Federal and state regulators and Congress continue to release new guidance and requirements to assist mortgage borrowers facing economic hardships resulting from the coronavirus (COVID-19) pandemic. Due to the high volume of borrower requests, the associated burden on servicers, and the unknown duration of the COVID-19 pandemic, it is critical for servicers to be in compliance with all forbearance-related requirements and to be responsive to borrower communications and inquiries.
We provide here a comprehensive summary of all the key servicing-related requirements that have been issued in response to the COVID-19 pandemic so that servicers may properly adapt to the numerous requirements. Now is the time to start planning and preparing for post-forbearance options.
The CARES Act, which took effect March 27, contains a number of federal law requirements applicable to mortgages and leases. These requirements, by their express terms, do not apply to all mortgages and leases, but rather are limited to properties that are subject to federally-backed mortgage loans or borrowers that participate in certain federal housing and urban development programs. The one exception is with respect to credit reporting, for which the new requirements apply to all consumers, not just borrowers under federal programs. Federally-backed mortgage loans include both residential and multifamily properties insured, guaranteed, supplemented, or assisted pursuant to various federal housing and urban development programs, or purchased or securitized by Fannie Mae or Freddie Mac. Individual condominium or cooperative units are included among the covered properties. Construction loans and “other temporary financings” are excluded.
A borrower with a federally-backed one- to four-family residential mortgage loan experiencing financial hardship due to the COVID-19 pandemic may request forbearance, regardless of delinquency status. Upon receipt of a borrower’s request for forbearance, the forbearance must be granted for up to 180 days, and must be extended for a further 180 days at the request of the borrower. The servicer is not required to obtain documentary evidence in support of the borrower’s request and, moreover, is not permitted to require that a borrower submit documentation as a condition of obtaining relief. During the forbearance period, no additional fees, penalties, or interest may be accrued, but the unpaid principal balance will continue to be due.
Multifamily loan borrowers also are entitled to forbearance, but to a more limited extent. The borrower must have been current on his or her payments as of February 1, 2020. Upon receipt of a request for forbearance (which may be oral or written) the servicer must provide forbearance for up to 30 days, and upon request of the borrower, extend the forbearance period for up to two additional 30-day periods. The servicer is not required to obtain documentary evidence in support of the borrower’s request (but is not expressly prohibited from doing so). A multifamily borrower who receives forbearance may not issue a notice to vacate a residential unit during the forbearance period, and in any event may not require a tenant to vacate before the date that is 30 days after the date on which the tenant is given a notice to vacate.
Irrespective of loan type, furnishers of credit information to credit reporting agencies must report consumers as “current” for the duration of the forbearance period, unless the borrower was already being reported as behind on payments, in which case delinquency reporting must be frozen as of the date of the forbearance. This requirement is not limited to federally-backed mortgages, but extends to all loss mitigation relief offered on all forms of credit “to a consumer who is affected by the [COVID-19] pandemic” during the period between January 31, 2020 and 120 days after the expiration of the current national emergency declaration. If the owner/borrower of a multifamily property is a natural person, he/she is deemed a “consumer” for these purposes, and gets the benefit of these credit reporting provisions.
Servicers of covered one- to four-family residential loans also are prohibited from initiating foreclosure actions for the 60-day period beginning March 18, 2020. These foreclosure restrictions do not apply to vacant or abandoned properties.
Shortly before the enactment of the CARES Act, the Federal Housing Finance Agency (FHFA) had already directed Fannie Mae and Freddie Mac (the government-sponsored enterprises, or GSEs) to suspend foreclosures and evictions for at least 60 days due to the COVID-19 pandemic. The foreclosure and eviction suspension applies to homeowners with a GSE–backed single family mortgage.
FHFA also announced that the GSEs will provide payment forbearance to single-family borrowers, which will allow mortgage payments to be suspended for up to 12 months due to hardship caused by the coronavirus. The GSEs also have offered multifamily property owners mortgage forbearance, subject to the condition that borrowers suspend all evictions for renters unable to pay rent due to the impact of COVID-19.
The FHFA announced on April 21 that servicers’ obligations to advance scheduled monthly payments for the GSE-backed single-family mortgage loans in forbearance will be limited to four months. After the four-month period, the GSEs will stand ready to take over advancing payments to investors in mortgage-backed securities (MBS). Previously, only Freddie Mac servicers, which generally are responsible for advancing scheduled interest, were limited in that obligation to four months of missed borrower interest payments. Fannie Mae servicers, by contrast, generally are obligated to advance both scheduled principal and interest payments that a borrower does not make, and Fannie Mae policy could have obligated servicers to do so indefinitely. Rising forbearances—mandated by the FHFA and state and federal actions in response to the COVID-19 pandemic—highlighted this significant difference between the two GSEs’ servicing policies. The FHFA announcement now largely aligns the two GSEs’ policies. The announcement appears to leave intact the disparity that Fannie Mae servicers must advance both principal and interest for the four-month period, while Freddie Mac servicers need only advance interest.
According to FHFA Director Mark Calabria, this change will allow all GSE servicers, regardless of type or size, to plan for exactly how long they will need to advance principal and interest payments on loans for which borrowers have not made their monthly payments. Mortgage loans that are delinquent for more than four months historically were purchased by the GSEs out of MBS pools. This FHFA action clarifies that mortgage loans with COVID-19 payment forbearances will be treated similarly to a natural disaster event and will remain in their MBS pools. This effort puts a four-month cap on servicer liability for advancing, which is significant because forbearances could last up to a year under the CARES Act (as described above). However, the announcement fails to address when servicers will be reimbursed for their advances, and raises questions about the sufficiency of liquidity across the market.
On April 22, the FHFA announced that it is allowing certain single-family loans in forbearance to be purchased and securitized through the GSEs. Mortgage loans either in forbearance or delinquent generally are ineligible for delivery under GSE requirements. However, the FHFA’s action lifts that restriction for a limited period of time and only for mortgages meeting certain eligibility criteria. Eligible loans will also be priced to mitigate the heightened risk of loss to the GSEs from these loans.
On April 27, Mr. Calabria reiterated that borrowers in forbearance with a Fannie Mae- or Freddie Mac-backed mortgage are not required to repay the missed payments in one lump sum. While his statement only covers Fannie Mae and Freddie Mac mortgages, he encouraged all mortgage lenders and servicers to adopt a similar approach.
Related Federal Guidance
On April 3, federal financial regulatory agencies, including the Board of Governors of the Federal Reserve System (Federal Reserve), the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Consumer Financial Protection Bureau (CFPB), and state financial regulators issued a joint policy statement providing needed regulatory flexibility to enable mortgage servicers to work with struggling consumers affected by the COVID-19 pandemic. The statement informs servicers of the agencies’ flexible supervisory and enforcement approach during the COVID-19 pandemic regarding certain communications to consumers required by the mortgage servicing rules.
The policy statement was designed to make it easier for mortgage servicers to place consumers in short-term payment forbearance programs such as the one required by the CARES Act. The policy statement clarifies that the agencies do not intend to take supervisory or enforcement action against mortgage servicers for delays in sending certain early intervention and loss mitigation notices and taking certain actions relating to loss mitigation set out in the CFPB’s mortgage servicing rules, provided that servicers are making good-faith efforts to provide these notices and take these actions within a reasonable time. The statement does not purport to impose any limitations on consumer claims premised on servicers failing to abide by federal guidance.
On April 7, federal financial institution regulatory agencies (including the CFPB), in consultation with state financial regulators, issued a revised interagency statement encouraging financial institutions to work constructively with borrowers affected by COVID-19 and providing additional information regarding loan modifications. The revised statement also provides the agencies’ views on consumer protection considerations. The agencies encourage financial institutions to work with borrowers and will not criticize institutions for doing so in a safe and sound manner. The agencies view prudent loan modification programs offered to financial institution customers affected by COVID-19 as positive and proactive actions that can manage or mitigate adverse impacts on borrowers, and lead to improved loan performance and reduced credit risk. Agency examiners will not criticize prudent efforts to modify terms on existing loans for affected customers.
With regard to loans not otherwise reportable as past due, the revised statement makes clear that financial institutions are expected to not designate loans with deferrals granted due to COVID-19 as past due because of the deferral. Since a loan’s payment date is governed by the due date stipulated in the legal agreement, then a financial institution’s agreement to a payment deferral may result in no contractual payments being past due, and these loans are not considered past due during the period of the deferral.
District of Columbia
On April 7, the DC Council unanimously approved an emergency bill extending additional relief to residents and businesses impacted by the COVID-19 pandemic. The bill freezes residential rent increases throughout the public health emergency, and 30 days beyond its end. It also creates a mandatory 90-day mortgage deferment program for residential and commercial mortgage holders who request one (the bill’s language is limited to mortgage companies regulated by the city, which means the payment deferrals do not apply to property owners who borrowed money from national banks, for example). No late fees or penalties would accrue and repayment of the deferred amount may be done via a repayment plan, but not through a required balloon lump payment (subject to investor guidelines).
Governor Cuomo’s Executive Orders
In response to the COVID-19 crisis, New York Governor Andrew Cuomo issued two executive orders that place temporary restraints on the ability of banks, residential mortgage servicers, and landlords to exercise remedies under certain agreements, mortgages, and leases. On March 20, Governor Cuomo issued Executive Order 202.8, which includes a statement that “there shall be no enforcement of either an eviction of any tenant residential or commercial, or a foreclosure of any residential or commercial property for a period of ninety days.” As such, landlords cannot seek to evict any tenants in New York State for a 90-day period, and lenders cannot proceed with foreclosure on residential or commercial mortgages on New York properties for a 90-day period.
On March 21, this action was followed by Executive Order 202.9, which includes two major actions. First, Order 202.9 temporarily modifies Section 39 of the New York Banking Law from March 21, 2020 to April 20, 2020, to provide that “it shall be deemed an unsafe and unsound business practice if, in response to the COVID-19 pandemic, any bank which is subject to the jurisdiction of the Department shall not grant a forbearance to any person or business who has a financial hardship as a result of the COVID-19 pandemic for a period of ninety days.” The provision applies to banks subject to New York Department of Financial Services (DFS) jurisdiction. In general, these include banks organized under or subject to the New York Banking Law. The provision is inapplicable to national banks, federal savings banks, and nonbank lenders. Second, Order 202.9 directed the DFS superintendent to promulgate emergency regulations concerning forbearance on mortgage payments and certain banking fees for consumers facing financial hardships relating to the COVID-19 pandemic.
New York Department of Financial Services Regulations
On March 24, DFS issued emergency regulations (the NY Regulations), adopted pursuant to Executive Order 202.9, to address these two areas. The NY Regulations require that, through April 20, 2020, DFS-regulated banks (that is, state banks chartered under New York law) and DFS-licensed residential mortgage servicers grant 90-day forbearances on certain residential mortgages on property located in New York to any New York consumer who applies and demonstrates financial hardship as a result of the COVID-19 pandemic. The NY Regulations provide that the obligation to grant a forbearance is subject to the safety and soundness requirements of the regulated institutions. The NY Regulations expressly exclude from their coverage any commercial mortgage loans, federally-insured loans, and loans “made, insured, or securitized by” Fannie Mae, Freddie Mac, Ginnie Mae, or the Federal Home Loan Banks. Many of these excluded residential mortgage loans are, in practice, already covered by previously-announced broader forbearance relief.
For the residential mortgage servicers to which the NY Regulations apply, compliance with the forbearance provisions becomes a matter of de facto federal law by virtue of the loss mitigation regulations in the mortgage servicing rules in the CFPB’s Regulation X, 12 CFR § 1024.38.
The NY Regulations clarify that, with respect to residential mortgage loans, DFS-regulated banks’ compliance with the NY Regulations satisfies their obligations under the temporary modification of Section 39 of the New York Banking Law that the first part of Order 202.9 addresses.
New York Attorney General Servicer Letters
On April 22, New York Attorney General (NYAG) Letitia James sent letters to 35 of New York’s major servicers, calling on them to provide immediate and long-term relief to all New York homeowners struggling to pay mortgages amidst the COVID-19 pandemic. According to Attorney General James, the letters “emphasize the responsibility of mortgage servicers to do more to ensure that COVID-19 does not cause unnecessary foreclosures or increase homelessness in New York State.”
While Attorney General James acknowledges that servicers have taken some key first steps, both voluntarily and in response to government action, to help homeowners adversely impacted by COVID-19, her letters outline additional steps servicers should implement to avoid a foreclosure crisis when the New York State-mandated mortgage forbearance agreements (as described above) have terminated. Attorney General James requested the following of servicers:
The NYAG also expressly encouraged servicers to take steps necessary to communicate effectively with customers who have limited English proficiency, for example by translating standard written solicitations and sections of their websites describing COVID-19-related forbearance programs.
With investors like Fannie Mae and Freddie Mac already requiring servicers to find an affordable solution at the end of the forbearance period, including by placing arrears at the end of the mortgage as additional monthly payments (which may be functionally equivalent to converting the forbearance into a deferment), Attorney General James is calling for all mortgage servicers to provide similar long-term relief to all New York homeowners in order to stave off a future foreclosure crisis.
Massachusetts Governor Charlie Baker signed emergency legislation on April 20 limiting evictions for residential and small business properties, and limiting foreclosures and requiring forbearance for residential properties. This legislation follows a number of actions by Governor Baker and the City of Boston to protect renters, homeowners, and small businesses during the COVID-19 pandemic.
Except for properties that are vacant or abandoned, lenders holding mortgages on residential properties are prohibited from foreclosing. Mortgage lenders are required to grant forbearance to residential borrowers for a 180-day period if, prior to the expiration of the statutory forbearance period, the borrower submits a request to the mortgage servicer affirming that the borrower has experienced financial impact from COVID-19. Lenders are not permitted to charge fees or penalties or interest beyond the amounts scheduled and calculated as if the borrower has made all scheduled payments in full and on time. Missed payments are to be added at the end of the term of the loan, unless the parties agree to an alternative arrangement.
A handful of other states, including California, Connecticut, Michigan, New Jersey, and Pennsylvania, have established voluntary programs whereby state residents who are struggling financially as a result of COVID-19 may, upon contacting their servicer, be eligible for a 90-day grace period for mortgage payments. Financial institutions will offer, consistent with applicable guidelines, residential mortgage payment forbearances of up to 90 days to borrowers economically impacted by COVID-19. In addition, those institutions will provide borrowers a streamlined process to request a forbearance for COVID-19-related reasons, supported with available documentation; confirm approval of and terms of the forbearance program; and provide borrowers the opportunity to request additional relief, as practicable, upon continued showing of hardship due to COVID-19. For at least 90 days, financial institutions will waive or refund at least mortgage-related late fees and certain other fees for customers who have requested assistance.
With respect to credit reporting, participating financial institutions will not report derogatory tradelines (e.g., late or missed payments) to credit reporting agencies for borrowers taking advantage of COVID-19-related relief, but they may report a forbearance, which typically does not alone negatively affect a credit score. In practice, these credit reporting provisions are likely supplanted by the CARES Act amendments to the federal Fair Credit Reporting Act. As discussed above, the CARES Act amendments require, during the period they are effective, all creditors to freeze credit reporting as of the date of the accommodation for any consumer affected by the COVID-19 pandemic.
A small collection of additional states have provided nonbinding guidance with respect to requesting or urging servicers to proactively work with borrowers impacted by the COVID-19 pandemic.
For our clients, we have formed a multidisciplinary Coronavirus COVID-19 Task Force to help guide you through the broad scope of legal issues brought on by this public health challenge, which includes a Financial Services COVID-19 Task Force to focus on the issues specifically impacting our financial services industry clients. We also have launched a resource page to help keep you on top of developments as they unfold. If you would like to receive a daily digest of all new updates to the page, please subscribe now to receive our COVID-19 alerts.
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David I. Monteiro