Appraiser Misconduct: Prevention Caveats

QUESTION
One of the appraisers we use is involved in an appraisal misconduct investigation. The investigation is being conducted by one of our investors.

They requested a list of all the appraisals he has done for the last three years and may want to expand the period further back in time. They also asked for a list of all our appraisers. We’re worried now about where this will lead.

We thought our appraiser independence policies were good. They had always passed banking examinations.

We decided to bring our problem to your attention, hoping that you would shed some light on how we can avoid this mess in the future.

What can we do to prevent appraiser misconduct?

ANSWER
High on the examination and enforcement agenda for state banking departments, the Consumer Financial Protection Bureau (CFPB), and the federal prudential agencies is appraisal fraud. FinCEN reports such mortgage fraud statistics regularly. The bedrock of residential mortgage banking is the underlying real property collateral.

Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) required the federal banking agencies to institute appraisal standards that, at a minimum, meet the generally accepted appraisal standards established by the Appraisal Foundation. These standards have become known as Appraisal Standards.

In general, FIRREA requires all real estate appraisals performed in connection with real estate-related financial transactions to be conducted by state-certified or licensed appraisers. It should be a hallmark of your policy to comply with these standards, whichever regulator supervises your institution. The foregoing departments and agencies have adopted the Appraisal Standards in a substantially similar construct.

Although you should not necessarily exclude any appraiser from consideration for an assignment solely by membership or lack of membership in any particular appraisal organization, you would want your Appraisal Standards to meet certain interagency appraisal and evaluation guidelines.

Here’s a checklist of some caveats that should be included in your compliance reviews. 

·     Provide for the independence of the persons ordering, performing, and reviewing appraisals or evaluations. 

·     Establish selection criteria and procedures to evaluate and monitor the ongoing performance of appraisers and persons who perform evaluations. 

·     Ensure that appraisals comply with the appraisal regulations and are consistent with supervisory guidance. 

·     Ensure that appraisals and evaluations contain sufficient information to support the credit decision. 

·     Maintain criteria for the content and appropriate use of evaluations consistent with safe and sound banking practices. 

·     Provide for the receipt and review of the appraisal or evaluation report in a timely manner to facilitate the credit decision. 

·     Develop criteria to assess whether an existing appraisal or evaluation may be used to support a subsequent transaction. 

·     Implement internal controls that promote compliance with these program standards, including those related to monitoring third-party arrangements. 

·     Establish criteria for monitoring collateral values. 

·     Review mortgage quality control reports for appraisal statistics, report them to management, and provide written management responses for any appraisal defects or process concerns. 

·     Establish criteria for obtaining appraisals or evaluations for transactions that are not otherwise covered by the appraisal requirements of the appraisal regulations.

Regulation Z, the implementing regulation of the Truth-in-Lending Act (TILA), prohibits a financial institution from directly or indirectly coercing, influencing, or otherwise encouraging an appraiser to misstate or misrepresent the value of the consumer’s dwelling. 

Indeed, a creditor may not extend credit when it knows, at or before loan consummation, of a violation of this requirement unless the creditor documents that it has acted with reasonable diligence to determine that the appraisal does not materially misstate or misrepresent the value of the dwelling.

For example, a creditor or mortgage broker may not: 

·     Imply to an appraiser that current or future retention of the appraiser depends on the amount at which the appraiser values a consumer’s principal dwelling. 

·     Exclude an appraiser from consideration for future engagement because the appraiser reports a value of a consumer’s principal dwelling that does not meet or exceed a minimum threshold. 

·     Tell an appraiser a minimum reported value of a consumer’s principal dwelling needed to approve the loan. 

·     Fail to compensate an appraiser because the appraiser does not value a consumer’s principal dwelling at or above a certain amount. 

·     Condition an appraiser’s compensation on loan consummation.

Certain actions are not prohibited, including: 

·     Asking an appraiser to consider additional information about a consumer’s principal dwelling or comparable properties. 

·     Requesting that an appraiser provide additional information about the basis for a valuation. 

·     Requesting that an appraiser correct factual errors in a valuation. 

·     Obtaining multiple appraisals of a consumer’s principal dwelling, so long as the creditor adheres to a policy of selecting the most reliable appraisal, rather than the appraisal that states the highest value. 

·     Withholding compensation from an appraiser for breach of contract or substandard performance of services as provided by contract. 

·     Taking action permitted or required by applicable federal or state statute, regulation, or agency guidance.

I would add a few Regulation Z caveats that coincide with the appraiser independence rule, with respect to any loan secured by a consumer’s principal dwelling, such as:

·     Not to engage in coercion, bribery, and other similar actions designed to cause an appraiser to base the appraised value of a property on factors other than the appraiser’s independent judgment. 

·     Not to permit appraisers or appraisal management companies to materially misrepresent the value of a consumer’s principal dwelling in a valuation. 

·     Not to allow the falsification of a valuation or material alteration of a valuation. 

·     Not to allow appraisers or appraisal management companies to have a financial or other interest in the property or the credit transaction. 

·     Not to extend credit if you know, at or before consummation, of a violation of the prohibition on coercion or of a conflict of interest, unless you document that you have acted with reasonable diligence to determine that the valuation does not materially misstate or misrepresent the value of the dwelling. 

·     To report appraiser misconduct to state appraiser licensing authorities. 

·     To pay reasonable and customary compensation to any “fee appraiser” (i.e., an appraiser who is not your salaried employee and is not an employee of an appraisal management company you hire).

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

Servicer’s Responsibility for Making Tax Payments

QUESTION
I am General Counsel to a large mortgage servicer. My question has to do with the transfer of mortgage servicing. 

Does RESPA require taxes to be paid by the entity responsible for servicing the mortgage at the time the tax payment is due or does RESPA demand that the entity that received funds for escrow make the tax payment when it is ultimately due?

ANSWER
Your question has regulatory and litigation history. When the terms of any federally related mortgage loan require the borrower to make payments to an escrow account, the Real Estate Settlement Procedures Act (RESPA) and its implementing Regulation X[i] require the servicer to make disbursements in a timely manner, which the regulation defines as “on or before the deadline to avoid a penalty.” This requirement does not apply when the borrower’s payment is more than 30 calendar days overdue. 

Regarding property taxes, if the taxing jurisdiction neither offers a discount for disbursements on a lump sum basis nor imposes any additional charge or fee for installment disbursements, the servicer must make disbursements on an installment basis, unless the servicer and borrower otherwise agree. If the taxing jurisdiction offers a discount for disbursements on a lump sum annual basis or imposes any additional charge or fee for installment disbursements, the servicer may, at its discretion (but is not required by RESPA to) make lump sum annual disbursements as long as that method of disbursement complies with the timeliness requirements of Regulation X.[ii] RESPA encourages,[iii] but does not require, the servicer to follow the preference of the borrower, if the servicer knows that preference. 

Having set forth some basic information, let’s turn now to your question, which involves the transfer of servicing: (1) whether RESPA requires taxes to be paid by the entity responsible for servicing the mortgage at the time the tax payment is due, or (2) whether RESPA demands that the entity that received funds for escrow make the tax payment when it is ultimately due. 

To begin, I refer you to a recent decision by the U.S. Court of Appeals for the 4th Circuit considered the meaning of the term “servicer” insofar it relates to the timely payment of taxes. The case is Harrell v. Freedom Mortgage Corp.[iv] 

Let’s look at the case through a timeframe outline. 

·In 2005, Harrell bought a home and financed its purchase with a loan from NYCB Mortgage Company.

·In 2012, Harrell refinanced with NYCB because interest rates had dropped significantly. His mortgage contract required him to make property tax payments to NYCB for deposit into an escrow account. This triggered a corresponding obligation under RESPA for NYCB to pay his property tax bills on time. 

The mortgage permitted NYCB to sell the mortgage loan and transfer the servicing rights. 

·In 2017, NYCB sold Harrell’s loan, as part of a much larger transaction, to Freedom Mortgage Corp. Freedom took over all servicing rights and responsibilities, effective October 31, 2017.

·Starting November 1, 2017, Harrell became obligated to pay his mortgage payments to Freedom.

·NYCB made Harrell’s June 2017 tax payment by its due date, but the November 2017 payment was late.

·Before October 31, 2017, Harrell had deposited the funds in the escrow account overseen by NYCB. Ownership of the loan and the servicing rights transferred from NYCB to Freedom on October 31, 2017.

·The November 15, 2017 due date for property taxes came and went, while Harrell’s funds remained in escrow.

·In 2018, Freedom finally made the tax payment from Harrell’s escrow account, but the tax jurisdiction assessed late payment penalties, and the tardy payment adversely affected Harrell’s 2017 income tax bill in the amount of $895. 

Harrell filed a putative class action against Freedom, alleging that Freedom’s failure to make a timely tax payment violated RESPA, breached his mortgage contract, and was negligent. Freedom responded by disclaiming responsibility, arguing that it was not the “servicer” responsible for the November 15 tax payment and that NYCB was. The district court agreed with Freedom and granted Freedom’s motion to dismiss. 

But the 4th Circuit reversed. 

By requiring “the servicer” to make tax payments “as [they] become due,” RESPA connects the servicer’s obligation to a payment’s due date, not the date of payment into escrow by the borrower. Thus, the relevant “servicer” under RESPA is the entity “responsible for servicing” the mortgage loan when the tax payment is due. Harrell sufficiently alleged that Freedom bore the responsibility for servicing his mortgage on the tax’s due date, therefore, under RESPA, Freedom was “the servicer” accountable for making the tax payment on time. 

The court noted that its role was not to ask how NYCB and Freedom had agreed by contract to allocate servicing responsibilities between themselves. Instead, its inquiry focused on what the statute requires. 

In the first place, the statute establishes the obligation for a servicer to make payments from the escrow account for taxes: 

“If the terms of any federally related mortgage loan require the borrower to make payments to the servicer of the loan for deposit into an escrow account for the purpose of assuring payment of taxes, insurance premiums, and other charges with respect to the property, the servicer shall make payments from the escrow account for such taxes, insurance premiums, and other charges in a timely manner as such payments become due.” 

The court noted that two factors triggered the servicer’s obligation to make payments: 

(1) Harrell’s loan qualified as a “federally related mortgage loan,” which encompasses virtually every residential real estate transaction closing in the United States; and, 

(2) the terms of Harrell’s loan required Harrell to make tax payments into an escrow account. Accordingly, Harrell’s servicer had to make tax payments from the escrow account as they became due, or Harrell could seek actual damages, statutory damages, costs, and attorneys’ fees. 

Secondly, RESPA defines the term “servicer” to mean “the person responsible for servicing of a loan.” The court combined that definition with the way RESPA[v] uses the word “servicer.” RESPA connects “the servicer’s” responsibility to effect payment to the date that payment “becomes due,” to wit, the date by which payment is required. It does not mention when or whether a payment is received into escrow from a borrower. This contemplates that whoever is “the servicer” when payment becomes due must make that payment. 

And third, RESPA also defines the term “servicing” as used in the phrase “the person responsible for servicing of a loan.” Thus:

“[R]eceiving any scheduled periodic payments from a borrower pursuant to the terms of any loan, including amounts for escrow accounts…, and making the payments of principal and interest and such other payments with respect to the amounts received from the borrower as may be required pursuant to the terms of the loan.”

Harrell’s complaint plausibly alleged that Freedom was responsible for servicing his mortgage loan on November 15, 2017, the tax payment due date, by saying that “NYCB transferred [his] mortgage…, including the servicing of [his] loan, to Freedom” before November 15, 2017. The NYCB-Freedom purchase agreement confirmed that, as of November 1, 2017, Freedom acquired “all right, title and interest of [NYCB]…as Servicer under the Servicing Agreements” and “the related Servicing obligations as specified in each Servicing Agreement.” Accordingly, Freedom agreed to “assume, pay, perform and discharge the obligation to service the Serviced Loans…on and after” that date. 

Because Harrell’s mortgage payments became due to Freedom on November 1, 2017, that was the “effective date of transfer” of his loan under RESPA. RESPA contemplates that before this date, NYCB was the servicer. From this date forward, Freedom became the servicer. Period. 

The court concluded that RESPA places the obligation to pay taxes with the entity responsible for servicing a loan when that tax payment is due. In this case, that entity was Freedom Mortgage. 

So, what lesson can we extract from the above-described case? 

Freedom argued that because servicing includes “making the payments of principal and interest and such other payments with respect to the amounts received from the borrower,” and NYCB had received Harrell’s escrow payment, that made NYCB the servicer. ‘Not so fast,’ said the court! The court determined that this confused the statutory duties of “servicers” with the definition of “servicing.” Instead, RESPA obligates “the servicer” to make timely payments from an escrow account. 

The court noted that an intuitive assumption seemed to underlie Freedom’s argument – the view that a middleman who receives a payment should be responsible for forwarding that payment along to the ultimate recipient. While that assumption might hold in normal transactions, it ignored the use of escrow accounts under RESPA. 

Borrowers like Harrell do not make payments simply to a servicer; rather, they make payments to a servicer for deposit into an escrow account. The servicer controls the account in trust; the account is not the servicer’s account. 

Transferring servicing involves transferring control over the escrow account. Accordingly, the court saw no interpretive problem with a transferor servicer depositing a borrower’s payment into escrow, and the transferee servicer being obligated to disburse those funds.

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

____________________________

[i] RESPA §§ 1024.17(k)1) and 1024.34(a)
[ii] RESPA § 1024.17(k)(1) and (k)(2)
[iii] Idem. Paragraph (k)(3)
[iv] Harrell v. Freedom Mortgage Corp., 2020 U.S. App., 4th Cir. October 2, 2020
[v] RESPA § 6(g), 12 U.S.C. § 2605(g)

Mortgage Companies and Credit Unions: New CRA Law

QUESTION
We are a credit union located in Illinois. Recently, we have become involved in developing CRA initiatives for the first time. Non-bank mortgage companies in Illinois are also affected. We have had numerous conversations with mortgage companies in our area about it. This is happening because Illinois has passed a law that requires us to collect and report CRA data.

Here’s a news article on the law: “Illinois Will Now Grade Credit Unions and Mortgage Companies on Their Commitment to Fair Lending.”

A few quotes from this article give you an idea of what I’m referring to.

“But now, for the first time in Illinois, mortgage companies and certain credit unions are subject to standards for community reinvestment just like banks.” …

 

“Only a few other states have their own CRA laws. Generally, state CRA laws and regulations hew closely to federal reinvestment policies and standards, but provide an extra layer of oversight.” …

 

“Meanwhile, Federal Reserve Chairperson Jerome Powell recently voiced his support for expanding the federal CRA to all institutions that make consumer loans.” … 

So, our question is, can you give us some preparatory notes to consider in drafting policies and procedures for the CRA requirements? 

ANSWER
We have clients in Illinois, and we’ve been tracking this legislation since its inception. Consequently, our clients have been getting gradually ramped up in advance of the law being passed. In the last month especially, we have been retained by state credit unions and non-bank mortgage lenders in Illinois to prepare them for the Illinois Community Reinvestment Act (ILCRA) requirements, as outlined in the subject legislation.

What action can you take?

We have subject matter experts and are fully staffed to help you. 

Don’t try to go it alone if you haven’t had substantial experience in Community Reinvestment Act requirements. 

Please notify others similarly situated to contact us HERE. We’ll respond promptly.

What is the new law about?

The federal CRA was passed to address concerns with financial institutions that accepted deposits from their local communities and failed to make loans in the same communities. Under the Illinois provision, the ILCRA does not just pertain to depository institutions. It requires regulators to examine financial institutions for ILCRA compliance and consider their local lending records when they seek approval to open new offices, relocate offices, merge or consolidate, acquire other institutions, or expand their authority. Your HMDA filing is still mandated, so the HMDA and ILCRA filings must be consistently corroborative of each other.

The ILCRA law you referred to was signed into law and became effective on March 23, 2021. It is called the Illinois Community Reinvestment Act (“ILCRA”).[i] The ILCRA requires continuing community investment obligations on covered financial institutions, which include non-depository mortgage lenders.

Take note, the ILCRA does not require financial institutions to undertake any particular activities or make risky loans. The law provides for considerable flexibility in meeting the credit needs of local communities within the bounds of safety and soundness.

The ILCRA applies to covered financial institutions, which include Illinois charted depositories (banks and credit unions), and entities licensed under the Illinois Residential Mortgage License Act of 1987 (ILRMLA), which lent or originated 50 or more residential mortgage loans in the previous calendar year.

How about definitions?

It is worth noting that the ILCRA does not define the terms “lent” or “originated,” and the scope of these terms is currently unclear. I suggest you review these definitions with us in the context of your institution’s loan products. However, how these terms will be defined are significant to some ILRMLA licensees because the ILRMLA license covers entities performing various mortgage market activities, for instance, mortgage brokers, lenders, services, and secondary market purchasers. Having said that, while it’s likely that these terms would cover brokers and lenders, it is somewhat unclear whether these terms also cover servicers and secondary market purchasers unless the terms “originated” or “lent” are defined to include mortgage loan modifications and purchasing mortgage loans.

What are performance tests?

Regulators are required to evaluate each financial institution’s actual performance in meeting the credit needs of its entire community, including low- and moderate-income neighborhoods. Generally, the regulator applies the lending, investment, and service tests to evaluate ILCRA compliance, the first test – the lending test – is the most important for the purposes of sketching out brief response because it focuses on your mortgage lending efforts. 

·        The lending test measures your lending activities by assessing the home mortgage loan originations and purchases, small business and small farm loans, community development loans, and, when appropriate, consumer loans. 

·        The investment test evaluates the extent to which you meet community needs through qualified investments. 

·        The service test reviews the availability and responsiveness of your systems for delivering retail banking and community development services. 

Are there checklists and worksheets?

There are some basic checklists and worksheets that you will want to include in your ILCRA policies and procedures, among which are review sheets for: 

1.       Branch Openings

2.       Public File Audits

3.       Service Activities

4.       Community Development Loans 

How do you meet a community’s financial needs?

The ILCRA expects you to meet the financial services needs of the communities where your institution has offices, branches, and other facilities are maintained. And that means taking into consideration the products and services offered via mobile and other digital channels. Additionally, your institution should help meet the financial services needs of deposit-based assessment areas, including areas contiguous thereto, low-income and moderate-income neighborhoods, and areas where there is a lack of access to safe and affordable banking and lending services. However, these obligations are imposed in a manner consistent with your institution's safe and sound operation.

Let’s drill down a little. Please keep in mind that this is a very complex area of regulatory compliance, so please keep this a high-level overview.

How will you be evaluated?

The Illinois Department of Financial and Professional Regulation (“IDFPR”) will assess the records of each institution that is subject to the ILCRA obligations. To conduct such compliance assessment, the IDFPR will set forth rules which must cover the assessment of the following factors: 

·        Activities to ascertain the financial services needs of the community, including communication with community members regarding the financial services provided; 

·        Extent of marketing to make members of the community aware of the financial services offered; 

·        Origination of mortgage loans, including, but not limited to, home improvement and rehabilitation loans, and other efforts to assist existing low-income and moderate-income residents to be able to remain in affordable housing in their neighborhoods; 

·        For small business lenders, the origination of loans to businesses with gross annual revenues of $1,000,000 or less, particularly those in low-income and moderate-income neighborhoods; 

·        Participation, including investments, in community development and redevelopment programs, small business technical assistance programs, minority-owned depository institutions, community development financial institutions, and mutually-owned financial institutions; 

·        Efforts working with delinquent customers to facilitate a resolution of the delinquency; 

·        Origination of loans that show an undue concentration and a systematic pattern of lending resulting in the loss of affordable housing units; 

·        Evidence of discriminatory and prohibited practices; and 

·        Other factors or requirements as in the judgment of the IDFPR reasonably bear upon the extent to which an institution meets the financial services needs of its entire community, including responsiveness to community needs as reflected by public comments.

What is in the assessment report?

Your institution will get a written report of the examination, parts of which will be made public. It will provide information no less than that provided under the Federal Community Reinvestment Act. You will have an opportunity to review and comment on the report of the examination. The public will have an opportunity for inspection and comments on the public-facing part of the report. The ILCRA requires covered institutions to provide a public notice in the public lobby of each of its offices, if any, and on its website. The public notice has a specific, public declaration language.

The ILCRA report of examination must include the following components: 

·        The assessment factors utilized to determine the institution’s descriptive rating; 

·        The IDFPR’s conclusions for each such assessment factor; 

·        A discussion of the facts supporting such conclusions; 

·        The institution’s descriptive rating and the basis therefor; and, 

·        A summary of public comments.

Is there a compliance rating?

Concerning the compliance rating, there are four such ratings, as follows: 

1.       Outstanding record of performance in meeting its community financial services needs; 

2.       Satisfactory record of performance in meeting its community financial services needs; 

3.       Needs to improve record of performance in meeting its community financial services needs; or, 

4.       Substantial noncompliance in meeting its community financial services needs.

The effect of the compliance rating will cause your company (viz., including parent and subsidiary) when you apply for: 

·        Establishment of a branch, office, or other facility; 

·        The relocation of a main office, branch, office, or other facility; 

·        A license renewal; 

·        Change in control; and, 

·        Mergers or acquisitions.

Importantly, that means dispositively that your record of compliance with the ILCRA obligations may be the basis for the denial of the foregoing applications.

Even non-depository mortgage lenders are covered?

Of course, non-depository mortgage lenders traditionally were not subject to community reinvestment obligations because, unlike banks, they did not make loans using depositors’ money; that is, non-depository mortgage lenders use their own private funds to provide financial services, and for this reason, historically, they were not required to “reinvest” depositors money back in the communities in which they operated. But the ILCRA has changed this standard: it imposes a new community investment (rather than the federal, generic “reinvestment”) obligation on non-depository mortgage lenders.

How will this affect your budget?

As I see it, the ILCRA will most likely result in additional costs related to compliance and examinations, especially for non-depository mortgage lenders. For them, it’s all entirely new. But a can of worms can be opened because of the ILCRA. It may lead to additional fair lending enforcement action against institutions as a result of ILCRA examinations. At this point, much will also depend on how the IDFPR defines assessment areas for ILCRA compliance – leading to a requirement for the institution to conduct marketing and outreach in areas that they did not cover or operate in before.

Will non-depository mortgage lenders ever be exempt?

Non-depository mortgage lenders will need to ramp up appropriately and promptly, as they are certainly going to be included, even though there has been an attempt to remove Illinois charted depositories (i.e., banks and credit unions) from the covered financial institutions. To which I submit: removal of banks and credit unions – don’t count on that happening!

After the passage of the ILCRA, on February 19, 2021, to wit, after the Illinois legislature passed the ILCRA, but before it became law, new legislation was proposed,[ii] which would remove Illinois charted depositories from the definitions of a covered financial institution under the ILCRA.

In any event, if this bill becomes law, it would still leave non-depository mortgage lenders subject to the ILCRA obligations. And, I expect this type of legislation to become law in many states soon.

I suggest that you notify covered institutions to contact us HERE. We’re ready to help.

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director

Lenders Compliance Group

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[i] Illinois Community Reinvestment Act (“ILCRA”), Senate Bill No. 1608, Public Act 101-0657, Article 35, was signed into law on March 23, 2021
[ii] House Bill No. 3694

Servicing Borrowers’ COVID-19 Emergencies

QUESTION
We are currently servicing $8 billion. As you know, COVID has really put a lot of pressure on servicers.

We are studying new directives and proposed rules from the CFPB. One of them deals with a proposed rule involving COVID-19 emergencies and hardships. We would like your feedback. 

What are the highlights of the proposed servicing rule that deals with COVID issues?

ANSWER
To begin, you should understand that the proposal, if finalized, would generally add to existing Regulation X provisions to help address COVID-19-related hardships. Given the nature and scope of the proposed rule, I will provide a cursory summary.

For servicing compliance support, you should contact us. 

Our Servicers Compliance Group will get you ready to implement the Proposed Rule.

The Consumer Financial Protection Bureau (CFPB) issued a notice of proposed rulemaking (viz., 2021 Mortgage Servicing COVID-19 Proposed Rule) to propose amendments to its Mortgage Servicing Rule that would provide additional assistance for borrowers impacted by the COVID-19 emergency ("Proposed Rule").

The Proposed Rule includes:

-Adding information that servicers would provide to certain borrowers during live contacts;

-Adding loan modification options that servicers may offer based on an incomplete loss mitigation application in certain circumstances; and,

-Establishing a temporary COVID-19 emergency-related preforeclosure review period, added to existing foreclosure protections.

Let’s dig a little deeper.

The Proposed Rule would add a definition for COVID-19-related hardship to generally mean

a financial hardship related to the COVID-19 emergency, as defined in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). 

I will set forth a summary of the Proposed Rule’s amendments.

There are four paramount changes.

1) Early Intervention: Live Contact

During live contacts established under the existing Mortgage Servicing Rule requirements, the Proposed Rule would require servicers to take additional actions with certain borrowers. 

For borrowers not yet in a forbearance plan at the time of live contact, if forbearance options are available to the borrower through the servicer, the servicer would be required to ask the borrower if they are experiencing a COVID-19-related hardship. If the borrower indicates they are, the servicer would be required to list and describe forbearance programs made available to that borrower. The servicer would also be required to provide the actions that the borrower must take to be evaluated for such forbearance programs.

For borrowers in a forbearance plan at the time of live contact, the servicer would be required to identify the date the borrower’s forbearance program ends and list and describe loss mitigation options made available to the borrower to resolve any delinquency the borrower will have at the end of the forbearance program. The servicer would also be required to provide the actions that the borrower must take to be evaluated for such loss mitigation options, information the servicer has under existing continuity of contact requirements. The servicer would only need to provide this information in the last live contact required under the existing rule that occurs prior to the end of the forbearance period.

This proposed provision is temporary. If finalized, it would only apply until August 31, 2022, one year after the proposed effective date.

2) Loss Mitigation Procedures: Reasonable Diligence

Under the existing rule’s reasonable diligence obligations for servicers in obtaining a complete loss mitigation application, the Proposed Rule would clarify when the servicer must perform reasonable diligence requirements for borrowers in a short-term payment forbearance program made available to borrowers experiencing a COVID-19-related hardship. 

For those borrowers, if the short-term payment forbearance program was offered based on the evaluation of an incomplete application, then, no later than 30 days before the end of the short-term payment forbearance program, the servicer would be required to contact the borrower and determine if the borrower wants to complete their loss mitigation application and proceed with a full loss mitigation evaluation. 

If the borrower requests further assistance, the servicer would be required to exercise reasonable diligence to complete the application before the end of the forbearance program.

3) Loss Mitigation Procedures: Evaluation of a Loss Mitigation Application

The Proposed Rule would add another exception to the existing rule’s prohibition on offering a loss mitigation option based on an evaluation of an incomplete loss mitigation application. A servicer would be allowed to offer certain loan modifications based on the evaluation of an incomplete application if certain criteria are met.

Those criteria include:

-The loan modification would extend the term of the loan by no more than 480 months and would not result in an increase to the borrower’s periodic principal and interest payment.

-If the loan modification allows a deferral of amounts until certain points, such as when the loan is refinanced or the property is sold, the amounts would not accrue interest; the servicer would not charge a fee connected to the loan modification; and certain existing charges owed by the borrower, such as late fees and stop payment fees, would be waived by the servicer upon acceptance of the loan modification.

-The loan modification must be made available to borrowers experiencing a COVID-19-related hardship, as that term is defined in the proposal.

-The borrower’s preexisting delinquency would be resolved by acceptance of the loan modification (and potential completion of a trial loan modification first, if required by the servicer).

If the borrower accepts a loan modification as described in the Proposed Rule, the acceptance would terminate the servicer’s obligation to exercise reasonable diligence to complete any loss mitigation application the borrower submitted prior to the borrower’s acceptance of an offer made under the proposed exception. It would also terminate the servicer’s obligation to review such an application under the existing rule requirements. 

he obligation to exercise reasonable diligence to complete any loss mitigation application the borrower submitted prior to the borrower’s acceptance of an offer made under the proposed exception would restart if the borrower fails to perform under any required trial loan modification or if the borrower requests further assistance.

4) Loss Mitigation Procedures: Prohibition on Foreclosure Referral

The Proposed Rule would add a temporary COVID-19 “preforeclosure review period” where a servicer is not permitted to make the first notice or filing for foreclosure. 

In addition to the existing rule that generally prohibits a servicer from making the first notice or filing unless the borrower is more than 120 days delinquent, the Proposed Rule would add a temporary blanket prohibition on making the first notice or filing for foreclosure because of delinquency until after December 31, 2021.

Jonathan Foxx Ph.D., MBA

Chairman & Managing Director

Lenders Compliance Group