a fair and responsible manner. Through reasonable efforts to maintain a tone of fairness and compassion; to ensure that governance is up to date with regulatory guidance; that processes and system controls are in alignment; and that reasonable monitoring of workflows and production output is conducted, the mortgage servicing industry can and must move forward. While resources may be stressed, keep an eye to the future, knowing that the metrics of the current period will tell the story of the good faith effort made.