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HUD Issues Three Mortgagee Letters
On September 27, HUD issued three Mortgagee Letters. In Mortgagee Letter 2013-34, HUD announced the indefinite delay of pre-foreclosure sale (PFS) requirements for FHA mortgagees, which were announced in July. Mortgagee Letter 2013-35 announces that, effective March 31, 2014, HUD will consolidate the identification numbers it issues to FHA lenders under Title I and II. Finally, Mortgagee Letter 2013-36 updates guidance regarding 203(k) insured mortgages in the Hurricane Sandy disaster area.
HUD Clarifies Changes to HECM Program, Updates FHA Loss Mitigation Home Retention Options
On September 25, HUD issued Mortgagee Letter 2013-33, which clarifies the recent changes HUD made to its HECM program earlier this month through Mortgagee Letter 2013-27. The new letter (i) defines mandatory obligation, (ii) adds additional mandatory obligations for traditional and refinance transactions, and for purchase transactions, (iii) identifies items that must be included in the first twelve-month disbursement limit and initial MIP calculation, (iv) states that the monthly increase to the principal limit must include the annual mortgage insurance rate as well as the mortgage note interest rate, (v) corrects the calculation of the life-expectancy set-aside, (vi) makes accommodations for mortgagors who entered into a bona fide sales contract and made an earnest money deposit on a property before the issuance of Mortgagee Letter 2013-27, and (vii) clarifies an exception to the general policy that a mortgagee increase the available principal limit if the mortgagor makes a partial payment. On September 20, HUD issued Mortgagee Letter 2013-32 to supersede its prior guidance regarding loss mitigation in Mortgagee Letter 2012-22. The letter, among other things, (i) defines “continuous income,” other than wages, for loss mitigation evaluations, and other terms, (ii) establishes the conditions required for a “special forbearance” to be used as a loss mitigation tool, (iii) provides guidance on capitalization of arrearages for modifications and partial claims, and (iv) discusses working with mortgagors in bankruptcy and those failing to complete trial payment plans. Mortgagees are required to implement the policies in Mortgagee Letter 2013-32 by December 1, 2013.
CFPB Finalizes Additional Modifications to Certain Mortgage Rules
On September 13, the CFPB issued final amendments to its Mortgage Servicing and Loan Originator Compensation rules. The CFPB’s press release states that the amendments (i) clarify what servicer activities are prohibited in the first 120 days of delinquency, (ii) outline procedures for obtaining follow-up information on loss mitigation applications, (iii) facilitate servicers’ offering of short-term forbearance plans, (iv) clarify best practices for informing borrowers about the address for error resolution documents, (v) facilitate lending in rural or underserve areas, (vi) clarify the restrictions on the financing of credit insurance premiums, (vii) clarify the definition of a loan originator, (viii) clarify the points and fees thresholds and loan originator compensation rules for manufactured housing employees, and (ix) revise effective dates of many loan originator compensation rule provisions to align with other mortgage rule effective dates. We are reviewing the actual final amendments and plan to provide more information and analysis in the near future. Please also see our Special Alert on these changes as proposed in June.
Fannie Mae Announces Miscellaneous Servicing Policy Changes
On August 28, Fannie Mae issued Announcement SVC-2013-17, which describes miscellaneous servicing policy changes and updates. The announcement provides that a servicer is no longer obligated to treat a servicer name change as a transfer of servicing (although all other notification requirements related to name changes remain unchanged). In addition, the announcement clarifies servicer obligations with respect to unemployment forbearance arrangements, providing that (i) prior to expiration of an initial unemployment forbearance term (or upon re-employment), the borrower must be evaluated for an extension or another workout option and (ii) prior to expiration of an extended unemployment forbearance term or upon notification of re-employment, the borrower must be evaluated for other available foreclosure alternatives. The announcement also provides that (i) a borrower in a trial period plan who receives an evaluation notice has 14 days to indicate his or her intent to accept or reject the modification offer, and (ii) in situations where a due-on-sale clause is not enforceable because the property transfer constitutes an “exempt transaction,” a servicer must implement policies and procedures allowing it to promptly identify and communicate with the new property owner (including a widow, executor or administrator of the borrower’s estate, or other authorized representative upon notice of the death of a borrower) and allow such new property owner to make mortgage payments, to pursue an assumption, and to be evaluated for foreclosure alternatives, as applicable. If a mortgage loan is delinquent and the new property owner is unable to bring the mortgage loan current, he or she must be evaluated for all available workout options, and the servicer must follow Servicing Guide eligibility and Borrower Response Package requirements in doing so. All changes and updates take effect immediately for mortgage loans that become delinquent on or after the date of the announcement, except those related to unemployment forbearance. Servicers are required to implement the unemployment forbearance policies no later than November 1, 2013.
Freddie Mac Updates Disaster Assistance, Other Servicing Policies
On August 15, Freddie Mac issued Bulletin 2013-15, which updates and revises many of its servicing requirements, including those related to assistance for borrowers impacted by an eligible disaster. With respect to such impacted borrowers, the Bulletin provides updated requirements related to (i) property protection activities, such as ascertaining the extent of the damage, and, if necessary, securing abandoned properties, (ii) managing the delinquency of a borrower whose mortgaged premises or place of employment was impacted by a disaster, (iii) the addition of the new Disaster Relief Modification for Borrowers who were current or less than 31 days delinquent at the time of a disaster, (iv) streamlined modifications for borrowers who were current or less than 31 days delinquent at the time of a disaster, (v) Trial Period Plan eligibility requirements, (vi) insurance loss settlements, and (vi) credit reporting. The Bulletin also instructs servicers to follow applicable state laws when handling Freddie Mac default legal matters (e.g. foreclosure) and adds a new Guide chapter about when servicers should take advantage of state procedures that allow for quickly completing foreclosures. Further, the Bulletin (i) revises requirements for servicemembers and their dependents, (ii) revises property inspection requirements, (iii) revises requirements for the reimbursement of attorney fees and costs related to contested foreclosures and mediation, expenses incurred for title work, and condominium, homeowners association and Planned Unit Development assessments in super lien states, (iv) permanently extends the submission time frame for 104SF claims from 30 days to 45 days, and (v) updates unemployment forbearance requirements.
Fannie Mae Updates Servicer Disaster Assistance Policies
On August 7, Fannie Mae issued Servicing Guide Announcement SVC-2013-16, which updates assistance policies for borrowers affected by earthquakes, floods, hurricanes, or other catastrophes caused by a person or event beyond the borrower’s control. The announcement provides a table of new pre-approved forbearance terms for borrowers affected by a disaster. Fannie Mae reminds servicers that while they have discretion to determine the appropriate duration of forbearance, any forbearance that exceeds the set terms must be approved in writing by Fannie Mae. The announcement also (i) updates requirements for insurance claim settlements, (ii) requires that income documentation be no more than 180 days old at the time of the post-disaster foreclosure prevention alternative evaluation, (iii) directs servicers to suspend credit reporting for a disaster-impacted borrower during a repayment plan or Trial Period Plan if the borrower is making the required payments, (iv) reduces eligibility requirements for streamlined modifications for borrowers completing a disaster-related forbearance plan in a FEMA-declared disaster area, (v) introduces a new modification, the Cap and Extended Modification for Disaster Relief, and (vi) addresses escrow analysis requirements prior to offering a Trial Period Plan for certain disaster-related modifications. All of these policy changes took effect immediately.
New York Seeks to Halt Online Payday Loans, Collections; Federal Agencies Issue Subpoenas
On August 6, the New York Department of Financial Services (DFS) sent letters to 35 online lenders, including lenders affiliated with Native American Tribes, demanding that they cease and desist offering allegedly illegal payday loans to New York borrowers. The letters demand that within 14 days the companies confirm that they are no longer soliciting or making payday loans in excess of the state usury caps. Under New York law, it is civil usury for a company to make a loan or forbearance under $250,000 with an interest rate exceeding 16% per year, and a criminal violation to make a loan with an interest rate exceeding 25% per year. The letters also remind recipients that it is illegal to collect on loans that exceed the usury cap; a separate letter to third-party debt collectors included the same notice. The DFS previously warned third-party debt collectors about collecting on illegal payday loans in March. In addition, the Department of Financial Services sent letters to 117 banks and NACHA requesting that they work with the DFS to create a set of model safeguard procedures to deny ACH access to the targeted lenders and provide the DFS with information about steps the institutions are taking to halt the allegedly illegal activity.
The role of banks in processing payday loan payments was identified as an enforcement priority earlier this year by the DOJ’s Financial Fraud Enforcement Task Force. The DOJ, the CFPB, and other federal agencies reportedly have issued subpoenas to banks and other entities as part of a broad investigation of online payday lending.
HUD Updates Pre-Foreclosure and Deed-in-Lieu of Foreclosure Requirements, Extends Unemployment Forbearance
On July 9, HUD issued Mortgagee Letter 2013-23, which updates pre-foreclosure sale (PFS) and deed-in-lieu (DIL) foreclosure requirements for FHA-approved mortgagees. For a standard PFS, the letter details (i) the deficit income test that mortgagees must use to determine hardship, (ii) the supporting documentation required for such tests, (iii) the method for calculating cash reserve contributions, and (iv) the requirements for approving a PFS based on imminent default. The letter also explains the eligibility requirements for streamlined PFS and DIL, including with regard to military servicemembers. Among numerous other policy changes, HUD also updated the disclosure requirements for all PFS and DIL transactions and outlined certain arms-length requirements for PFS transactions. Mortgagees must implement the new policies by October 1, 2013. Recently, HUD also issued Mortgagee Letter 2013-22 to extend indefinitely its policy to provide special forbearance for unemployed borrowers. That policy, detailed in Mortgagee Letter 2011-23, was set to expire on August 1, 2013.
Fannie Mae Updates Hardest Hit Fund Requirements
On July 1, Fannie Mae issued Servicing Guide Announcement SVC-2013-14 to notify servicers that they must accept modification assistance received from a state housing finance agency for a mortgage loan in connection with any Fannie Mae modification, without regard to whether principal forbearance is required. In doing so, servicers must also comply with certain delinquency management and default prevention requirements outlined in Announcement SVC-2011-18. Servicers are required to implement the policy changes no later than October 1, 2013, and are encouraged to do so immediately.
Special Alert: CFPB Proposes Additional Changes to Mortgage Rules
On June 24, 2013, the Consumer Financial Protection Bureau ("CFPB") issued another set of proposed amendments to its January 2013 mortgage rules. Whereas the proposed and final amendments issued by the CFPB in April and May focused largely on the Ability-to-Repay/Qualified Mortgage rule, this proposal primarily addresses several important questions that have emerged during the implementation process regarding the Mortgage Servicing and Loan Originator Compensation rules.
Even with this additional guidance from the CFPB, the volume and complexity of the new requirements and the number of outstanding issues still present a daunting task for many industry participants as they seek to implement the numerous rules by January 2014.
Comments on the proposed amendments are due July 22, 2013.
Key Proposed Amendments
Mortgage Servicing
Start of Foreclosure Process. The current rule prohibits a servicer from making the first notice or filing required for foreclosure unless the loan is more than 120 days delinquent. The proposed rule would clarify what servicer actions are prohibited during the first 120 days of delinquency. In short, the CFPB is proposing to adopt the literal meaning of "first notice or filing required by applicable law" and prohibit servicers from filing any document that "would be used by the servicer as evidence of compliance with foreclosure practices required pursuant to State law" during the 120-day period. Thus, a breach letter required by Fannie Mae or any other debt collection activity should not be prohibited during the 120-day pre-foreclosure period provided such documents are not to be used as evidence of complying with requirements applicable to state law foreclosure processes.
This interpretation is expected to have significant implications for state foreclosure processes, particularly those states with pre-foreclosure mediation requirements and right to cure notices. For example, a notice of default in the District of Columbia may not be mailed to borrowers until after the 120-day pre-foreclosure period because the District of Columbia marks the notice of default as the "first notice or filing required by applicable law." Similarly, servicers in California and other states with pending or effective "Homeowners Bill of Rights" statutes (e.g., Alabama, Florida, Nevada, and Utah) may not fulfill those statutes' requirements to contact or provide borrowers with information regarding servicemember protections or foreclosure alternatives until after the pre-foreclosure period. In addition, it would appear that servicers in Massachusetts would have to wait 120 days before mailing borrowers a 150-day notice of right to cure, which would mean that a servicer may not begin the foreclosure process until 270 days after delinquency begins. By contrast, because Kentucky does not have additional pre-foreclosure statutory requirements, servicers would need only to wait the CFPB's minimum period of 120 days of delinquency to file a foreclosure complaint in Kentucky.
Incomplete Loss Mitigation Applications. The current rule requires servicers to review a borrower's loss mitigation application within five business days and provide a notice informing the borrower that the application is either: (1) complete; or (2) identifying the specific information needed to complete the application and stating that the borrower should provide that information by the earliest of four specific dates. The current rule also generally prohibits a servicer from offering a loss mitigation option based on an incomplete application.
The proposed amendments would:
- Allow servicers who initially describe an application as complete based on the five-day review to request additional information in some circumstances;
- Allow servicers to select a "reasonable date" by which an incomplete application should be completed; and
- Allow servicers to offer a borrower the option of a short-term forbearance program (i.e., forbearance of payments for up to two months) even if the application is not complete, subject to certain requirements.
Notice of Denial. The proposed amendments would clarify that, when notifying a borrower that he or she has been denied for a loss mitigation option, the servicer need only disclose the actual reasons for the denial and not other potential reasons.
Loan Originator Compensation
Effective Date. The CFPB proposed to modify the effective date for portions of this rule. Specifically, the proposed rule would: (1) move the effective date for most provisions forward from January 10, 2014 to January 1, 2014; and (2) generally apply the revised restrictions on compensation to transactions consummated and for which the employer paid compensation on or after January 1, 2014. These revisions are intended to permit employers of loan originators to make changes to their compensation, registration, licensing, and training practices at the start of the calendar year.
Definition of Loan Originator. The proposed amendments would provide a number of clarifications about who is and is not covered by the rule. In particular, the CFPB would clarify that employees of a creditor or loan originator in certain administrative or clerical roles (such as tellers or greeters) do not become loan originators solely by providing an application form or discussing general credit terms with consumers (e.g., "We offer rates as low as 3% to qualified consumers."). Instead, to be a loan originator, the employee would need to discuss particular credit terms that are or may be available from the creditor to that consumer selected based on the consumer's financial characteristics.
Other Rules
Points and Fees for Qualified Mortgages and High-Cost Mortgages. The proposed amendments would clarify the treatment of: (1) charges paid by parties other than the consumer - in particular, the amendments make clear that seller's points and charges paid by the creditor are excluded from the finance charge component of points and fees; and (2) loan originator compensation to retailers of manufactured homes and their employees.
Rural and Underserved Areas. The proposed amendments would revise the exceptions available to small creditors (creditors with no more than $2 billion in assets that, along with affiliates, originate no more than 500 first-lien mortgages covered under the ability-to-repay rules per year) operating in predominantly "rural" or "underserved" areas while, as announced in May, the CFPB re-examines the underlying definitions of "rural" or "underserved" over the next two years. Specifically, the CFPB would allow all small creditors, regardless of whether they operate predominantly in "rural" or "underserved" areas, to continue originating balloon high-cost mortgages if the loans meet the requirements for balloon qualified mortgages. In addition, the CFPB would allow more small creditors to take advantage of the exemption from the requirement to establish escrow accounts for higher-priced mortgage loans.
Prohibition on Financing Credit Insurance. For purposes of the prohibition on financing credit insurance premiums in connection with certain consumer credit transactions secured by a dwelling, the proposed amendments would clarify what constitutes financing of premiums by a creditor and, for purposes of the statutory exclusion for certain credit insurance premium calculation and payment arrangements, when credit insurance premiums are considered to be calculated and paid on a monthly basis.