Servicing Quality Control – Missing in Action

QUESTION

We are a lender that is also a Master Servicer. We use a subservicer to handle our servicing. I was hired last month to manage the servicing platform. Our servicing volume is three billion at this time. Our company is on with Fannie Mae and Freddie Mac. We will be applying to Ginnie Mae at the beginning of next year. 

One of the first things I looked for was the servicing quality control reports. I was shocked that servicing quality control was not done – ever! I am panicking because we are applying to Ginnie Mae, and we also have never done servicing quality control to show Fannie and Freddie. On top of that, Fannie will be doing a MORA review in the next few months. 

What should we do to get current with servicing quality control? And, what are the requirements? Our CEO reads your articles, and I want to show him your response. 

ANSWER

First and foremost, you will need to go back at least twelve months, maybe longer, to get servicing quality control to the point that it is acceptable to the GSEs. Ginnie Mae will undoubtedly expect to receive the reports for the twelve months previous to the application’s formal commencement. 

The GSEs conduct their own performance tests. They will communicate any performance deficiencies noted to the servicer. But, the GSEs could elect to terminate a servicer’s right to service their mortgage loans, although the servicer will still have an opportunity to explain any mitigating circumstances or factors that justify the servicing actions it took or did not take, given the timeframe specified by the GSEs in their communication of the performance deficiencies. 

Servicing quality control is implemented for a variety of reasons, such as complying with insurer and guarantor requirements; proper servicing to private institutional investors; conforming to company policies and procedures; complying with applicable federal, state, and local laws and regulations; complying with HUD FHA guidelines; implementing quality control requirements for various types of loans (i.e., FHA, VA, USDA, conventional); meeting Fannie Mae, Freddie Mac, and specific investor requirements; and, meeting quality control guidelines appropriate to a Ginnie Mae Issuer. 

Furthermore, quality control servicing identifies inadequacies, errors, or abuses relating to particular persons or practices involved in the loan servicing process, which becomes an alert to initiate corrective action. And it helps to prevent fraud by evaluating, documenting, and monitoring the general quality of loans serviced, thereby expanding the scope of quality control reviews when fraudulent activity or patterns of deficiencies are identified. 

The evaluation of the actions the servicer takes in servicing the mortgage loans will focus primarily on determining whether the servicer took all of the appropriate steps to cure the delinquency and deficiency or avoid foreclosure and if foreclosure could not be avoided, confirming that the servicer completed the legal actions within the GSEs’ required timeframes. 

In all our years of providing servicing quality control, we find that some companies have been remiss in consistently conducting quality control of loan servicing. This baffles me, frankly. Sometimes, company representatives tell us they didn’t realize they should be performing quality control audits on their loan servicing. Not implementing servicing quality control is a substantive regulatory mistake. Once you recognize a mistake, you should fix it; problems propagate and lead to regulatory and investor actions if the error is not quickly resolved. 

Every Master Servicer should have a Servicing Quality Control Plan (“Plan”). It should provide detailed sections that include, though are not limited to: 

• Assumptions
• Borrower Contact
• Collection & Loss Mitigation
• Default System (i.e., SFDM)
• Deficiency Identification
• Delinquencies
• Discretionary Reviews Criteria
• Early Payment Defaults
• Foreclosure
• Loans in Default
• Loss Mitigation
• Maintenance
• Methodology
• Notification Requirements
• Payoffs
• Quality Control Auditor Information
• Quality Control Parameters
• Record Keeping
• Reporting
• Responsibilities and Authorities
• Risk Categories
• Risks and Ratings
• Selection and Timing
• Selection by Loan Type
• Servicing Review Timeframes
• Servicing Standards
• Servicing Transfer
• System Integrity
• Taxes, Insurance, Escrow Administration
• Third-Party Auditor Information
• Timeliness and Frequency

I could go on, but hopefully, you get the point! Depending on the size, complexity, and risk profile of the financial institution, more sections would be needed. You must have a Plan that adequately provides the audit guidelines. If you want more information about our Servicing Quality Control Plan or Servicing Audits, please ask for it HERE. 

The Plan should be sufficient in scope to enable the company to evaluate the accuracy, compliance, and consumer protection within loan servicing operations. It should also provide independent evaluation, separated from the required operational functions. 

Monthly quality control of your loan servicing – whether single-family or multi-family – is a critical obligation. It is an essential requirement of your relationship with investors. If you are not conducting servicing quality control, you are bucking for an adverse rating from the GSEs. Without sequential monthly reports for servicing quality control, a Ginnie Mae Issuer application will be dead in the water.

Multifamily Relief and Rental Protections under the CARES Act

QUESTION
We specialize in multifamily lending and servicing. 

The CARES Act provides for mortgage and rental relief based on the type of property. 

A recent internal audit showed us that we do not have adequate procedures in place to implement the relief provision of the CARES Act. So, we are particularly interested in knowing about multifamily relief and rental protections. 

In counseling your multifamily clients, what are some of the guidelines that you recommend with respect to procedures for mortgage and rental relief?

ANSWER
In conducting internal audits for our clients, we may show a finding for weakness in CARES Act procedures for both single and multifamily properties. This is not unusual, given the many new regulatory requirements in response to the COVID-19 pandemic. If you would like us to conduct an internal audit that targets such pandemic response regulations, or a full internal audit review, please contact me HERE.

The Coronavirus Aid Relief and Economic Security Act (CARES Act) indeed contains several provisions that are addressed at mortgage and rental relief. These provisions are in addition to existing sections 1024.39 through 1024.41 of RESPA. The type of relief available depends on the type of property involved.

One-to-Four Family real estate is covered in Section 4022 (Foreclosure Moratorium and Consumer Right to Request Forbearance) of the CARES Act, where it grants forbearance rights and protection against foreclosure to borrowers with a federally backed mortgage loan. Multifamily real estate - five or more families - are addressed in section 4023 of the CARES Act.

Let’s look at the Multifamily. Then, I will discuss rental protections.

Multifamily relief provisions apply to federally backed multifamily mortgage loans. These include 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.
• 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, and such a request may be verbal or written.

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 two additional 30-day periods, upon the request of the borrower, provided that such request is 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 at least 15 days prior to the end of the original 30-day period.

The borrower can discontinue forbearance at any time.

Now, let’s discuss rental protections.

A multifamily borrower receiving forbearance may not, for the duration of the forbearance:

• 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.
• Require a tenant to vacate a dwelling unit on the applicable property on fewer than 30 days’ notice (and such notice may not be issued during the forbearance period).

A related provision of the CARES Act provides a temporary moratorium on eviction in certain properties, including those that have a federally backed multifamily mortgage loan. The moratorium imposed by this provision applies irrespective of whether the borrower has sought or is granted forbearance relief.

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 non-payment of rent or other fees or charges.
• Charge the 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 on fewer than 30 days’ notice, and such notice may not be issued during the 120-day period.

Jonathan Foxx, Ph.D., MBA

Chairman & Managing Director

Lenders Compliance Group

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