Interagency Statements on Residential Mortgage Servicing and Loan Modification and Reporting

COVID-19 Update

Residential mortgage servicers have now received critical new guidance regarding borrowers adversely impacted by COVID-19. In the first guidance, on April 3, the CFPB, the Federal Reserve, the FDIC, the NCUA, the OCC and state banking regulators issued a joint statement (“Joint Statement”) on supervisory and enforcement practices regarding the mortgage servicing rules. In the second guidance, dated April 7, the same five federal agencies, now “in consultation with” state regulators, issued an interagency statement (“Interagency Statement”) on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The primary purpose of these statements is to clarify and provide regulatory guidance to financial institutions and mortgage servicers attempting to comply with new mortgage servicing-related requirements under the CARES Act, which was signed into law on March 27.

What Mortgage Servicers Need to Know

The April 3 Joint Statement provides information and clarification regarding the agencies’ flexible supervisory and enforcement approach, particularly the application of the Regulation X mortgage servicing rules, during the COVID-19 emergency. Alongside the joint statement, the CFPB issued (also on April 3) a series of answers to 13 frequently asked questions regarding short-term loss mitigation options, early intervention requirements, continuity of contact requirements, annual escrow statements, electronic communications with borrowers and payoff statements. Together, the two documents are intended to provide mortgage servicers with the flexibility to provide borrowers with timely assistance, ensure that all borrowers are treated fairly and get the assistance they need, and allow for placing consumers in short-term forbearance programs either voluntarily or as required by the CARES Act.

As we have previously reported, the CARES Act requires mortgage servicers to provide deferrals of mortgage payments for up to 180 days and possibly longer to borrowers who have federally backed mortgage loans and who make a forbearance request and affirm that they are experiencing a financial hardship during the COVID-19 emergency. These servicers may not request additional information from the borrower before granting the request. If a borrower requests another forbearance of up to 180 days in addition to the initial forbearance, the servicer must extend the forbearance. When a borrower makes a request and affirms financial hardship, this constitutes an incomplete loss mitigation application for the purposes of Regulation X.

While servicers still must provide certain Regulation X notices when receiving these incomplete loss mitigation applications (for instance, the acknowledgement notice within five days of receipt, even if the borrower has been offered or is in forbearance), they do not generally have to exercise reasonable diligence to complete the application until near the end of the forbearance period. The April 3 Joint Statement suggests that the agencies will facilitate these CARES Act efforts by adopting a flexible supervisory and enforcement approach relating to Regulation X. In particular, beginning on April 3 and until further notice, the agencies assert that they do not intend to take supervisory or enforcement action against servicers for failing to send the acknowledgement notice within five days of receiving an incomplete application, as long as the acknowledgement notice is sent before the end of the forbearance period (or the end of the repayment period for a short-term repayment plan). Additionally, beginning on April 3 and until further notice, the agencies do not intend to take supervisory or enforcement actions against servicers, provided the servicers make good faith efforts to act within a reasonable time, for delays in (1) sending the loss mitigation-related notices and taking actions described in Regulation X, 12 CFR 1024.41(b)-(d), (h)(4) and (k), including the 30-day evaluation and notice and the appeals notice; (2) establishing or making good faith efforts to establish live contact with delinquent borrowers; (3) sending the written early intervention notice to delinquent borrowers; and (4) sending the annual escrow statement. The flexible supervisory and enforcement approach described above applies regardless of whether a borrower is experiencing a financial hardship due, directly or indirectly, to the COVID-19 emergency.

Because of the strict language in the Joint Statement and the behavior of regulators in the past, mortgage servicers should be cautious in taking advantage of this regulatory flexibility and watchful for additional guidance revoking the flexibility.

What Financial Institutions Working With Customers Affected by COVID-19 Need to Know

The April 7 Interagency Statement is intended to assure financial institutions that they have broad discretion to implement prudent modification programs. The statement encourages financial institutions to work with borrowers to meet their contractual payment obligations in a prudent manner. The agencies assert that they will not criticize institutions as long as any actions taken are consistent with safety and soundness principles. Additionally, the agencies assert that they will not criticize institutions for working with borrowers as part of a risk mitigation strategy intended to improve an existing non-pass loan.

The CARES Act allows a financial institution to account for an eligible loan modification under Section 4013 or in accordance with ASC Subtopic 310-40. Loan modifications that are not eligible for, or are not accounted for, Section 4013 should be evaluated as to whether they are troubled debt restructurings (TDRs). Section 4013 loan modifications (loan modifications that are (1) related to COVID-19; (2) executed on a loan not more than 30 days past due as of December 31, 2019; and (3) executed after March 1, 2020, and before the earlier of 60 days after the termination of the national emergency or December 31, 2020) do not have to be reported as TDRs, but financial institutions should maintain records of the volume of these loans, the data from which may be collected for supervisory reports. Non-4013 modifications do not automatically result in TDRs. A restructuring constitutes a TDR only if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. Short-term modifications, including payment deferrals, fee waivers, extensions of repayment terms or delays in payment that are insignificant, made on a good faith basis in response to COVID-19 to borrowers who were current (less than 30 days past due) prior to any relief are not TDRs.

The Interagency Statement asserts that the agencies’ examiners will exercise judgment in reviewing loan modifications and will not automatically adversely risk rate credits that are affected by COVID-19, nor will they criticize prudent efforts to modify the terms on existing loans to affected customers. Similarly, the Interagency Statement asserts that the Federal Reserve, the FDIC and the OCC will not consider one-to-four-family residential mortgages restructured or modified for the purposes of their respective risk-based capital rules, as long as they are prudently underwritten and not 90 days past due or carried in nonaccrual status. Financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due, because no contractual payments will actually be past due. These short-term arrangements should not generally be reported as nonaccrual, though financial institutions should refer to applicable regulatory reporting instructions, internal accounting policies, and the charge-off guidance in the instructions for the Consolidated Reports of Condition and Income. The Interagency Statement also reminds financial institutions that loans restructured as described in the statement will generally continue to be eligible as collateral at the Federal Reserve’s discount window.

Finally, the Interagency Statement reminds lenders and servicers to continue to adhere to consumer protection requirements, including fair lending laws, and assures financial institutions that the agencies do not intend to take consumer compliance public enforcement action against institutions in circumstances related to the national emergency when the institution made a good faith effort to support borrowers and comply with consumer protection requirements. Again, as stated above, financial institutions should remain cautious in any deviation from regulatory requirements in spite of these assurances.

Additional Guidance

The Manatt consumer financial services team is advising a number of mortgage lenders and servicers on COVID-19-related issues. If you require assistance, please contact the author or any member of the Manatt team.

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