Prescreened Advertisements

QUESTION

I am the CEO of our company, and we were recently referred to your firm for assistance with our review of advertisements. We’re currently talking to your people about making sure we have reliable advertising review procedures. And we’ve already purchased your advertising manual. We hope to engage Lenders Compliance Group to work with us on our advertising procedures.

We do a lot of direct mail pre-approvals. I am writing to you because I am concerned about two recent consent orders from the CFPB that involve direct mail. Both of these cases involve direct mail advertising issues, caused by prescreening, relating to VA loans in particular.  

I want to do whatever is necessary to comply with proper prescreening procedures.

What are some basic procedures we need to be following on our prescreened advertisements?

ANSWER

Thank you for your question. It is a timely inquiry. The two companies are Sovereign Lending Group, Inc. (“Sovereign”) and Prime Choice Funding, Inc. (“Prime Choice”). The CFPB issued consent orders to both of them on July 24^th. These actions stem from the Bureau’s sweep of investigations of multiple mortgage companies that use deceptive mailers to advertise VA-guaranteed mortgages. Some state banking departments have been actively pursuing similar examinations and enforcement.

In the case of Sovereign, the consent order requires the company to pay $460,000 in civil monetary penalties and imposes requirements to prevent future violations. In the case of Prime Choice, the consent order requires the company to pay $645,000 in civil monetary penalties and imposes requirements to prevent future violations. In both cases, the principal means of advertising is through direct-mail campaigns targeted primarily at the United States military service members and veterans.

The Bureau alleged that Sovereign sent consumers hundreds of thousands of mailers for VA-guaranteed mortgages that contained false, misleading, and inaccurate statements or that lacked required disclosures, in violation of the Consumer Financial Protection Act’s (CFPA) prohibition against deceptive acts and practices, the Mortgage Acts and Practices – Advertising Rule (“MAP Rule”), and Regulation Z. Sovereign allegedly sent consumers numerous advertisements for VA-guaranteed mortgages that, among other things, misrepresented the credit terms of the advertised mortgage, misleadingly described an adjustable-rate mortgage as having a “fixed” rate, falsely stated that the consumer had been prequalified for the advertised mortgage, created the false impression that Sovereign was affiliated with the government, used the name of the consumer’s current lender in a misleading way, and failed to include multiple disclosures required by Regulation Z.

With respect to Prime Choice, the Bureau alleged that the company sent consumers millions of mailers for VA-guaranteed mortgages that contained false, misleading, and inaccurate statements or that lacked required disclosures, in violation of the CFPA’s prohibition against deceptive acts and practices, the MAP Rule, and Regulation Z. Prime Choice allegedly sent consumers numerous advertisements for VA-guaranteed mortgages, causing violations similar to those made by Sovereign.

There are several acceptable reasons for obtaining and using consumer reports, one of which is the intent to use them in connection with a prescreened “firm offer of credit or insurance.” This use is often referred to as “prescreening.” This type of marketing requires considerable regulatory compliance knowledge and support. Most financial institutions do not have the adequate level of expertise needed to review such marketing techniques to know how to prevent deceptive acts and practices, ensure compliance with the MAP Rule, and comply with Regulation Z.

Retaining a firm like Lenders Compliance Group for such support should be part of your prescreening review process. Just one, single error in prescreened marketing can cost considerable financial and regulatory risk. Please contact me HERE if you want to talk about your compliance concerns.

Your institution engages in prescreening activities if it either: 

• Obtains specific customer authorization for any prescreening; or
• Extends a firm offer of credit or insurance to each consumer identified by the prescreening.

The firm offer must be honored if the consumer is determined, based on information in a consumer report, to meet the specific criteria used to select the consumer for the offer.

There are several factors that you will need to state in your policy and implement in your procedures (and those procedures should be tested periodically). Four factors come to mind: disclosure, the record of criteria, opt-outs, and limited information. I will provide a brief overview of each factor.

Disclosure

With each prescreened solicitation, your institution should provide a clear and conspicuous statement that:

• Information contained in the consumer’s consumer report was used in connection with the transaction.
• The consumer received the offer of credit because the consumer satisfied the criteria for creditworthiness or insurability under which the consumer was selected for the offer.
• If applicable, your institution may choose not to extend credit if, after the consumer responds to the offer, the consumer does not meet the criteria used to select the consumer for the offer or any applicable criteria bearing on creditworthiness or insurability or does not furnish any required collateral.
• The consumer has a right to prohibit information contained in the consumer’s file with any consumer reporting agency from being used in connection with any credit or insurance transaction not initiated by the consumer. The consumer may exercise the right by notifying a notification system set up for that purpose.
• Includes the address and a toll-free number for the notification system.
• Is presented in a format, type size and manner that is simple and easy to understand, in accordance with FTC regulations (not yet adopted as of the date of publication of this book).

Record of Criteria

Your institution should keep on file the criteria used to select consumers for any prescreened offer.

Examples of criteria would include: 

• All criteria bearing on credit worthiness or insurability, as applicable, that are the basis for determining whether to extend credit or insurance pursuant to the offer.
• Any requirement for the furnishing of collateral as a condition of the extension of credit or insurance, until the expiration of the three-year period beginning on the date on which the offer is made to the consumer.

Opt-outs

Any prescreening must not include customers who have opted out of prescreening.

Limited information

In connection with any prescreening, your institution should receive from the consumer reporting agency only: 

• The name and address of each consumer.
• An identifier not unique to the consumer and used solely for the purpose of verifying the identity of the consumer.
• Other information pertaining to a consumer that does not identify the relationship or experience of the consumer with respect to a particular creditor or other entity.

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group

Cancelling the Rescission

QUESTION

We service our own mortgage loans. Our foreclosure attorney has told us that we can foreclose on a property even though the borrower canceled the rescission over six years ago. 

The borrower sent a letter to us, canceling the loan after the closing. But then he canceled the rescission by telling us that he wanted to go ahead with the loan. So, our manager wrote in the margin of the letter “cancellation canceled.” 

Our borrower was current until this year. But he fell far behind and went into default. We tried to foreclose, but the borrower now says he rescinded, so he claims that we can’t foreclose. Our attorney says we can foreclose. 

We have no other document that shows the borrower canceled the rescission, only our own employee’s margin note - “cancellation canceled” - in the borrower’s letter. 

So, did he cancel the rescission?

ANSWER

‘Tis the stuff of litigation! 

I bring you good tidings, as it favors your attorney’s view. 

But it is possible that your borrower will hire an attorney to oppose the foreclosure. Before proceeding with the good news, you can let out a rant now at the borrower’s attorney, who may take up your borrower’s cause.

I suggest Kent’s rant, in King Lear: 

A knave; a rascal; an eater of broken meats; a
base, proud, shallow, beggarly, three-suited, hundred-pound, filthy, worsted-stocking knave; a
lily-livered, action-taking knave, a whoreson, glass-gazing, super-serviceable finical rogue;
one-trunk-inheriting slave; one that wouldst be abawd, in way of good service, and art nothing but
the composition of a knave, beggar, coward, pandar,   
and the son and heir of a mongrel bitch: one whom I
will beat into clamorous whining, if thou deniest
the least syllable of thy addition.

Ah! Now that feels better. So, now, let’s proceed with the good news.

Regulation Z [§ 1026.23(a)(3)] allows a consumer to exercise the rescission right until the third “business day” following the last in time of the following events:

• Consummation of the (consumer) credit transaction;
• Delivery of the notice of right to rescind, as required by Regulation Z § 1026.23(b);
• Delivery of all “material disclosures.”

Upon receipt of a rescission notice that complies with Regulation Z, a creditor must, within 20 days,

“return to the obligor any money or property given as earnest money, down payment, or otherwise, and shall take any action necessary or appropriate to reflect the termination of any security interest created under the transaction.”

I’m going to use a case to support the view that your attorney is correct. 

A New Jersey state court recently considered a situation similar to this one, where a borrower exercised her right to rescind in a timely manner, then accepted the loan proceeds and made timely monthly payments for five years.

Here’s what happened.

On April 21, 2004, Dicicco executed a fixed-rate note in favor of Full Spectrum Lending, secured by a mortgage on her residence. The next day, on April 22, 2004, Dicicco sent a notice of cancellation to the lender. The lender failed to unwind the transaction and proceeded to disbursement. The record does not indicate when Full Spectrum received the notice, but the parties did not dispute that Full Spectrum failed to unwind the transaction and proceeded to disburse the loan funds to Dicicco.

At closing, Dicicco used the proceeds to pay off a prior mortgage in the amount of $226,357.33 and a tax bill in the amount of $1,483.66. She also received a cash payment of $38,457.91.

She made timely monthly payments for about five years, then defaulted in March 2009. Bank of N.Y. Mellon, as assignee of the mortgage, began foreclosure proceedings.[i]

Dicicco answered, alleging that the bank “lack[ed] standing to prosecute” because it or Full Spectrum had “failed to comply with TILA by failing to honor…[Dicicco’s] written rescission notices as required by TILA…and Regulation Z.” She argued that her notice of rescission had been sent prior to disbursement and that pursuant to TILA the mortgage and note were deemed null and void, and therefore she had no obligation to pay.

The bank moved for summary judgment and to strike Dicicco’s answer and counterclaims. Dicicco cross-moved for summary judgment, saying the complaint should be dismissed because

“there does not exist a valid mortgage on the premises as the transaction was canceled in accordance with TILA and Regulation Z."

Here is where it gets interesting, in that it shows the argument advanced by Dicicco’s attorney.

At a summary judgment hearing, Dicicco’s counsel argued that Dicicco’s five years of timely payments were undertaken simply to “preserve the status quo” and because Dicicco was trying to preserve her position concerning her loan so that when [Full Sprectrum] did unwind it she would not be behind.” The counsel concluded that “any payments that she made were…at best…received as a gift by [Full Sprectrum]…and [Dicicco] has no further obligation.” Decicco maintained that TILA supported a conclusion that “upon rescission the loan was void” and she was “required to tender back the loan proceeds…only after [Full Spectrum] performed its statutory obligations.”

The bank acknowledged that it “doesn’t dispute the fact that a valid notice of rescission was sent [by Decicco to Full Spectrum]” and agreed that Full Spectrum had received the notice to cancel yet still tendered the loan proceeds to her. The bank also acknowledged that, under TILA, Dicicco “was not obligated to return the cash that she received…immediately, because…[she was] not obligated to return those funds until…[Full Spectrum] acted.”

The trial court granted summary judgment for the bank. It rejected the bank’s arguments that Dicicco’s claims were time-barred by TILA. Dicicco was entitled to raise violations of TILA as a defense in the foreclosure action.

Even so, the April 2004 notice of rescission did not bar foreclosure given Decicco’s “subsequent and consistent ratification of the terms of the loan” by choosing to keep the funds and make timely payments for 5 years. The trial court found that Dicicco must have considered the mortgage and note enforceable because it was unlikely that she would have continued sending monthly payments to a creditor to whom she believed nothing was owed.

The court also declined to unjustly enrich Decicco, stating that to escape foreclosure on these facts would “render the proceeds of the [m]ortgage a windfall to [Dicicco], who would then be free of any obligation under the [n]ote” and the bank would be left without recourse to pursue the amount loaned by Full Spectrum. The Office of Foreclosure entered judgment for $445,554.90, plus interest and costs.

The appellate court affirmed. Dicicco had ratified the terms of the loan by commencing payment and continuing to pay for 5 years. The court said that the 2015 ruling in Jesinoski did not apply to a case of ratification and did not stand for the proposition that a creditor under these circumstances loses all interest in the property resulting in the borrower getting a free house.[ii] Dicicco did not tender the residence or the proceeds of the loan to Full Spectrum or the bank following the notice of rescission.

I have written extensively about the Jesinoski decision. See my article Right of Rescission after Jesinoski v Countrywide.[iii]

Jesinoski did not overturn precedent that “a notice of rescission is not effective if the obligor lacks either the intention or the ability to perform, i.e., repay the loan” nor did it overturn a court’s discretion to modify rescission procedures. DiCicco clearly intended to repay the loan, as she performed in accordance with its terms for years and used its funds to pay off a prior mortgage and other debts, and also retained $38,457.66 of the proceeds.

Thus, to allow Dicicco to void the mortgage and escape foreclosure would lead to her unjust enrichment.

Jonathan Foxx, Ph.D., MBA

Chairman & Managing Director

Lenders Compliance Group

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[i] Bank of N.Y. Mellon v. Dicicco, 2020 N.J. (App. Div. Feb. 3, 2020)

[ii] Jesinoski v. Countrywide Home Loans, Inc., 574 U.S. 259 (2015). This case pivoted on the language of 15 U.S.C.S. § 1635(a). The ruling, briefly put, said that (1) the rescission was effected when a borrower notified the creditor of his intention to rescind; (2) so long as the borrower notified within three years after the transaction was consummated, his rescission under the Truth in Lending Act was timely, and there was no requirement that a borrower sue within three years; and (3) The borrowers' complaint was improperly dismissed as untimely where they had mailed the lenders a written notice of their intention to rescind within three years of their mortgage loan's consummation, and that was all that was required in order to exercise the right to rescind under the Act.

[iii] Right of Rescission after Jesinoski v Countrywide, Foxx, Jonathan, Lenders Compliance Group, March 6, 2015 https://lenderscompliance.blogspot.com/2015/03/right-of-rescission-after-jesinoski-v.html

Navigating the COVID-19 Loss Mitigation Options

QUESTION

We originate and service a lot of FHA loans, both refinance and purchase money. Recently, FHA put out a Mortgagee Letter that involves loss mitigation options during the COVID-19 pandemic.

Our compliance department is just two people, and we are getting bombarded with loss mitigation issues on our FHA loans. The Mortgagee Letter is so filled with legalese that we can’t make sense of some of the requirements.

Hopefully, you can enlighten us without the legalistic mumbo-jumbo.

So, in normal lingo, what are some of the main features of these COVID-19 loss mitigation requirements?

ANSWER

I know how you feel. Some issuances from federal agencies are so overly-lawyered that only the lawyers seem to be able to interpret them. Maybe it's their way of keeping job security!

But, to keep it real, the financial services industry is highly litigious, which is a reflection of its many accrued regulations as well as the mandates to implement federal and state banking laws. It is often not that we have too many rules and laws. Most existing laws simply need to be enforced. Lack of enforcement is a much bigger problem than too many laws. So, sometimes we just need to be patient with the legalese. After all, a day may come when you need a good lawyer to defend actions you have taken in good faith. And I am more than happy to provide the straight-out plain talk, and hopefully, a better understanding to be able to subdue some of your bewilderment.

The HUD issuance you are referring to is Mortgagee Letter 2020-22, which is dated July 8, 2020. It pivots from the previous Mortgagee Letter 2020-06 of April 1, 2020. The earlier ML was issued as a response to the Coronavirus Aid, Relief, and Economic Stimulus (CARES) Act, which was signed into law on March 27, 2020. ML 2020-06 provided guidance in establishing (1) the Forbearance for Borrowers Affected by the COVID-19 National Emergency (COVID-19 Forbearance), (2) the COVID-19 National Emergency Standalone Partial Claim (COVID-19 Standalone Partial Claim), and (3) the extension period for Home Equity Conversion Mortgages (HECM) affected by COVID-19.

We discuss these guidelines to some extent in our free Checklist and Workbook on the Business Continuity plan and Pandemic Response (which, by the way, will soon be published in Update # 8.) Download it HERE.

ML 2020-22 deals with additional Loss Mitigation Home Retention Options due to the COVID-19 National Emergency. The ML pertains to forward mortgages. Note the word “options.” The options are available to borrowers affected by the COVID-19 national emergency who were current or less than 30 days past due as of March 1, 2020. With respect to mortgage servicing, the servicers must offer eligible borrowers the COVID-19 Loss Mitigation Options no later than 90 days from the date of the ML (viz., July 8^th), but servicers may begin offering the new options immediately.

So, the ML 2020-22 updates the guidance in ML 2020-06, and the requirements are going to be incorporated into HUD Handbook 4000.1. ML  2020-06 dealt with the COVID-19 forbearance based on the CARES Act and the COVID-19 Standalone Partial Claim. Now, HUD is issuing the ML 2020-22 to fortify on such measures by establishing the following six COVID-19 Home Retention and Disposition Options:

1. COVID-19 Owner-Occupant Loan Modification
2. COVID-19 Combination Partial Claim and Loan Modification
3. COVID-19 FHA-Home Affordable Mortgage Program (FHA-HAMP) Combination Loan Modification and Partial Claim with Reduced Documentation (which may include principal deferment and requires income documentation)
4. COVID-19 Non-Occupant Loan Modification
5. COVID-19 Pre-Foreclosure Sale (PFS)
6. COVID-19 Deed-in-Lieu (DIL) of Foreclosure

I’m going to explain these options in cursory detail. The options require systemic implementation. Make sure you discuss these options with a compliance professional. If you need assistance, we’re here to help. Let me know. Click HERE.

The options are meant to provide methods to reinstate a mortgage after the expiration of the COVID-19 forbearance period. The COVID-19 Standalone Partial Claim – indeed, the first three options listed above – are available for eligible owner-occupant borrowers who are able to resume their monthly mortgage payment (or, if applicable, a modified payment).

The COVID-19 Non-Occupant Loan Modification is available for eligible non-occupant borrowers who are able to resume the monthly mortgage payment (or, if applicable, a modified payment).

The use of a COVID-19 Home Retention Option does not count against a borrower’s limit of one FHA-HAMP agreement within 24 months. The last two options – specifically, the Home Disposition Options – are available for eligible owner-occupant and non-occupant borrowers who are unable to reinstate the mortgage.

For eligible borrowers, servicers must complete a Loss Mitigation Option no later than 90 days from the earlier of the completion or expiration of the COVID-19 forbearance. For the Home Disposition Options, a signed Agreement to Participate (ATP) Agreement or signed DIL Agreement will meet this requirement.

For borrowers who are participating in a COVID-19 forbearance, servicers are granted an automatic 90-day extension of the first legal deadline date, from the earlier of the completion or expiration of the COVID-19 forbearance, to complete a Loss Mitigation Option or to commence or re-commence foreclosure.

By the way, a trial payment plan is not required for a borrower to be eligible for a COVID-19 Loss Mitigation Option.

Now I am going to get into some detail, but I hope to keep it measured, succinct, and brief. Where possible, I will provide a bulleted outline. I will discuss the -

• COVID-19 Standalone Partial Claim,
• COVID-19 Owner-Occupant Loan Modification,
• COVID-19 Combination Partial Claim and Loan Modification,
• COVID-19 FHA-HAMP Combination Loan Modification and Partial Claim with Reduced Documentation, and 
• COVID-19 Non-Occupant Loan Modification.

COVID-19 Standalone Partial Claim

The borrowers who receive a COVID-19 forbearance must be evaluated for the COVID-19 Standalone Partial Claim no later than the end of the forbearance period.

There are three criteria that the servicer must confirm, to wit, that -

(1) the borrower was current or less than 30 days past due as of March 1, 2020,
(2) the borrower indicates an ability to resume making on-time mortgage payments, and
(3) the property is owner-occupied.

The terms of the COVID-19 Standalone Partial Claim are the following: 

• The borrower’s accumulated late charges, fees and penalties are waived;
• The COVID-19 Standalone Partial Claim amount includes only arrearages that consist of principal, interest, taxes and insurance;
• The COVID-19 Standalone Partial Claim does not exceed the 30% maximum statutory value of all partial claims for an FHA insured mortgage; and
• The borrower may receive only one permanent COVID-19 Home Retention Option.

COVID-19 Owner-Occupant Loan Modification

For borrowers who do not qualify for a COVID-19 Standalone Partial Claim, the servicer must review the borrower for a COVID-19 Owner-Occupant Loan Modification, which modifies the rate and term of the mortgage at the end of a COVID-19 forbearance period.

The servicer must confirm three criteria, to wit, that -

(1) the borrower was current or less than 30 days past due as of March 1, 2020,
(2) the borrower indicates an ability to make the modified mortgage payment, and
(3) the property is owner-occupied.

Title Insurance Disclosure on the LE and CD

QUESTION

Title insurance disclosure is a challenge for our organization. For the most part, we believe we have a good understanding of how to disclose. But there are a few areas where we could use some clarification. Our interest is how to disclose title insurance on the LE and the CD. 

Thank you for the FAQ. It is the only FAQ like it in the country, and we really appreciate it.

Here are the questions that we have put together for you to answer on the weekly FAQ. I hope you can respond soon. 

For lender’s title insurance, how should we disclose the premium on the LE?

For owner’s title insurance, how do we disclose if the lender does not require it?

Given that a single rate is sometimes used, how do we disclose on the LE and CD?

Finally, if there is a single rate and the seller pays the owner’s premium, how do we disclose?

ANSWER

Thank you for your kind words. We have been providing the FAQ for many years and look forward to continuing our commitment to bringing such information to the mortgage community.

Let’s start with your first question and take it from there!

For lender’s title insurance, how should we disclose the premium on the LE?

Lender’s title insurance is disclosed as the amount of the premium on the Loan Estimate (“LE”). The amount may be disclosed as Title - Premium for Lender’s Coverage (or any similar language as long as it clearly indicates the amount of the premium disclosed and that the premium is for lender’s title insurance coverage). 

On the Closing Disclosure (“CD”), the cost of lender’s title insurance is disclosed in the Loan Costs Table under either Services Borrower Did Not Shop For or Services Borrower Did Shop For, depending on whether the consumer did or did not shop for the lender’s title insurance, and with a similar label.[i]

For owner’s title insurance, how do we disclose if the lender does not require it?

As you may know, in most cases the lender does not require the consumer to obtain owner’s title insurance. Nevertheless, if the consumer obtains owner’s title insurance and the creditor does not require it, the cost of owner’s title insurance is disclosed in Closing Cost Details in the Other Costs Table on the LE and CD. Generally, the amount disclosed for owner’s title insurance is based on the owner’s policy rate. 

For the LE, the cost disclosed for the owner’s title insurance policy is not based on any enhanced title insurance policy rate - where "enhanced" provides additional coverage and may increase the amount of coverage as the property appreciates - unless the creditor knows (or has reason to believe at the time the creditor is issuing the LE) that an enhanced owner’s title insurance policy will be purchased, such as if it is required by the real estate sales contract. In any event, when the consumer purchases owner’s title insurance and it is not required by the creditor, this fact is noted on the LE and CD through the use of the term “optional.” 

If the seller pays for the owner’s title insurance, the “optional” description is not required on the CD.[ii]

Given that a single rate is sometimes used, how do we disclose on the LE and CD?

Let’s define the terms. Title companies often offer a different rate, called a single or simultaneous rate, if a consumer purchases both lender’s and owner’s title insurance from the same company, rather than purchasing each policy from separate companies.

There is a formulaic way to assist lenders in disclosing the required rates consistently, that is, in a way that does not depend on (1) whether the consumer purchases lender’s and owner’s title insurance policies individually, (2) obtains the policies from the same company and gets the simultaneous rate, or (3) buys only the required lender’s title insurance.

Note: If the consumer obtains only the required lender’s title insurance policy and no owner’s title insurance policy, the use of this formula by the creditor is not necessary.

Here’s a formulaic outline for the premium of an owner's title insurance policy for which there is a simultaneous issuance of a lender's and an owner's policy, and then disclosed on the LE and CD:

Step 1: Determine the full owner’s policy premium.

Step 2: Add this amount to the simultaneous premium for the lender’s policy.

Step 3: Now subtract out the full lender’s premium.

Note: The premium disclosed for the lender’s title insurance policy is the full lender’s premium, not the discounted, or simultaneous, rate.[iii]

Finally, if there is a single rate and the seller pays the owner’s premium, how do we disclose?

The answer to this question requires a brief preamble. There may be a difference between the cost of owner’s title insurance disclosed and the disclosed seller’s credit, if the purchase and sales contract between the consumer and seller indicates that both lender’s and owner’s title insurance will be purchased from the same company and the seller will pay the full owner’s policy premium rate (as opposed to a discounted rate).

I realize that’s a mouthful! So, to put this succinctly, assuming the scenario, given the disclosure formula for the owner’s title insurance cost when there is a simultaneous rate for lender’s title insurance, there may be excess seller’s credit beyond the disclosed cost of owner’s title insurance.

Because the seller’s credit may be in excess of the owner’s disclosed title insurance cost, the disclosed amount of the seller credit left over after application to the owner’s title insurance cost may be disclosed in three different ways on the CD:

1. Shown as a credit towards the amount of the lender’s premium or any other title insurance costs for premiums or endorsements in the Loan Costs Table or Other Costs Table;[iv] or

2. Added to and shown in aggregate with other seller credits in the Summaries of Transactions tables as a general Seller Credit;[v] or

3. Disclosed as a standalone seller credit on another blank line in the Summaries of Transactions tables.[vi]

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group

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[i] See 12 CFR § 1026.37(f)(2) and (f)(3); Comment 37(f)(2)-4; 12 CFR § 1026.38(f)(2) and (f)(3); and Comments 38(f)(2)-1 and 37(f)(2)-3

[ii] 12 CFR §§ 1026.37(g)(4) and 38(g)(4); Comment 37(g)(4)-1; 12 CFR §§ 1026.37(g)(4)(ii) and 38(g)(4)(ii); Comments 37(g)(4)-1, -3, and 38(g)(4)-2; Comment 38(g)(4)-2; 12 CFR §§ 1026.37(f)(2); 37(f)(3); and 38(f)(2) and 38(f)(3)

[iii] Comments 37(g)(4)-2 and 38(g)(4)-2

[iv] 12 CFR §§ 1026.38(f) and (g)

[v] 12 CFR § 1026.38(k)(2)(vii)

[vi] 12 CFR § 1026.38(k)(2)(viii)

CARES Act: Relief Protection

QUESTION

We are a large servicer with three regional offices. I am the compliance manager for one of those offices. Our Chief Compliance Officer reads your weekly FAQs, as do I and the compliance staff in all our offices

Our CARES policy has gone through several iterations. We want to provide a brief outline of two real estate categories that are given relief under CARES. This outline will be in our policy’s first section and will also be given to our operations personnel.

What types of relief are available for the two categories of one-to-four family real estate and multifamily real estate?

We also want to know what relief protections are available for renters in multifamily real estate?

ANSWER

Thank you for your question! I appreciate your continuing interest in our weekly FAQs.

The Coronavirus Aid Relief and Economic Security Act (CARES Act) contains several provisions that address mortgage and rental relief. I will provide a brief outline here regarding the relief available. But I suggest you consider my outline in tandem with, among other things, the provisions in sections 1024.39 through 1024.41 of RESPA (Real Estate Settlement Procedures Act).

First, I will offer an outline of the type of relief available, depending on the type of property involved. Second, I will address your question about renter protection.

One-to-Four Family Real Estate

Section 4022 (Foreclosure Moratorium and Consumer Right to Request Forbearance) of the CARES Act grants forbearance rights and protection against foreclosure to borrowers with a federally backed mortgage loan.

Thus, for this purpose, a federally backed mortgage loan is any loan that: 

• Is secured by a first or subordinate lien on residential real property (including individual units of condominiums and cooperatives) designed principally for the occupancy of from one to four families.
• Is federally owned or otherwise backed by one of the following federal agencies and entities:

• U.S. Department of Housing and Urban Development (HUD);

• U. S. Department of Agriculture (USDA);

• USDA Direct;

• USDA Guaranteed;

• Federal Housing Administration (FHA);

• U.S. Department of Veterans Affairs (VA);

• Fannie Mae; and

• Freddie Mac.

Borrowers with a federally backed mortgage loan, who are experiencing financial hardship due, directly or indirectly, to the COVID-19 emergency may request a forbearance on their loan, regardless of delinquency status, by submitting a request (viz., an attestation) to their servicer. They must explicitly affirm that they are experiencing financial hardship during the COVID-19 emergency.

Upon receiving a request for forbearance, a servicer must provide forbearance for up to 180 days, with no additional documentation required, other than the borrower’s attestation to a financial hardship caused by the COVID-19 emergency. Importantly, 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) may be charged to the borrower in connection the loan.

At the request of the borrower, the forbearance period may be extended for up to an additional 180 days, provided that the borrower’s request is made during the covered period. The initial or extended period may also be shortened at the borrower’s request.

Excluding vacant or abandoned properties, a servicer of a federally backed mortgage loan may not initiate any judicial or nonjudicial foreclosure process, move for a foreclosure judgment or order of sale, or execute a foreclosure-related eviction or foreclosure sale for 60 days beginning on March 18, 2020.

Multifamily Real Estate

Loans secured by multifamily property are addressed in section 4023 of the CARES Act. These provisions apply to federally backed multifamily mortgage loans, including any loan (other than temporary financing, such as a construction loan) that: 

• Is secured by a first or subordinate lien on residential multifamily real property designed principally for the occupancy of five or more families; and,
• Is made, in whole or in part, or 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 administrated by HUD, or is purchased or securitized by Fannie Mae or Freddie Mac.

Multifamily borrowers with a federally backed multifamily mortgage loan experiencing financial hardship due, directly or indirectly, to the COVID-19 emergency may request forbearance. The loan must have been current on its payments as of February 1, 2020. The request for relief must be submitted to the borrower’s servicer. Such a request may be verbal or written. The borrower can discontinue forbearance at any time.

Upon receipt of an oral or written request, the servicer must: 

• Document the hardship.
• Provide forbearance for up to 30 days.
• Extend forbearance for up to 2 additional periods of 30-days each, provided that such request is (1) made during the covered period (viz., the covered period begins upon enactment (March 27, 2020) and ends on December 31, 2020, or, if sooner, the termination date of the COVID-19 national emergency as declared by the president); and (2) made at least 15 days prior to the end of the original 30-day period.

Renter Protections

For the duration of the forbearance, a multifamily borrower receiving forbearance may not: 

• Evict or initiate the eviction of a tenant from a dwelling unit within the applicable property solely for nonpayment of rent or other fees;
• Charge late fees, penalties, or other charges to such tenant on account of the late payment of rent; and
• Require a tenant to vacate a dwelling unit on the applicable property based on fewer than 30 days’ notice (and such notice may not be issued during the forbearance period).

I would also note that a related provision of the CARES Act operates to provide a temporary moratorium on eviction in certain properties, including those that have a federally backed multifamily mortgage loan. Under this provision, during the 120-day period beginning on March 27, 2020, the lessor may not: 

• File any action to recover possession of the covered dwelling on account of nonpayment of rent or other fees or charges.
• Charge a tenant for fees, penalties, or other charges related to nonpayment of rent.

Also, the lessor may not require a tenant to vacate a dwelling unit based on fewer than 30 days’ notice, and such notice may not be issued during the 120-day period. Note, also, that the moratorium imposed by this provision applies irrespective of whether the borrower has sought or is granted forbearance relief as discussed above.

Jonathan Foxx, Ph.D., MBA

Chairman & Managing Director

Lenders Compliance Group