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Financial Services Law Insights and Observations

States say FHA must require servicers to comply with Covid-19 loss mitigation options

State Issues State Attorney General FHA HUD Mortgages Mortgage Servicing Covid-19 Federal Issues Consumer Finance Loss Mitigation

State Issues

On December 21, a coalition of attorneys general from 20 states and the District of Columbia sent a letter to the FHA urging the agency to address mortgage servicers’ alleged failure to adequately implement Covid-19 recovery loss mitigation options for eligible borrowers. As previously covered by InfoBytes, FHA issued Mortgagee Letter 2021-18 in July, which required mortgage servicers to offer a zero-interest subordinate lien option to eligible homeowners who can resume their existing mortgage payments under the “COVID-19 Recovery Standalone Partial Claim” option. For borrowers that are unable to resume their monthly mortgage payments, FHA established the “COVID-19 Recovery Modification” option, which extended the term of a mortgage to 360 months at market rate and targeted a 25 percent principal and interest reduction for all eligible borrowers. At the time, FHA informed servicers that they could start offering the options as soon as operationally feasible but were required to use the new options within 90 days.

The AGs alleged in their letter that several servicers of FHA-insured loans are reportedly failing to adequately implement these Covid-19 relief programs, and are instead “routinely sending borrowers letters that fail to include the Covid-19 Recovery Modification as an available option, are requiring paperwork and imposing qualifications that are not necessary under the FHA’s guidelines, and are instructing borrowers during customer-service phone calls that this option does not exist.” The AGs expressed deep concerns over these reports and requested that FHA take immediate action to ensure that FHA’s loss mitigation options, including the Covid-19 Recovery Modification, are fully implemented, and that borrowers receive accurate, up-to-date information. The AGs asked that FHA-approved lenders and servicers be required to demonstrate that they are taking affirmative actions to implement these Covid-19 relief options and requested training for all customer service staff to ensure borrowers receive the necessary information.

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