Mortgage Industry Should Prepare For Forbearance Scrutiny

By Ashley Taylor, John Lynch and Nick Ramos
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Law360 (June 9, 2020, 3:55 PM EDT) --
Ashley Taylor
Ashley Taylor
John Lynch
John Lynch
Nicholas Ramos
Nicholas Ramos
The COVID-19 pandemic has wreaked havoc on the U.S. economy in unimaginable ways. Millions are unemployed as a result of federal and state action to contain and limit the spread of the virus. The cascading effects of shutting down the entire U.S. economy have already been felt by both mortgage servicers and borrowers alike.

In an effort to limit the damage to certain borrowers, both federal and state governments have enacted laws, promulgated rules and issued guidance requiring or encouraging many mortgage servicers or lenders to provide forbearance options under certain circumstances.

According to the Mortgage Bankers Association's forbearance and call volume survey, the number of loans in forbearance has steadily increased to a total of about 4.1 million loans or 8.16% of servicers' portfolio volumes as of May 10. This upward forbearance trend is likely to continue, so mortgage servicers and lenders should closely track evolving requirements and guidance to avoid potential liability.

Federal Overview

Section 4022 of the Coronavirus Aid, Relief, and Economic Security, or CARES, Act provides certain borrowers experiencing a financial hardship due to the COVID-19 outbreak the option to request a mortgage forbearance. If single-family mortgage loan borrowers with federally backed mortgages request such a forbearance, their lenders or services are required to grant them up to 180 days, which may be extended for up to another 180 days.

The CARES Act also prohibits lenders and servicers from (1) requiring any additional document other than the borrowers attestation to financial hardship caused by COVID-19; and (2) imposing additional, fees, penalties or interest on borrowers beyond those that could have been imposed if the borrowers made all their payments on time.

Section 4023 of the CARES Act provides a similar forbearance option for multifamily-mortgage loan borrowers with federally backed loans experiencing hardships, but the timelines are different. These borrowers are entitled to a forbearance for 30 days, which may be extended for up to another 60 days.

Notably, the CARES Act does not include a private right of action for qualified borrowers to sue lenders and servicers for any alleged violations. Nor does the CARES Act provide much detail on forbearance repayment requirements. So, it is up to federal agencies to fill in details and enforce the law.

The Consumer Financial Protection Bureau, or CFPB, has issued a guide to COVID-19 mortgage relief options. In its guide, the CFPB notes that both forbearance and repayment options may differ depending on the federal agency or entity that backs the loans. The guidance also summarizes repayment options for loans backed by Fannie Mae, Freddie Mac, the Federal Housing Administration, the U.S. Department of Veterans Affairs and the U.S. Department of Agriculture.

Generally, however, the CFPB states that forbearance repayment options might include repayment in one lump sump at the end of the forbearance period, adding the missed payments onto existing monthly payments for a set number of months, or adding the amount to the end of the loan as additional payments or a lump sum.

In addition, in mid-April, the CFPB and the Federal Housing Finance Agency announced a new, joint borrower protection program. The program involves consumer complaint, analytical tool and other information sharing between the two agencies. This is significant because the CFPB relies on this information to inform its supervisory and enforcement work.

As with any new legislation, it takes time to analyze the law and create programs that comply with it. Nonetheless, concerned with how some mortgage lenders and servicers have responded to the CARES Act forbearance provisions, several members of the U.S. House of Representatives Committee on Financial Services sent 11 letters to large mortgage servicers on May 4.

The letters asked recipients to produce a plethora of documents and information related to communications with borrowers that have federally backed mortgages. In total, there were 13 requests for documents or information, with several subrequests, related to the recipients' forbearance programs, communications with borrowers and customer service operations.

Congressional inquiries and partnerships like the one between the CFPB and Federal Housing Finance Agency may foreshadow more aggressive federal enforcement action or litigation in the near future. More likely, however, are state actions to implement their own versions of mortgage forbearance requirements.

State Overview

Since the beginning of the pandemic, it has been clear that the Trump administration has encouraged states to take the lead in the so-called war on COVID-19. For the most part, state governments have answered the call issuing emergency laws and devising regionally or locally focused plans to fight the virus. States are also showing a willingness to take the lead in protecting mortgage borrowers in the wake of COVID-19. Some states are taking a more collaborative approach with the mortgage industry, while others are taking a more heavy-handed approach.

In Ohio, Gov. Mike DeWine issued Executive Order 2020-08D, in which he strongly encouraged mortgage lenders and servicers to provide forbearance options for commercial real estate borrowers for properties in Ohio. Specifically, the executive order requests that lenders offer at least 90 consecutive days of forbearance for these types of borrowers experiencing hardship due to COVID-19. Notably, the order excludes any mention of residential mortgage borrowers and specifics about forbearance options or repayment plans. 

The Washington, D.C., Council passed the COVID-19 Response Supplemental Emergency Amendment Act of 2020. Section 202 of the Emergency Act discusses mortgage relief options for both residential and commercial borrowers. The act ordered the Department of Insurance, Securities and Banking to develop a mortgage deferment program for borrowers that, at a minimum:

  • Grants at least a 90-day deferment period of mortgage payments for borrowers;

  • Waives certain fees accrued during the public health emergency; and

  • Does not report delinquency as a result of the deferral to credit bureaus.

The Emergency Act also further requires borrowers to demonstrate "to the mortgage servicer evidence of financial hardship resulting directly or indirectly from the public health emergency," which differs from the CARES Act by requiring more than a simple borrower attestation.

Pursuant to the Emergency Act, the Department of Insurance, Securities and Banking issued guidance on May 4 outlining additional requirements for D.C.'s mortgage deferment program. The guidance describes who is considered a mortgage lender under the Emergency Act, outlines what mortgage lenders must do when they receive requests from borrowers, imposes reporting and record-keeping requirements on mortgage lenders, and prohibits mortgage lenders from requiring lump sum payments from any borrower under the program.

Shortly after the D.C. Council passed the Emergency Act, the D.C. attorney general issued a statement announcing that his office would "begin enforcing an additional slate of emergency protections for District residents in the [Emergency Act]." So it is likely that consumer complaints about noncompliance with the mortgage deferment program will be taken seriously.

In New Jersey, Gov. Phil Murphy announced that he had received commitments from many financial institutions to provide mortgage forbearance and financial protections for residents facing economic hardships as a result of COVID-19. Murphy stated that these financial institutions will:

  • Offer up to 90 days of mortgage payment forbearance;

  • Provide a streamlined process to request forbearance for COVID-19-related reasons;

  • Confirm approval of and terms of forbearance programs;

  • Provide borrowers an opportunity to request additional relief upon continued showing of hardship;

  • Not report borrowers to credit reporting agencies for those that take advantage of the relief; and

  • Waive mortgage-related fees for those requesting assistance.

New Jersey's Department of Banking and Insurance has also issued guidelines for these programs. The department stated that, although specific forbearance plans are set by the financial institutions, it has requested that forbearance payments be added to and made at the end of the mortgage loans.

The department also notes that immediate efforts have been focused on residential mortgage relief, but that it is exploring options for mortgage relief for small businesses. Finally, the department also provided instructions for consumers to file a complaint if mortgage lenders or servicers are not communicative or cooperative.

In New York, Gov. Andrew Cuomo issued Executive Order 202.9 amending Section 39 of the state banking law to deem it an "unsafe and unsound business practice" for any bank, subject to the jurisdiction of the New York State Department of Financial Services, to deny forbearance to any person or business experiencing a financial hardship as a result of the COVID-19 pandemic for up to 90 days.

In accordance with the order, the department issued a directive to New York state-regulated and exempt mortgage servicers, guidance and an emergency regulation amending Part 119 of the state's banking regulations. Part 119 requires New York-regulated institutions to allow any individual residing in New York, and able to demonstrate a financial hardship from COVID-19, to apply for forbearance of payments due on residential mortgages on property located in New York.

In such a situation the New York-regulated institution would be required to grant forbearance to the borrower for 90 days, subject to safety and soundness requirements. Part 119 also establishes requirements for qualifications to receive relief, processing applications, record-keeping, and outlines the factors the DFS will consider in assessing whether regulated institutions have "engaged in an unsafe or unsound practice by denying an application for such forbearance."

Notably, Part 119 specifically excludes commercial mortgages.

In addition, New York Attorney General Letitia James took the most aggressive step we have seen to-date from a state enforcement perspective by issuing 35 letters to New York's major mortgage servicers.

In the letter, James stated that her office "intends to hold the servicing industry publicly accountable for meeting its obligations to homeowners during this crisis." She also stated her office "will be doing this by monitoring compliance with emergency laws and regulations, evaluating servicers' performance at implementing COVID-19 relief programs, and determining which servicers are working most effectively to protect the long-term financial health of New York's homeowners and communities."

The letter outlined several strongly recommended procedures for placing loan payments into forbearance and communicating those steps to borrowers. Regarding these recommendations, the attorney general requested that recipients implement, and confirm implementation of, the procedures or alternative measures within 10 business days, which will be considered when responding to consumer complaints and evaluating compliance.

The letter also requested that recipients provide specific, recommended loan modification options, or comparable options, 30 days prior to the conclusion of forbearance agreements with borrowers. For these recommendations, James requested a confirmation within 30 days of whether recipients have implemented them or alternative measures. Again, the letter stated that the attorney general would consider these responses when evaluating consumer complaints and compliance.

The discussion in this section only focused on a few states, but it is clear that states are taking varied approaches to protecting mortgage borrowers during the COVID-19 crisis. Some states, like New Jersey, are seeking collaborative approaches with industry to address this issue. States like New York, on the other hand, are taking a more proactive approach to supplement federal law by creating additional state requirements and signaling that it plans to aggressively enforce them.


This article merely scratches the surface on the myriad federal and state laws and requirements that have recently emerged to protect mortgage borrowers in the COVID-19 era. These new legal requirements could have long-term legal implications for lenders and servicers depending on the nature of the forbearance and repayment options.

Given the context of the COVID-19 pandemic and recent actions, it is likely that noncompliance with these requirements will be scrutinized in detail by federal and state governments. This suggests that mortgage lenders and servicers should be prepared to hear from federal agencies or state attorneys general or licensing authorities.

Lenders or servicers that receive a regulatory inquiry from a government agency should be thoughtful in how they respond because any communication will likely be subject to freedom of information laws, or public record law equivalents, unless certain precautions are taken. This caution is key because these issues are likely to be closely monitored by plaintiffs' attorneys.

Lenders and servicers should comply with government agencies' requests in a way that avoids further scrutiny or inquiries and does not make them a target for other attorneys or government agencies.

Ashley Taylor and John Lynch are partners, and Nick Ramos is an associate, at Troutman Sanders LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

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