How to Prepare for a Global Recession

YOUR COMPLIANCE QUESTION 

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I am the CFO of a Mortgage REIT, a residential mortgage lender, and a mortgage servicer. Our board met to discuss what could happen to our mortgage originations in the event of a global recession. Our secondary and capital markets department is already gearing up for a recession. Our loan originations were affected by rising rates – and not in a good way. Our margins have been compressed, and hedging is difficult. 

Your name came up in the meeting, as one of the board members knows you. The thought was that you have many clients and probably have a good idea about the overall condition of the mortgage banking industry and how it can prepare for a recession. Because of your place in compliance and risk management, she feels that you could shed light on how we can prepare for a recession. Thank you for considering our question! 

How can a mortgage lender protect itself in a global recession? 

OUR COMPLIANCE SOLUTION

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RESPONSE TO YOUR QUESTION 

Our clients often discuss how their compliance failures result in direct financial losses. During a period of financial stress, a lender scrambling to address compliance deficiencies while also managing credit losses and liquidity pressures faces a compounded crisis that can accelerate failure. In this article, I want to address your specific question about what happens in mortgage banking in a global recession and how to prepare for it. 

Compliance Amplifies Everything 

Let me state at the outset that compliance during a recession amplifies everything! Specifically, in a recession, the compliance-stability connection intensifies because: 

• Regulators increase examination frequency and scrutiny, 
• GSEs conduct more aggressive post-purchase file reviews, 
• Borrower complaints rise sharply, triggering CFPB investigations, 
• Desperate borrowers and originators increase fraud risk, making compliance controls more critical, 
• Investors have less tolerance for defects and push repurchases more aggressively, and 
• State attorneys general become more active in mortgage enforcement. 

A lender entering a recession with a strong compliance foundation is dramatically better positioned than one carrying hidden violations that regulators and investors are about to discover. 

Fundamental Rule 

Here's the fundamental rule to planning for a recession: 

Lenders who prepare during good times survive recessions;

lenders who assume good times last forever do not. 

The 2008 crisis wiped out hundreds of mortgage companies that were profitable just 18 months earlier. The ones that survived – and thrived afterward – had built conservative balance sheets, diversified channels, and operational flexibility long before the storm arrived. 

Let's zoom out to the implications of a worldwide recession on mortgage banking. Understanding its impact on the banking ecosystem will give us a perspective on how a lender can protect itself in a recession.

Counteroffer or Adverse Action: Timing Requirements

QUESTION 

I am in the underwriting department and have a question about notifying the borrower about our decision to approve or adverse their loan. 

We provide an approval, counteroffer, or we adverse the loan. We underwriters here have a system that does not correctly differentiate the notification timing for counteroffers versus adverse action. But I believe counteroffers get additional time on notifications. 

I think this also has to do with how we define a counteroffer and adverse action. Our system works with a set of rules, and I think the rules are incorrectly defined. So, here are my questions. 

What are the notification requirements for our decision to approve, counteroffer, or adverse a loan? 

What is a “counteroffer?” 

What is “adverse action?” 

ANSWER 

Creditors are subject to specific notification requirements under the Equal Credit Opportunity Act (ECOA) in connection with credit applications, with the notice requirements varying based on the action taken by the creditor and whether the application is for consumer credit or business credit. 

Under the ECOA, there are four notification timing requirements for consumer credit. 

1.    Thirty (30) days after receiving a completed application concerning the creditor’s approval of, counteroffer to, or adverse action on the application; 

2.    Thirty (30) days after taking adverse action on an incomplete application, unless an incomplete application notice is provided under procedures specified in Regulation B, the implementing regulation of the ECOA [see section 202.9(c)]; 

3.    Thirty (3) days after taking adverse action on an existing account; or 

4.    Ninety (90) days after notifying the applicant of a counteroffer if the applicant does not expressly accept or use the credit offered.[i] 

With respect to defining a “counteroffer,” it refers to when a creditor offers to grant credit in a different amount or on other terms than the amount or terms requested by the applicant.[ii] 

You might want to know that, pursuant to the ECOA, a counteroffer need not be held open for any particular length of time.[iii] 

Defining adverse action is a bit tricky, so I will provide what it means and doesn’t mean. 

What does “adverse action” mean: 

1.    A refusal to grant credit in substantially the amount or on substantially the terms requested in an application unless the creditor makes a counteroffer and the applicant uses or expressly accepts the credit offered; 

2.    A termination of an account or an unfavorable change in the terms of an account that does not affect all or substantially all of a class of the creditor’s accounts; or 

3.    A refusal to increase the amount of credit available to an applicant who has applied for an increase.[iv] 

What “adverse action” does not include: 

1.    A change in the terms of an account expressly agreed to by an applicant; 

2.    Any action or forbearance relating to an account taken in connection with inactivity, default, or delinquency as to that account; 

3.    A refusal or failure to authorize an account transaction at the point of sale or loan, except when the refusal is a termination or an unfavorable change in the terms of an account that does not affect all or substantially all of a class of the creditor’s accounts, or when the refusal is a denial of an application for an increase in the amount of credit available under the account; 

4.    A refusal to extend credit because applicable law prohibits the creditor from extending the credit requested; or 

5.    A refusal to extend credit because the creditor does not offer the type of credit or credit plan requested.[v] 

Finally, there is the matter of determining when a notification occurs. Notification occurs when a creditor delivers or mails a notice to the applicant’s last known address or, in the case of an oral notification, when the creditor communicates the credit decision to the applicant.[vi] 

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

Lenders Compliance Group

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[i] 12 CFR § 202.9(a)

[ii] 12 CFR § 202.2(c)(1)

[iii] 12 CFR, Supplement I to Part 202 – Official Staff Interpretations § 202.9(a)(1)-5

[iv] 12 CFR § 202.2(c)(1)

[v] 12 CFR § 202.2(c)(2)

[vi] 12 CFR, Supplement I to Part 202 – Official Staff Interpretations § 202.9-3

Responding fully to an RFI

QUESTION 

We are a mortgage servicer, providing servicing throughout the country. I am the company’s Assistant General Counsel. 

As a result of a multistate banking examination, it is alleged that we failed to respond fully to RFI requirements. Specifically, the claim is that we did not provide sufficient information in response. 

Our staff has done considerable research on this matter; however, we have yet to determine how much information is sufficient to satisfy the RFI requirements. I am writing to you to get your view. 

How much information must a servicer provide in response to an RFI? 

ANSWER 

The Real Estate Settlement Procedures Act (RESPA) and its implementing Regulation X require servicers to respond to borrower requests for information (RFIs). This procedure results from the Dodd-Frank Wall Street Reform and Consumer Protection Act’s expansion of the scope of RESPA’s complaint handling requirements beyond the previously existing qualified written request (QWR) requirements. 

The RFI requirements apply to any written request from a borrower (or an agent for a borrower) to a servicer for information if the request includes three elements: 

(1) the name of the borrower; 

(2) information that enables the servicer to identify the borrower’s mortgage loan account; and 

(3) a statement of the information the borrower is requesting. 

Let’s take a look at the procedural components. 

Regulation X sets up a 2-step process for responding to RFIs, as follows: 

First, within five days (excluding legal public holidays, Saturdays, and Sundays) after receiving an RFI, a servicer must provide a written acknowledgment of receipt; and 

Second, a servicer generally must respond to the RFI not later than 10 days after receiving an RFI for the identity of, and address or other relevant contact information for, the owner or assignee of a mortgage loan, and not later than 30 days after receiving any other RFI. 

The servicer may extend the 30-day period by 15 days if, before the end of the 30-day period, the servicer notifies the borrower of the extension and its reasons. (The 10-day period cannot be extended.) A servicer need not comply with this 2-step process if it provides the information requested in writing within 5 days after receiving the RFI, along with contact information, including a telephone number, for further assistance. 

In general, the servicer must respond to an RFI by taking one of two actions: 

(1) providing the borrower with the requested information and contact information in writing, including a telephone number; or 

(2) conducting a reasonable search for the requested information and providing the borrower with a written notification stating that the servicer has determined that the information is not available to the servicer, with the basis for that determination and contact information, including a telephone number. 

Now, to your question about how much information must the servicer provide. 

Regulation X offers guidance regarding the types of information a servicer need not provide and what information is considered not available to the servicer. For example, information is not available if a borrower requests information stored on electronic back-up media that is not accessible by servicer personnel in the ordinary course of business without undertaking extraordinary efforts to identify and restore the information. Also, a servicer is not required to respond to RFIs that are overbroad or unduly burdensome, such as RFIs that seek documents relating to substantially all aspects of mortgage origination, mortgage servicing, foreclosure, and mortgage sale or securitization. 

I think a recent court decision may provide some clarification. 

The U.S. Court of Appeals for the 6th Circuit addressed a borrower’s claim that her mortgage loan servicer failed to provide all the information she requested in an RFI.[i] 

In 2005, Ms. Miller bought a home and financed the purchase with a mortgage loan. She fell behind on her payments and by January 2019 was 29 payments past due. She unsuccessfully sought a loan modification. In March 2019, a sheriff’s sale took place. 

In August 2019, Miller sued the lender’s assignee and the loan servicer, including RESPA claims for violating Regulation X’s RFI requirements and “dual-tracking” prohibition. (I’ll get to “dual tracking” shortly.) She claimed that the defendants “did not provide all of the information sought in her letters” and that she “was inconvenienced and incurred expenses in seeking the information that [d]efendants refused to provide.” 

Miller asked for “actual damages, including, but not limited to: 

(1) out-of-pocket expenses incurred dealing with the RESPA violation including expenses for preparing, photocopying and obtaining certified copies of correspondence, 

(2) lost time and inconvenience to the extent it resulted in actual pecuniary loss, 

(3) late fees, and 

(4) denial of credit or denial of access to full amount of credit line, additional [statutory] damages in the amount of $2,000.00, plus attorney’s fees, the costs of this lawsuit, and litigation expenses.” 

The district court dismissed all her claims for lack of standing, finding that she had failed to plead sufficient damages to establish an injury-in-fact.

Mortgage Forbearance Complaints

QUESTION
In the last few months, we have had an increase in consumer complaints. Most of them have to do with issues at our servicing department. However, we get complaints about our loan originating department, too. 

Our complaint log for the originations department is small compared to the one for our servicing department. We want your firm to conduct an internal audit of our servicing department. I spoke with your representatives, and they sent me helpful material. We’re scheduling you for September. 

We would like to know more about the types of complaints that involve mortgage servicing. Our servicing manager is particularly interested in learning about forbearance complaints. 

So, what kind of forbearance complaints are typical in servicing these days? 

ANSWER
Complaints relating to mortgage servicing have been increasing. What your question does not mention is the effect of the pandemic on triggering consumer complaints involving servicing. The pandemic was declared a national emergency due to COVID-19. The CFPB issued legislative and policy responses aimed at assisting mortgage borrowers. Given the toll that the pandemic took on people’s financial stability, it should come as no shock that high on the list of complaints is the forbearance issue.[i] 

There were 2.7 million borrowers in active forbearance as of January 2021. Many of these borrowers had been in forbearance for more than a year.[ii] As of April 2021, a good portion of those borrowers have missed three months' payments.[iii] 

I will offer a response based on my firm’s experience providing servicing compliance support as well as the Bureau’s recent Complaint Bulletin in May 2021. The CFPB found[iv] that four significant statistics reflect the huge number of complaints. These are: 

1. The volume of overall mortgage complaints increased to more than 3,400 complaints in March 2021 – the highest monthly mortgage complaint volume in nearly three years. 

2. Some consumers experience various communication issues related to forbearance plans and options available at the end of these plans. 

3. Some consumers described confusion with mandatory account notices. 

4. Some consumers reported long delays in modifying their loans to address forborne payments. 

The range of complaints includes such issues as applying for a mortgage or refinancing an existing mortgage; closing on a mortgage; problems with a credit or consumer report; struggling to pay the mortgage; and trouble during the payment process. The most common issue reported since January 2020 has been the difficulties encountered during the payment process. 

Indeed, the number of borrowers delinquent on their mortgage has doubled since the beginning of the pandemic.[v] By “delinquent” is meant borrowers who are behind on their scheduled payments. Many of these borrowers are in forbearance and are reported as current on their credit reports vis-à-vis the CARES Act. 

Furthermore, although the number of borrowers struggling to pay their mortgage increased in March and April 2020, the number decreased in the following months. It picked up again in 2021 and has just regained pre-pandemic levels. 

According to the CFPB, it received approximately 38,100 mortgages (origination and servicing) complaints from January 1, 2020 through March 31, 2021. This is around 5% of all complaints the CFPB received during this period. Mortgage complaint volume has averaged about 2,500 per month since January 2020. But in March 2021, the volume of mortgage complaints spiked 36% to more than 3,400, which appears to be the highest such volume to date. 

Take a look at this chart. 

Mortgage Complaint Volume

Indexed by Month[vi]

 

To put the chart in perspective, the decreases may be explained, in part, by relief provided by the CARES Act, which was effective in March 2020.[vii] I will not provide all the ways the CARES Act addressed forbearance concerns; however, a few relevant areas include such assistance as requiring only an attestation of hardship due to COVID-19, which permitted borrowers to obtain relief quickly; homeowners with an eligible mortgage who had experienced financial hardship due to the pandemic had the right to request and obtain forbearance on their mortgage for up to 180 days; and, homeowners had the right to request and obtain an extension for up to another 180 days (for a total of up to 360 days). 

In February 2021, the Federal Housing Finance Agency (FHFA), Federal Housing Administration (FHA), Department of Veterans Affairs (VA), and Department of Agriculture (USDA) announced they were expanding their forbearance programs beyond the minimum required by the CARES Act for a maximum of up to 18 months of forbearance for borrowers who requested additional forbearance by a date certain.[viii] 

Although the number of mortgage forbearance complaints is increasing, their share of overall mortgage complaint volume peaked at more than 20% in April 2020. Since that point, they have remained in the range of 11 to 14% of overall volume, which, according to the CFPB, suggests that several issues are contributing to the increase in mortgage complaints. 

When indexed on a monthly basis, this chart shows mortgage forbearance complaints as a percentage of overall mortgage complaints. 

Mortgage Forbearance Complaints as a Share of Mortgage Complaints Overall

Indexed by Month[ix]

Concerning your question about what kind of forbearance complaint is typical in servicing these days, I would say the most usual complaint involves servicer communications with consumers. Lack of clarity in communications leads to consumer frustration, especially when the answer is relatively easy for the servicer to provide, such as informing consumers about when their forbearance period ended, what would happen to forborne payments, and if the forbearance period could be extended. 

Based on the review of complaints and servicers’ responses, the CFPB has taken the position that consumers would benefit from more precise communication from servicers over the phone and in writing. As the Bureau has stated, in part:

Consumers appear concerned about their forbearance plan end date and available loss mitigation options, especially options that would resolve forborne payments (e.g., deferment). Complaints also suggest that at least some consumers are anticipating the end of their forbearance plans; therefore, servicers that are proactive in communicating before the end of the forbearance period may help give consumers sufficient time to understand all available relief options and to apply for help.[x] 

Additionally, servicers must provide several written and oral notices to consumers. For instance, no later than the 36th day of delinquency, the servicer is generally required to make good faith efforts to establish live contact with the consumer to inform them of certain loss mitigation option information.[xi] Or, no later than the 45th day of delinquency, in most circumstances, the servicer is also required to provide the borrower a written notice concerning their delinquency and providing specific information about loss mitigation options.[xii] 

Consumers have expressed confusion when their monthly mortgage statement indicated that their mortgage loan account was delinquent during a forbearance period. In evaluating this challenge, the CFPB believes that “it may be helpful for servicers to more clearly communicate to borrowers about whether their mortgage loan could be considered delinquent during a forbearance plan.”[xiii] 

One other area of complaints is consistently a problem: loan modifications following a forbearance period. Complaints include long delays in servicers establishing an FHA partial claim or otherwise modifying their loan to address forborne payments. Or, delays were due to additional document requests from servicers. Other consumers reported receiving conflicting information about potential relief options that were later denied because the borrowers did not meet certain criteria. 

Finally, from the Bureau’s point of view,[xiv] I will provide several issues that servicers will have to navigate as consumers extend or exit forbearance plans. 

Those issues include: 

- Difficulty reaching a servicer representative to talk through options; 

- Needing to correct inaccurate credit information furnished about a loan in forbearance; 

- Ensuring that the principal balance is accurate after a deferral plan becomes effective; 

- Providing accurate information about loan status and relief options during forbearance; 

- Accurately communicating that no written application would be required to extend a forbearance plan; 

- Not imposing an inspection fee, late payment fee, or modification fee during a CARES Act forbearance period; and, 

- Accurately applying payments while a loan is in forbearance or while the post-forbearance review is ongoing, including after a servicing transfer. 

Be sure to review all relevant policies and procedures to ensure that they reflect the Bureau’s expectations and applicable regulatory requirements. I also suggest routinely conducting testing, training, risk assessments, servicing quality control, and internal audits. 

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

Lenders Compliance Group

___________________________

[i] The Coronavirus Aid, Relief, and Economic Security (CARES) Act, for example, provides that homeowners with GSE and federally backed mortgages may request and obtain a forbearance for up to 180 days, and an extension for another 180 days (for a total of 360 days). Guidance from the GSEs and federal agencies allow up to 18 months of forbearance. Preventing foreclosures is a top priority. See Bulletin 2021-02: Supervision and Enforcement Priorities Regarding Housing Insecurity, CFPB, at https://files.consumerfinance.gov/f/documents/cfpb_bulletin-2021-02_supervision-and-enforcement-priorities-regarding-housing _WHcae8E.pdf
[ii] Protection for Borrowers Affected by the COVID-19 Emergency under the Real Estate Settlement Procedures Act (Act), Regulation X, FR, 12 CFR Part 1024, Bureau of Consumer Financial Protection, Proposed Rule, p. 14, et sequi
[iii] Idem p. 17
[iv] May 2021 Complaint Bulletin: Mortgage Forbearance issues described in Consumer Complaints, Consumer Financial Protection Bureau. I will be using certain graphics and some direct findings from this Bulletin.
[v] Housing Insecurity and the COVID-19 Pandemic, p. 6, March 2021, CFBP, available at https://www.consumerfinance.gov/documents/9512/cfpb_Housing_insecurity_and_the_COVID-19_pandemic.pdf
[vi] Op. cit. 4, Figure 1
[vii] 15 U.S.C. § 9056(c), Coronavirus Aid, Relief, and Economic Security (CARES) Act
[viii] See Press Release, The White House, Fact Sheet: Biden Administration Announces Extension of COVID-19 Forbearance and Foreclosure Protections for Homeowners, February 16,2021). Inter alia.
[ix] Op. cit. 4, Figure 4
[x] Op. cit. 4, p. 9
[xi] 12 CFR 1024.39(a)
[xii] 12 CFR 1024.39(b)
[xiii] Op. cit. 4, p. 10
[xiv] Op. cit. 4, p. 11