InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
Oklahoma enacts student loan servicer prohibitions
On April 27, the Oklahoma governor signed SB 261, which creates the Oklahoma Student Borrower’s Bill of Rights Act and outlines new provisions for student loan servicers. Among other things, the act prohibits student loan servicers from (i) directly or indirectly defrauding or misleading student loan borrowers; (ii) engaging in unfair or deceptive practices, such as “misrepresenting the amount, nature or terms of any fee or payment due or claimed to be due on a student education loan, the terms and conditions of the loan agreement or the borrower’s obligations under the loan”; (iii) obtaining property by fraud or misrepresentation; (iv) incorrectly applying or failing to apply a borrower’s loan payments to an outstanding balance; (v) providing inaccurate information to a credit bureau about a borrower; (vi) failing to report a borrower’s favorable and unfavorable payment history at least once a year except in the case of loan rehabilitation; (vii) refusing to communicate with a borrower’s authorized representative; (viii) making false statements or misrepresenting by omission any material facts in connection with a government investigation; (ix) failing to inform borrowers of their federal income repayment options prior to offering deferment or forbearance; and (x) failing to inform borrowers if their loan does not qualify for a loan forgiveness program. The act takes effect November 1.
In 2023, the governor signed HB 1443 to make a technical correction to the text. The change is effective November 1.
FHA streamlines mortgage servicing operational requirements
On April 19, FHA issued an update to Section III of the Single Family Housing Policy Handbook 4000.1, which streamlines many standard mortgage servicing operational requirements. The updates also incorporate FHA actions taken to support borrowers experiencing Covid-19-related financial hardships. The changes/updates include:
- A revised loss mitigation home retention “waterfall” to help servicers quickly review borrowers in danger of foreclosure for a permanent FHA Home Affordable Modification Program option without a lengthy forbearance. FHA noted in its announcement that this process “has been proven to be highly effective at helping borrowers avoid redefault and foreclosure.”
- Streamlined documentation requirements designed “to avoid unnecessary delays” and be more closely aligned “with standard industry servicing practices.” One example includes removing signature requirements on trial payment plans.
- A revised structure for certain allowable costs and fees corresponding with other industry participants’ fee structures.
The changes take effect August 17.
Industry group sues to stop Washington’s emergency rule banning credit scoring in insurance underwriting
On April 8, the American Property Casualty Insurance Association (APCIA) filed a lawsuit in Washington Superior Court in an attempt to stop an emergency rule issued last month by the Washington Insurance Commissioner, which bans the use of credit-based insurance scores in the rating and underwriting of insurance for a three-year period. The rule specifically prohibits insurers from “us[ing] credit history to place insurance coverage with a particular affiliated insurer or insurer within an overall group of affiliated insurance companies” and applies to all new policies effective, and existing policies processed for renewal, on or after June 20, 2021.
According to a press release issued by the Commissioner, the emergency rule is intended to prevent discriminatory pricing in private auto, renters, and homeowners insurance in anticipation of the end of the CARES Act, which will expire 120 days after President Biden declares an end to the national emergency caused by the Covid-19 pandemic. Under the CARES Act, Congress required furnishers of information to credit bureaus to modify credit reporting practices if and when they grant an “accommodation”—that is, an agreement to defer payments, modify a loan, or grant other relief—to borrowers impacted by the Covid-19 pandemic, irrespective of asset type to ensure that borrowers who sought and obtained forbearance or other relief were not credit reported as becoming delinquent or further delinquent as a result of the forbearance or other relief (see Buckley Special Alert), which the Commissioner believes has disrupted the credit reporting process and reportedly caused credit bureaus to collect inaccurate credit histories for some consumers. The Commissioner further contends that because “the predicative ability of current credit scoring models cannot be assumed,” scoring models used by insurers to set rates for policyholders have been degraded and will have a disparate impact on consumers with lower incomes and communities of color. Sources report that APCIA’s lawsuit—which seeks declaratory and injunctive relief (and asks the court to declare the Commissioner’s rule invalid and to enjoin its enforcement)—claims the Commissioner’s rule will harm insured consumers in the state who pay less for auto, homeowners, and renters insurance because of the use of credit-based insurance scores to predict risk and set rates.
California regulator reminds mortgage lenders and servicers of pandemic-related relief
On April 9, the California Department of Financial Protection and Innovation issued guidance to mortgage lenders and servicers to remind them of state law protections for homeowners and encourage them to work with impacted borrowers to avoid foreclosure. The regulator noted that, under California’s Homeowner Relief Act, if a mortgage servicer denies a forbearance request between August 31, 2020 and September 1, 2021, the servicer must provide written notice to the borrower that specifies why relief was not provided, and provide certain information to assist the borrower with defects in the application. The regulator also encouraged mortgage services to work with their customers to propose solutions to avoid foreclosure and stated that prudent efforts to do so will not be criticized by examiners.
Special Alert: CFPB proposes to halt foreclosure starts from August 31 until 2022 and create new loss mitigation requirements for servicers
The Consumer Financial Protection Bureau on Monday issued a proposal that would broadly halt foreclosure initiations on principal residences from August 31, 2021 until 2022, and change servicing rules to promote consumer awareness and processing of Covid-relief loss mitigation options. Although the proposal would give servicers some flexibility in streamlining the modification process, most already have been offering many of these types of modifications since the early days of the pandemic. The proposal also would create new and detailed obligations for communicating with borrowers to ensure they are aware of their loss mitigation options for pandemic-related hardships.
The CFPB indicated that a final rule implementing the proposal will take effect Aug. 31 — a tight timeline to address public comments, which are due May 10. The proposal comes as the housing market is strengthening, loans in Covid-related forbearance are dropping, the unemployment rate is ticking down, and the nation’s vaccination program is gathering momentum.
Restrictions on foreclosure initiation through Dec. 31 for principal residences
The CFPB proposes prohibiting servicers from making the first notice or filing for foreclosure from the effective date on Aug. 31, 2021 until after Dec. 31, 2021, on all principal residences, regardless of whether the loan default was related in any way to the Covid-19 pandemic. Regulation X currently requires a servicer to generally refrain from making the first notice or filing to initiate foreclosure until the borrower reaches the 120th day of delinquency. Although the CFPB has previously taken the position that a borrower generally is not obligated to make a lump sum payment upon expiration of the forbearance period (See for example: Slides - Housing Counseling Webinar Forbearance Options and Resources - March 22, 2021 (hudexchange.info)), the proposal acknowledges that borrowers who enter forbearance programs and do not make payments during the forbearance period become increasingly delinquent on their mortgage obligation. As a result, without additional action, servicers likely would have a right under Regulation X to initiate foreclosure in the event a borrower comes off of a forbearance plan and does not cure the delinquency through reinstatement, deferral, or some other loss mitigation alternative to foreclosure. The proposal said a temporary foreclosure prohibition would address this concern.
The CFPB indicated it is considering creating exemptions from this restriction that would allow for the commencement of foreclosure proceedings if the borrower is not eligible for any nonforeclosure loss mitigation options or has failed to respond to servicer outreach.
It is possible that loan investors who had expected to instruct servicers to foreclose on defaulted loans will raise a legal challenge to the broad proposed foreclosure restriction, which appears to be principally based upon the CFPB’s authority to issue regulations creating mortgage servicer obligations as “appropriate to carry out [the Real Estate Settlement Procedures Act’s] consumer protection purposes.” It is an open question whether a blanket prohibition on foreclosures — including those unrelated to the pandemic — and applicable to all mortgage servicers is within the CFPB’s statutory authority under RESPA or the Dodd-Frank Act
Modifications based on evaluation of an incomplete loss mitigation application
The proposal also would allow servicers to offer borrowers with a Covid-19 related hardship a loan modification based on an incomplete application, as long as the modification met the following criteria:
- Term and payment limitations: The modification may not cause the borrower’s principal and interest payment to increase and may not extend the term of the loan by more than 480 months from the date of the modification.
- Non-interest-bearing deferred amounts: Any amounts that the borrower may delay paying until the loan is refinanced, the property is sold, or the loan modification matures, must not accrue interest.
- Fee restrictions: No fees may be charged for the loan modification and all existing late charges, penalties, stop-payment fees, and similar charges must be waived upon acceptance (the CFPB said it was aware that certain agencies, including the Federal Housing Administration, only require waiver of fees incurred after the beginning of the pandemic, and that such modifications would not fall within this safe harbor).
- Covid-related hardship: The loan modification is made available to borrowers experiencing a Covid-19-related hardship, which is very broadly defined in the regulation as “a financial hardship due, directly or indirectly, to the Covid-19 emergency.”
- Delinquency cure: The modification must be designed to end any preexisting delinquency.
Interestingly, investors and agencies have largely eliminated documentation requirements in response to the pandemic, and servicers have been successfully offering streamlined loan modifications under Regulation X’s current requirements. The lack of documentation requirements has seemingly blurred the lines of what constitutes a complete loss mitigation application.
Additional borrower outreach required
The proposed rule would require servicers, for one year after the effective date, to give borrowers Covid-forbearance-related information regarding the current Regulation X early intervention requirements, as follows:
- For borrowers not currently in forbearance, when live contact is made with the borrower, and the investor makes available to that borrower a Covid--related forbearance program, the servicer must inquire whether the borrower has a Covid-related hardship, then list and briefly describe available programs and actions the borrower must take to be evaluated for them. The CFPB noted that this could include listing federal, state, and/or investor-specific options.
- If the borrower is on forbearance, during the last live contact made pursuant to the early intervention rules prior to the program’s expiration, the servicer must inform the borrower of the date on which the current forbearance period ends and each type of post-forbearance option that is available to the borrower to resolve the post-forbearance delinquency, along with the actions that must be taken to be evaluated for such options. Importantly, this list would include all available loss mitigation options—not simply Covid-specific options.
The proposed rule would also require a servicer to contact the borrower no later than 30 days before the end of the forbearance period to determine if the borrower wishes to complete the loss mitigation application and proceed with a full loss mitigation evaluation. If the borrower requests further assistance, the servicer must exercise reasonable diligence to complete the application before the end of the forbearance program period.
The compliance requirements the proposal contemplates seems likely to present additional complexity and liability for mortgage servicers as they gear up to address the upcoming wave of delinquent borrowers who will be coming out of Covid-related forbearances.
If you have any questions regarding the CFPB’s proposal, please visit our Mortgages practice page or our Covid-19 Legal Resources & Capabilities page or contact a Buckley attorney with whom you have worked in the past.
CFPB urges servicers to stave off foreclosure wave
On April 1, the CFPB urged mortgage servicers “to take all necessary steps to prevent a wave of avoidable foreclosures this fall.” Citing to the millions of homeowners currently in forbearance due to the Covid-19 pandemic, the Bureau’s compliance bulletin warns servicers that consumers will need assistance when pandemic-related federal emergency mortgage protections begin to expire later this year. The Bureau notes that it “will closely monitor how servicers engage with borrowers, respond to borrower requests, and process applications for loss mitigation,” and “will consider a servicer’s overall effectiveness in helping consumers when using its discretion to address compliance issues that arise.” According to the Bureau, industry data suggests that almost 1.7 million borrowers will exit forbearance programs starting in September, many of whom will be a year or more behind on mortgage payments. The Bureau cautions servicers to take proactive measures to prevent avoidable foreclosures, including by (i) contacting borrowers before the end of the forbearance period; (ii) working with borrowers to ensure they obtain all necessary information; (iii) addressing language access and maintaining compliance with ECOA and other applicable laws; (iv) evaluating income fairly when determining loss mitigation options; (v) handling inquiries promptly; and (vi) preventing avoidable foreclosures through compliance with foreclosure restrictions under Regulation X and other federal and state restrictions.
Treasury issues emergency capital investment program FAQs
On March 30, the U.S. Treasury Department issued frequently asked questions to provide timely guidance concerning all aspects of the Emergency Capital Investment Program (ECIP). The FAQs cover issues regarding:
- The types of institutions eligible to participate in the ECIP;
- Submission of an ECIP application and emergency investment lending plan;
- How Treasury will decide allocation of the available capital among applicants that meet the thresholds for eligibility, including how well an applicant has responded to the needs of communities impacted by the Covid-19 pandemic;
- Whether an institution can choose to issue preferred stock or subordinated debt in the ECIP; and
- Compliance and reporting requirements.
The ECIP was established by the Consolidated Appropriations Act of 2021 (covered by InfoBytes here), and will provide up to $9 billion in capital directly to Community Development Financial Institutions and minority depository institutions to provide, among other things, “loans, grants, and forbearance for small and minority businesses and consumers in low income communities” that may be disproportionately impacted by the Covid-19 pandemic. As previously covered in InfoBytes, on March 22, the OCC, Federal Reserve Board, and the FDIC published an interim final rule (IFR) to facilitate the implementation of the ECIP.
FHA: Temporary endorsement of mortgages under forbearance will expire March 31
On March 23, FHA issued a reminder regarding the upcoming expiration of the temporary guidance concerning endorsement processes for mortgages where a borrower was granted a forbearance related to the Covid-19 pandemic prior to the loan being endorsed for FHA insurance. As previously covered by InfoBytes, the temporary guidance—announced last June in Mortgagee Letter (ML) 2020-16—granted mortgagees the ability to submit a mortgage for insurance endorsement involving a borrower who is experiencing financial hardships due to the Covid-19 pandemic, provided the mortgagee “executes a two-year partial indemnification agreement.” The temporary guidance was last extended in ML 2020-45, and is set to expire March 31.
Agencies issue rulemaking to facilitate Emergency Capital Investment Program for CDFIs and MDIs
On March 22, the OCC, Federal Reserve Board, and the FDIC published an interim final rule (IFR) to facilitate the implementation of the Emergency Capital Investment Program (ECIP). As previously covered by InfoBytes, the ECIP was established by the Consolidated Appropriations Act of 2021, and will provide up to $9 billion in capital directly to Community Development Financial Institutions and minority depository institutions to provide, among other things, “loans, grants, and forbearance for small and minority businesses and consumers in low income communities” that may be disproportionately impacted by the Covid-19 pandemic. The IFR outlines capital designations and investment eligibility criteria, and specifically notes that the agencies have revised “the capital rule to clarify that senior preferred stock will qualify as additional tier 1 capital and subordinated debt will qualify as tier 2 capital.” The ECIP will expire six months after the date on which the national Covid-19 emergency ends.
Virginia reaches settlement with open-end credit plan lender
On March 4, the Virginia attorney general announced a settlement with an open-end credit plan lender, resolving allegations that the company violated Virginia consumer finance laws by (i) imposing a $100 origination fee on loans during a statutorily-mandated finance charge-free grace period; (ii) “[e]ngaging in a pattern of repeat transactions and ‘rollover’ loans with thousands of consumers who were required to close accounts that they paid down to a $0 balance,” but were then allowed to open new accounts for which new fees were charged on a monthly basis; and (iii) charging interest on accounts at an annual rate of 273.75 percent, far exceeding the 36 percent limit that open-end credit lenders are allowed to charge. Under the terms of the settlement, the company is permanently enjoined from further violating Virginia’s consumer finance laws, and is required to pay $850,000 in restitution and $150,00 in attorneys’ fees and settlement costs. The company must also provide more than $10 million in debt forbearance on “accounts that remain unpaid and that were not converted to a separate loan program in October 2018.”