In This Issue:

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For Borrowers with a Forbearance, Fannie Mae and Freddie Mac Address their Eligibility for New Loans

On May 19, 2020, Fannie Mae in an update to Lender Letter 2020-03 and Freddie Mac in Bulletin 2020-17 announced temporary eligibility requirements for new purchase and refinance transactions involving borrowers affected by the COVID-19 pandemic who are, or have been, in a forbearance with their existing mortgage loan. The Federal Housing Finance Agency also issued a corresponding news release, with Director Calabria stating that this “action allows homeowners to access record low mortgage rates and keeps the mortgage market functioning as efficiently as possible.” Sellers must apply the new eligibility policies to loans with application dates on or after June 2, 2020, and may apply the policies to applications that are already in process.

For a borrower with an existing mortgage loan that is current as of the Note Date of the new mortgage loan, the standard Fannie Mae and Freddie Mac eligibility criteria will apply. An existing mortgage loan will be considered current as of the Note Date of the new mortgage loan if the borrower made all mortgage payments due in the month prior to the Note Date no later than the last business day of that month. Freddie Mac also expressly notes that such borrowers may not be in a repayment plan, loan modification trial period plan, payment deferral, or subject to another loss mitigation program.

If a borrower resolved missed payments on an existing mortgage loan through a reinstatement, the only additional eligibility requirements are that, if the reinstatement that was completed after the application date and before the Note Date of the new mortgage loan, the seller must document the source of funds used for the reinstatement, and the proceeds of the new loan may not be used for the reinstatement.

If missed payments on an existing mortgage loan have been or will be resolved through a loss mitigation option, the borrower must meet the applicable additional eligibility requirements outlined below:

  • If the borrower is subject to a repayment plan, the borrower must have (1) made three payments under the plan or (2) completed the plan, whichever occurs first (there is no requirement that the plan actually be completed). Freddie Mac adds that the borrower must be performing, and not have missed any payments, under the plan. Freddie Mac also notes that the proceeds from the new mortgage loan may be used to pay off the remaining payments under the repayment plan.
  • If the borrower is subject to a payment deferral, the borrower must have made three consecutive payments following the effective date of the payment deferral agreement. Freddie Mac adds that the payments must have been made timely, and notes that the proceeds from the new mortgage loan may be used to pay off the deferred amount.
  • If the borrower is subject to a modification with a trial period, the borrower must have completed the three-month trial payment period.
  • If the borrower is subject to any other loss mitigation solution, the borrower must have (1) successfully completed the loss mitigation program or (2) made three consecutive full payments in accordance with the program. Freddie Mac adds that the borrower must be performing, and not have missed any payments, under the program.

Fannie Mae advises that the temporary policies do not apply to high LTV refinance loans, and Freddie Mac advises that the temporary policies do not apply to Enhanced Relief Refinance® Mortgages.

- Mortgage Banking Group

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Fannie Mae and Freddie Mac Announce COVID-19 Payment Deferral

On May 13, 2020, Fannie Mae in Lender Letter 2020-07 and Freddie Mac in Bulletin 2020-15 announce a COVID-19 payment deferral that was developed at the direction of the Federal Housing Finance Agency. Servicers may begin to evaluate borrowers for a COVID-19 payment deferral starting July 1, 2020.

The payment deferral is designed to help borrowers affected by a hardship related to COVID-19 to return their mortgage to a current status after up to 12 months of missed payments. The missed payments would be placed into a non-interest bearing balance that would be due and payable at the maturity of the mortgage loan, or the earlier payoff of the loan or transfer or sale of the property. Fannie Mae advises that the deferred balance would include up to 12 months for principal and interest payments, out-of-pocket escrow advances paid to third parties, and servicing advances paid to third parties in the ordinary course of business and not retained by the servicer, if allowed by state law. Freddie Mac advises that the deferred balance would include up to 12 months of principal and interest payments, and the expenses and amounts due that are permitted to be capitalized under the Flex Modification capitalization rules described in section 9206.15 of the Freddie Mac Seller/Servicer Guide. All other terms of the mortgage loan would remain unchanged.

Borrower and loan eligibility factors regarding the payment deferral include:

  • The borrower had experienced a financial hardship result from COVID-19 that affected their ability to make monthly mortgage loan payments, and the hardship was resolved.
  • The mortgage loan was current or no more than 31 days delinquent as of March 1, 2020.
  • The mortgage loan is at least 31 days delinquent but no more than 360 days delinquent as of the date of the evaluation.
  • The loan must be a conventional first lien loan, and may have fixed, step or adjustable interest rate.
  • The property may be vacant or condemned, and Freddie Mac expressly indicates that the home may be a primary or secondary home, or an investment property.

The guidance addresses the requirement to establish a quality right party contact with the borrower, and to solicit the borrower for a payment deferral. Servicers may not require a complete borrower response package if the eligibility criteria are satisfied, and no trial period will be required. No processing or administrative fees may be imposed on a borrower to implement a COVID-19 payment deferral.

The Fannie Mae Lender Letter and Freddie Mac Bulletin, along with Attachments to the Bulletin that can be accessed here, provide further details on the COVID-19 payment deferral. They also provide details on other loss mitigation options that must be considered if the borrower does not qualify for a COVID-19 payment deferral.

Fannie Mae and Freddie Mac will announce the servicer incentive for a COVID-19 payment deferral in the future.

- Mortgage Banking Group

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Fannie Mae, Freddie Mac, and HUD Extend Foreclosure Moratorium and Take Other Actions

On May 14, 2020, Fannie Mae in an update to Lender Letter 2020-02, Freddie Mac in Bulletin 2020-16, and the U.S. Department of Housing and Urban Development (HUD) in Mortgagee Letter 2020-13 extended their foreclosure moratoriums through June 30, 2020.

Previously Fannie Mae and Freddie Mac halted foreclosure activities through May 17, 2020, in accordance with the CARES Act. HUD also previously announced a foreclosure moratorium for the same period.

In addition, Fannie Mae and Freddie Mac updated their property inspection guidance by advising that property inspections must not be completed when the borrower is experiencing a hardship related to COVID-19, unless as of March 1, 2020, (1) the mortgage loan was delinquent, and (2) the proper was confirmed to be vacant or abandoned. The agencies also changed the requirements for evaluating borrowers affected by COVID-19 for certain modifications by advising that the requirements apply if the borrower was current or fewer than 31 days delinquent as of March 1, 2020, instead of the previous March 13, 2020 date. Additionally, the agencies reminded servicers of the need to evaluate borrowers for the new COVID-19 Payment Deferral starting July 1, 2020.

HUD in Mortgagee Letter 2020-14 extended the effective date of the employment re-verification and appraisal guidance provided in Mortgagee Letter 2020-05 in view of COVID-19. Originally, the appraisal guidance was effective for appraisal inspections completed on or before May 17, 2020, and the employment re-verification guidance was effective for cases closed on or before May 17, 2020. Based on the extension, the appraisal guidance is now effective for appraisal inspections completed on or before June 30, 2020, and the employment re-verification guidance is effective for cases closed on or before June 30, 2020.

- Mortgage Banking Group

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VA Extends Foreclosure Moratorium

On May 15, 2020, the U.S. Department of Veterans Affairs (VA) issued Loan Guaranty Circular 26-20-18, dated May 14, 2020, to impose a further foreclosure moratorium on VA-guaranteed loans through June 30, 2020. VA-guaranteed loans initially were subject to the foreclosure moratorium under the CARES Act for the 60-day period that started on March 18, 2020. On May 14, 2020 Fannie Mae, Freddie Mac, and the U.S. Department of Housing and Urban Development extended the foreclosure moratoriums they previously had announced pursuant to the CARES Act through June 30, 2020.

- Mortgage Banking Group

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CFPB Revises Confusing ECOA Valuations Rule Factsheet

As previously reported, at the end of April 2020, the CFPB issued two factsheets regarding the Equal Credit Opportunity Act (ECOA) and Regulation B provisions that require creditors to provide the applicant with a copy of any written appraisal or other valuation developed in connection with an application for a first lien mortgage loan to be secured by a dwelling (ECOA Valuations Rule). One factsheet addressed the transactions that are covered by the rule, and the other factsheet addressed the rule’s delivery and timing requirements.

We noted that the first factsheet was likely to create confusion regarding the ECOA Valuations Rule’s coverage. Without announcement, the CFPB issued a revised version of the factsheet. The revised factsheet does not reflect that there is a prior version of the factsheet.

For the ECOA Valuations Rule to apply, there must be an application for credit to be secured by a dwelling. For purposes of the ECOA Valuations Rule, a “dwelling” is defined as “a residential structure that contains one to four units whether or not that structure is attached to real property. The term includes, but is not limited to, an individual condominium or cooperative unit, and a mobile or other manufactured home.”

The original factsheet and revised factsheet both provide that two factors determine whether a structure is a dwelling under the ECOA Valuations Rule: “The structure: (1) must be residential and (2) contain one-to-four units. When both factors are present, a dwelling exists.” Unfortunately, the first factsheet then provided the following examples of what are and are not dwellings:

Examples of structures that are dwellings:

  • A 10-unit residential structure with three units securing a loan.
  • A parcel of land with multiple residential structures totaling 20 units but with two-units in the same structure securing the loan.
  • A 30-unit condominium with two condos securing a loan.

Examples of structures that are not dwellings include:

  • Multiple dwellings, such as an inventory of individual housing structures, pledged as collateral.
  • A building with more than four residential units securing a loan. For example, a 10-unit residential structure with eight units securing the loan.
  • Land without any type of structure on it.
  • Motor vehicles as defined in 12 USC § 5519(f)(1), including recreational vehicle trailers, motor homes, campers, and recreational boats.
  • A three-unit commercial property.

Despite first indicating that the structure must contain one-to-four units to be a dwelling, the original factsheet then provided examples based on the number of units that secure the loan and not the number of units in the structure.

The revised factsheet sets forth the following examples of what are dwellings for purposes of the ECOA Valuations Rule:

Examples of structures that are dwellings:

  • A parcel of land with multiple residential structures totaling 20 units but with two-units in the same structure securing the loan.
  • A 4-unit condominium with two condos securing a loan.

The CFPB deleted the 10-unit residential structure example, and changed the 30-unit residential structure example to a 4-unit structure example.

With the examples of structures that are not dwellings, the CFPB revised the first example to read:

  • Multiple structures, such as an inventory of individual housing structures, pledged as collateral.

In the first example, the CFPB replaced the word “dwellings” with the word “structures”.

What the CFPB still has not done in the revised factsheet is expressly address whether it interprets the ECOA Valuations Rule to apply when a loan is secured by a first lien on no more than four units in a residential structure that contains more than four units. As a result, the revised factsheet continues to create possible confusion as to the ECOA Valuation Rule’s coverage. If the CFPB interprets the rule to apply where a residential structure contains more than four units, it should amend the rule to provide clarity on that point and apply this interpretation only from the date that the amended rule is effective.

Richard J. Andreano, Jr.

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New CFPB Factsheets Addressing ECOA Valuations Rule Are Likely to Create Confusion Regarding Coverage

The CFPB recently issued two factsheets regarding the Equal Credit Opportunity Act (ECOA) and Regulation B provisions that require creditors to provide the applicant with a copy of any written appraisal or other valuation developed in connection with an application for a first lien mortgage loan to be secured by a dwelling (ECOA Valuations Rule). One factsheet addresses the transactions that are covered by the rule, and the other factsheet addresses delivery and timing requirements of the rule. Unfortunately, the first factsheet is likely to create confusion regarding the coverage of the ECOA Valuations Rule.

Transaction Coverage Factsheet

The factsheet focuses on three elements regarding the coverage of the ECOA Valuations Rule: (1) whether there is an application for credit, (2) whether the credit would be secured by a first lien on a dwelling, and (3) whether the written appraisal or other valuation is prepared in connection with the application for credit.

Application for Credit. The factsheet provides that if an entity (1) grants “extensions of credit” as defined in Regulation B, (2) is a “creditor” as defined in Regulation B, and (3) received an oral or written request (made in accordance with its policies and procedures) for an extension of credit, then there is an application for credit. The factsheet addresses loss mitigation, and provides that if these three elements are met in a loss mitigation situation, then there is an application for credit. The factsheet indicates that as long as there is an application for credit to be secured by a first lien on a dwelling, the ECOA Valuations Rule applies even if the credit is for business purposes.

With regard to applications that are denied or withdrawn, the factsheet reflects that there is no exception to the applicant notice or the appraisal/valuation delivery requirements of the ECOA Valuations Rule for denied or withdrawn applications. Pursuant to the applicant notice requirement of the ECOA Valuations Rule, within three business days after receiving a covered application a creditor must mail or deliver to the applicant a notice advising of the right to receive a copy of any written appraisal or other valuation developed in connection with the application. The Loan Estimate under the TRID rule, which must be mailed or delivered to the applicant within three business days after receipt of an application, contains language that satisfies the notice requirement. The factsheet notes that even when a creditor decides to deny an application within three business days of receipt, the notice requirement still applies. As it is likely that no Loan Estimate would be issued in such a situation, a creditor would need to mail or deliver a notice to the applicant. The factsheet provides that the creditor could modify the notice to make clear to the applicant that the credit application was denied. Of course if an application is denied within three business days of receipt, it is likely that no written appraisal or other valuation would be developed in connection with the application and, if so, there would be no requirement to deliver a written appraisal or other valuation.

Secured by a First Lien on a Dwelling. For purposes of the ECOA Valuations Rule, a “dwelling” is defined as “a residential structure that contains one to four units whether or not that structure is attached to real property. The term includes, but is not limited to, an individual condominium or cooperative unit, and a mobile or other manufactured home.”

The factsheet provides that two factors determine whether a structure is a dwelling under the ECOA Valuations Rule: “The structure: (1) must be residential and (2) contain one-to-four units. When both factors are present, a dwelling exists.” While the factsheet states that a structure must contain one-to-four units to be a dwelling, it then provides the following examples of what are and are not dwellings:

Examples of structures that are dwellings:

  • A 10-unit residential structure with three units securing a loan.
  • A parcel of land with multiple residential structures totaling 20 units but with two-units in the same structure securing the loan.
  • A 30-unit condominium with two condos securing a loan.

Examples of structures that are not dwellings include:

  • Multiple dwellings, such as an inventory of individual housing structures, pledged as collateral.
  • A building with more than four residential units securing a loan. For example, a 10-unit residential structure with eight units securing the loan.
  • Land without any type of structure on it.
  • Motor vehicles as defined in 12 USC § 5519(f)(1), including recreational vehicle trailers, motor homes, campers, and recreational boats.
  • A three-unit commercial property.

Despite first indicating that the structure must contain one-to-four units to be a dwelling, the factsheet then provides examples based on the number of units that secure the loan and not the number of units in the structure. Thus, while the factsheet is intended to provide clarity, it may instead create confusion. Likely, the CFPB is basing the approach on the second sentence of the definition of “dwelling,” which provides that the “term includes, but is not limited to, an individual condominium or cooperative unit, and a mobile or other manufactured home.” If the CFPB is interpreting the ECOA Valuations Rule to apply when a loan is secured by a first lien on no more than four units in a residential structure that contains more than four units, it should amend the rule to provide clarity on that point and apply this interpretation only from the date that the amended rule is effective.

Additionally, the non-dwelling example in the factsheet of “[m]ultiple dwellings, such as an inventory of individual housing structures, pledged as collateral” is in need of clarification.

The factsheet notes that there is no requirement that a residential structure be owner-occupied to be a dwelling. As a result, assuming the other conditions are met, the ECOA Valuations Rule “applies to commercial transactions involving one to four unit residential structures, including rental homes and other investment properties.” With regard to mixed-use properties, the factsheet indicates that depending on the circumstances they can be dwellings, and provides the following example:

A one-to-four-unit property that includes both a residential and commercial structure would satisfy the definition of a dwelling if:

  • Only the residential portion of the property is pledged as collateral for the loan; or
  • The entire property (both the commercial and residential structure) is pledged as collateral.

Developed in Connection with an Application. The factsheet provides that if an appraisal was developed in connection with a prior extension of credit, and the creditor uses that same appraisal in connection with an application to renew the loan, the valuation is not developed in connection with the renewal application. However, if a written appraisal or other valuation is prepared in connection with the loan renewal application, then that appraisal or valuation would be developed in connection with the application.

The factsheet indicates that if a written appraisal or other valuation is developed in connection with an application but not used by the creditor in connection with the application, the creditor still must provide the appraisal or valuation to the applicant.

Delivery and Timing Factsheet

The factsheet notes that the ECOA Valuations Rule requires that a creditor “provide” the applicant with a copy of each written appraisal or other valuation developed in connection with a covered application. The factsheet then explains that the ECOA Valuations Rule defines “provide” to mean to “deliver” a copy of each written appraisal or other valuation, and that for purposes of the rule delivery is the earlier of:

  • Three business days after mailing or delivering a copy of the valuation to the last known address of the applicant; or
  • When evidence indicates actual receipt of a copy of the appraisal by the applicant.

The factsheet then provides examples of how the delivery concept interacts with the requirement that the applicant receive the copy of the appraisal or valuation no later than three business days before consummation.

The factsheet also notes the ability of the applicant to waive or modify the timing requirement, but does not reference the recent FAQ issued by the CFPB addressing the right to modify or waive the timing requirement as flexibility that is available in view of the COVID-19 national emergency.

- Richard J. Andreano, Jr.

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Fannie Mae and Freddie Mac Extend Eligibility for Sale of Loans in COVID-19 Forbearance

As previously reported, on April 22, 2020, Fannie Mae and Freddie Mac addressed the temporary eligibility for the sale of mortgage loans in a COVID-19 forbearance. Among the various original requirements for eligibility for sale, Fannie Mae and Freddie Mac required that a loan in forbearance have a note date on or after February 1, 2020, and on or before May 31, 2020. On May 19, 2020 Fannie Mae in an update to Lender Letter 2020-06 and Freddie Mac in Bulletin 2020-17 extended the eligible note date until June 30, 2020. The agencies also updated the submission or settlement date timeframes outlined in the original guidance.

- Mortgage Banking Group

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Fannie Mae and Freddie Mac Update COVID-19 FAQs

In conjunction with the May 5, 2020 update to and extension of their temporary origination and appraisal guidance, Fannie Mae and Freddie Mac updated their COVID-19 FAQs.

The agencies include new FAQs addressing their guidance that furloughed employees do not qualify under their guidelines for temporary leave income policy. In particular, Fannie Mae includes the following new FAQs:

Q5. If a VOE indicates the borrower is actively employed, but borrower discloses they are furloughed, what are the next steps?

The income may not be used for qualifying. A borrower who is furloughed or laid off is not considered to be actively employed. See Lender Letter LL-2020-03, Impact of COVID-19 on Originations for details.

Q10. If the borrower is furloughed but continues receiving income for a specified period of time, such as four weeks, can the income be used for qualifying?

No. This income is not stable, predictable, or likely to continue and therefore does not meet the requirements in Selling Guide B3-3.1-01, General Income Information; Continuity of Income.

Freddie Mac includes the following new FAQs:

Q3: The Borrower works for a company that has publicly stated employees will continue to be paid through a certain date (e.g., 3 weeks out); however, the employer’s physical place of business is temporarily closed. Is it acceptable to use the income to qualify the borrower?

No, the Guide requirements for Income Continuance are not met. As of this writing, the economic effect of COVID-19 to the ability of certain employers to re-open are unknown. This impacts a reasonable expectation of income continuance, regardless of the planned temporary closure status.

Q5: The 10-day PCV verifies the borrower’s employment status as employed; however, I have other information that indicates the Borrower may be furloughed or laid off. Is it acceptable to use the 10-day PCV as confirmation of the Borrower’s employment status?

No, the Seller’s knowledge that the Borrower may be furloughed or laid off contradicts a reasonable expectation of continuance and probability of consistent receipt of income. In this scenario, the Seller must resolve the discrepancy – which may require updated income documentation – before proceeding with using the income for qualifying. It is also recommended that, if possible, the Seller ask the employer during employment verification whether the borrower’s employment status or income level has changed within the last 60 days, as it is possible that a 10-day PCV employment status may still indicate “employed” after the borrower is furloughed or laid off.

Fannie Mae and Freddie Mac also address the situation in which a self-employed borrower has received a Paycheck Protection Program loan.

Fannie Mae includes the following new FAQs:

Q16. Does the lender need to consider a Paycheck Protection Program (PPP) loan when analyzing a self-employed borrower?

The PPP is a loan issued by Small Business Administration lenders under the CARES Act. These loans are designed to provide a direct incentive for small businesses to keep their workers on the payroll. The existence of a PPP loan could be helpful information in analyzing the borrower’s business. Lenders should apply due diligence and review the actions of the business and any impact the current situation has taken on the flow of income.

Q17. Does the lender need to consider a Paycheck Protection Program (PPP) loan in the borrower’s DTI?

Under the CARES Act, PPP loan terms allow deferred payments for a specified period, no personal loan guarantee, and the potential for all or some portion of the loan to be forgiven. Therefore, no payments would be expected to be included in the borrower’s liabilities at this time. Once it has been determined that any portion of the PPP loan must be repaid, follow the Selling Guide requirements for loans paid by a business.

Freddie Mac:

Q10. If the Borrower is self-employed and has disclosed that they are in the process of obtaining, or have obtained a new SBA Paycheck Protection Plan (PPP) loan under the CARES Act provisions, must a payment be considered?

If a self-employed Borrower has taken out an SBA PPP loan under the CARES Act, no payment – estimated or otherwise – need be included in the DTI or considered in the income calculation (e.g., as a deduction from income) at this time. This guidance may change as more information about the PPP loans becomes available, including the amount of loan forgiveness (e.g., full, reduced or none) which will be determined at a later date.

New FAQs from Fannie Mae also address changes in an applicant’s pay structure, temporary age of document requirements, the temporary suspension of employment validation through Desktop Underwriter® (DU®) and corresponding suspension of representation and warranty relief for employment verification within the Desktop Underwriter® (DU®) validation service, the use of third-party employment verification reports, the self-reporting of a loan in a COVID-19 forbearance, and other matters.

New FAQs from Freddie Mac also address temporary age of document requirements, the self-reporting of a mortgage in a COVID-19 forbearance, and other matters.

- Mortgage Banking Group

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Update: States Issue Work-From-Home Guidance for Mortgage Lenders

In response to the COVID-19 pandemic, state mortgage regulators are daily issuing guidance (1) about whether work from home arrangements are permissible under their existing licensing requirements and/or (2) are granting temporary permission for licenseable activity to occur from unlicensed locations (including employee homes) under specified conditions. Below we identify the states that have issued guidance specifically on this topic. Please note that the scope, duration, conditions and requirements set by the states differ – some even require approval – so please carefully review the state’s guidance set forth at the hyperlink. This is a rapidly changing area so check back regularly for updates and changes.

Alabama  Memorandum 
Alaska Notice
Arkansas Interim Regulatory Guidance
California Guidance
Colorado Bulletin
Connecticut No Action Position
District of Columbia Order
Hawaii Interim Regulatory Guidance (NMLS link)
Idaho Temporary Regulatory Guidance
Indiana Guidance (NMLS link)
Iowa Letter
Kansas Guidance
Kentucky Guidance
Louisiana Declaration
Maryland Bulletin
Massachusetts E-mail (NMLS link)
Michigan Bulletin
Minnesota Letter (NMLS link)
Mississippi Interim Regulatory Guidance
Montana Guidance
Nebraska Guidance on Temporary Branch Relocations (NMLS link)

Application Form (NMLS link)

Nevada Extended Memorandum
New Hampshire Memorandum
New Jersey Bulletin
New Mexico Memorandum
North Dakota Press Release – Preparation for COVID-19 Response
Oklahoma Revised Interim Guidance
Ohio FAQ
Oregon Revised Bulletin No. DFR 2020-6
Pennsylvania Guidance
Rhode Island Revised Banking Bulletin 2020-1
South Carolina Interim Regulatory Guidance
South Dakota Interim Regulatory Guidance (NMLS link)
Tennessee Interim Guidance
Texas Guidance
Utah Guidance (NMLS link)
Vermont Memorandum
Washington Interim Guidance Extended
West Virginia Guidance (NMLS link)
Wisconsin Directive


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Mortgage Banking Group

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CFPB 2020 Fair Lending Report Highlights Adverse Action Notices When Using Artificial Intelligence

The CFPB’s annual fair lending report covering its 2019 activities is scheduled to be published in tomorrow’s Federal Register. While most of the report recycles information about which we have previously blogged, it does contain the following noteworthy information:

  • The section of the report on “Innovations in access to credit” includes a subsection about “providing adverse action notices when using artificial intelligence and machine learning models.” The Bureau states that an area of innovation that it is monitoring for fair lending and credit access issues is “artificial intelligence (AI), and more specifically, machine learning (ML), a subset of AI.” The Bureau observes that there may be questions about how institutions can comply with ECOA and FCRA adverse action notice requirements “if the reasons driving an AI decision are based on complex interrelationships.” It comments that “the existing regulatory framework has built-in flexibility that can be compatible with AI algorithms.” The Bureau gives the following examples of such flexibility:
    • The Bureau states that the Regulation B (ECOA) official commentary provides that in giving specific reasons for adverse action, “a creditor need not describe how or why a disclosed factor adversely affected an application, or, for credit scoring systems, how the factor relates to creditworthiness. Thus, the Official Interpretation provides an example that a creditor may disclose a reason for a denial, even if the relationship of that disclosed factor to predicting creditworthiness may be unclear to the applicant.” The Bureau comments that this flexibility could be useful to creditors when issuing adverse action notices “based on AI models where the variables and key reasons are known, but which may rely upon non-intuitive relationships.”
    • The Bureau states that “neither ECOA nor Regulation B mandate the use of any particular list of reasons. Indeed, the regulation provides that creditors must accurately describe the factors actually considered and scored by the creditor, even if those reasons are not reflected on the current sample forms.” The Bureau comments that this latitude could be useful to creditors “when providing reasons that reflect alternative data sources and more complex models.”

The Bureau also notes that new tools continue to be developed to explain AI decisions and “hold great promise…to facilitate use of AI for credit underwriting compatible with adverse action notice requirements.” It also comments that despite the flexibility of the existing regulatory framework “there still may be some regulatory uncertainty about how aspects of the adverse action notice requirements apply in the context of AI/ML.” The Bureau encourages entities to consider using the Bureau’s new innovation policies (e.g. No-Action Letter Policy) to address potential compliance issues.

  • In discussing its annual risk-based prioritization process for 2019, the Bureau states that it focused its fair lending supervision efforts on mortgage origination, small business lending, student loan origination, and debt collection and model use and provides the following details:
    • Mortgage origination. The Bureau continued to focus on (1) redlining and whether lenders intentionally discouraged applications from individuals living or seeking credit in minority neighborhoods, (2) assessing whether there is discrimination in underwriting and pricing processes including steering, and (3) HMDA data integrity and validation (which supports ECOA exams) and HMDA diagnostic work (monitoring and assessing new rule compliance).
    • Small business lending. The Bureau focused on assessing whether (1) there is discrimination in the application, underwriting, and pricing processes, (2) creditors are redlining, and (3) there are weaknesses in fair lending related compliance management systems.
    • Student loan origination. The Bureau focused on whether there is discrimination in policies and practices governing underwriting and pricing.
    • Debt collection and model use. The Bureau focused on whether there is discrimination in policies and practices governing auto loan servicing and credit card collections, including the use of models that predict recovery outcomes.
  • In 2019, the Bureau initiated 26 supervisory events (Matters Requiring Attention and Supervisory Recommendations) relating to fair lending.
  • In 2019, the Bureau referred three ECOA matters to the DOJ, with such matters involving (1) a pattern or practice of redlining in mortgage origination based on race, (2) discrimination based on public assistance in mortgage origination, and (3) discrimination based on race and national origin in auto origination.
  • In 2019, neither the CFPB nor any of the other eleven federal agencies with ECOA enforcement authority brought a public enforcement action for ECOA violations.
  • In 2019, in addition to the Bureau’s three referrals to the DOJ, the FDIC referred two matters and the Federal Reserve and the NCUA each referred one matter. The matters referred by the FDIC involved discrimination in auto origination based on the applicant’s receipt of income derived from a public assistance program and discrimination in the underwriting of commercial loans based on religion. The Fed’s referral involved pricing discrimination based on national origin, race, and sex, and the NCUA referral involved discrimination on the basis of age.
  • The new report does not discuss the Bureau’s plans to reexamine the disparate impact doctrine in light of the U.S. Supreme Court’s Inclusive Communities decision and to hold a symposium on disparate impact and the ECOA.

Click here and use the ‘Register’ button to access the materials from our May 20 webinar, “Fair Lending and UDAAP Considerations During the COVID-19 Era.”

- Christopher J. Willis & John L. Culhane, Jr.

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Federal Court Grants TRO in Trade Group Lawsuit Challenging Massachusetts emergency Debt Collection Regulation

A Massachusetts federal district court has entered a temporary restraining order that blocks the state’s attorney general from enforcing the prohibitions on initiating lawsuits and making collection calls in the AG’s emergency debt collection regulation promulgated on March 26. The TRO was sought by ACA International, the Association of Credit and Collection Professionals, in its lawsuit seeking to have the court declare the emergency regulation invalid and enjoining the AG from enforcing the regulation.

The emergency regulation, entitled “Unfair and Deceptive Debt Collection Practices During the State of Emergency Caused by COVID-19,” applies to creditors and debt collectors. Section 35.03 of the regulation makes it an unfair or deceptive act or practice for creditors and debt collectors to engage in various types of activities, including initiating, filing, or threatening to file a new collection lawsuit or initiating, threatening to initiate or acting upon any legal or equitable remedy for the garnishment, seizure, attachment, or withholding of wages, earnings, property, or funds for the payment of debt to a creditor. Section 35.04 prohibits debt collectors (which includes first-party service providers collecting on behalf of creditors in the creditor’s name) from initiating telephone calls to the debtor’s residence, cellular phone, or other telephone number provided as a personal number.

Among the grounds asserted by ACA in its lawsuit for why the emergency regulation is invalid is that it is a content-based restriction on speech that violates the First Amendment of the U.S. Constitution. The district court determined that the telephone call ban was a limitation on commercial speech protected by the First Amendment subject to “intermediate scrutiny.” To satisfy such scrutiny, the AG would need to show that the asserted government interest is substantial, the emergency regulation advances that interest, and the regulation is no more extensive than necessary to serve that interest. The court did not find two of the three government interests invoked by the AG to be substantial: shielding consumers from aggressive debt collection practices that wield undue influence in view of the pandemic and temporarily vouchsafing citizens’ financial wellbeing during the pandemic. However, for purposes of the TRO motion, the court assumed that the third interest invoked by the AG, protecting residential tranquility while consumers are largely staying at home during the pandemic, to be a significant state interest.

The court went on to conclude that the AG had not shown that the emergency regulation advanced the state’s “residential tranquility” interest or that the restriction on speech imposed by the regulation was not more extensive than necessary. According to the court, “the best that can be said for the Regulation is it decreases incrementally the number of times that a phone might ring in a debtor’s home with a wanted or unwanted call from one species of debt collectors.” The court viewed the decrease as “incremental” because “the prior supplanted regulation had already imposed a limit of two calls per week by debt collectors.” In addition, the regulation did not insulate consumers from debt collection efforts overall, since certain nonprofits, federal employees, collectors collecting mortgage or tenant debts, and others are exempted from the call ban. Instead, “it singles out one group [of] debt collectors and imposes a blanket suppression order on their ability to use what they believe is their most effective means of communication, the telephone.”

The court commented that if the AG meant for the regulation to serve as “a strict-liability ban on all deceptive and misleading collection calls, the Regulation is redundant as that is already the law, both state and federally.” Pointing to prohibitions on unfair or deceptive acts or practices in the FTC Act, the Massachusetts UDAP statute, and the existing Massachusetts debt collection statute, the district court stated that “I do not believe that the Regulation adds anything to the protections that the existing comprehensive scheme of law and regulation already affords to debtors, other than an unconstitutional ban on one form of communication.”

ACA also argued that the regulation restricted the right of debt collectors and creditors to “petition the Government for a redress of grievances” by restricting access to the courts in violation of the First Amendment of the U.S. Constitution. In response, the AG argued that the effect of Section 35.03 “is merely to delay a creditor’s day in court, while temporarily protecting consumers from a method of debt collection that is uniquely threatening under the circumstances of the pandemic.” The district court agreed with ACA that the regulation created an unconstitutional obstacle to the right of ACA members to access the courts and, citing U.S. Supreme Court precedent, commented that “the mere fact of an emergency does not increase constitutional power, nor diminish constitutional restrictions.”

Having decided that ACA had shown a likelihood of success on its constitutional claims, the district court indicated that a finding of a First Amendment violation obviated the need for ACA to show irreparable harm. With respect to the balance of equities and the public interest, the court stated that given “the plethora of protection provided to debtors by the laws and regulations the court has previously cited, the interest a debtor may have in the Regulation may not weigh as heavy as the threat of extinction faced by smaller collection agencies who have been effectively put out of business.” The court also found that “perhaps of greater concern is the impact the Regulation may have on hospitals and utilities who depend on collection agencies to remain solvent.” In addition, the court stated that it “recognizes the argument advanced by ACA that a capitalist society has a vested interest in the efficient functioning of the credit market which depends in no small degree on the ability to collect debts.”

The TRO entered by the court enjoins the AG from enforcing Section 35.04 in its entirety and from enforcing Section 35.03 “in so far as it bars the defined debt collectors from bringing enforcement actions in the state and federal courts of Massachusetts.”

- Stefanie Jackman

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CFPB, FHFA and HUD Announce COVID-19 Mortgage and Housing Assistance Website

On May 12, 2020, the Consumer Financial Protection Bureau (CFPB), Federal Housing Finance Agency (FHFA) and U.S. Department of Housing and Urban Development (HUD) announced a joint COVID-19 mortgage and housing assistance website. Through the website, consumers can access information on the mortgage relief and renter protections provided for in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), as well as information on avoiding scams related to COVID-19.

Through the website, mortgage borrowers can access tools provided by Fannie Mae and Freddie Mac to determine if either agency owns their loan. Consumers also can access CFPB information on mortgage loan basics, such as understanding key mortgage terminology and reading the periodic mortgage statement, as well as information on what they should do after receiving a forbearance. The information addresses specific Fannie Mae, Freddie Mac, Federal Housing Administration (FHA), U.S. Department of Agriculture and U.S. Department of Veterans Affairs policies, and consumers are invited to check back for updated information.

In the statement announcing the website, FHFA advises that the payments that are missed because of a CARES Act forbearance “can be added to the normal monthly payments, paid back all at once, tacked on to the end of the loan, or the borrower can have the term of the loan extended.” Previously, FHFA, as well as Fannie Mae and Freddie Mac, made clear that lump sum payments would not be required at the end of a CARES Act forbearance. However, the borrower can opt to pay the missed payments in a lump sum at the end of the forbearance.

Echoing a prior statement, FHA also notes that borrowers will not be required to make lump sum payments at the end of a CARES Act forbearance. FHA also advises that it developed the COVID-19 Standalone Partial Claim, which may be available for borrowers who were current or less than 30 days delinquent as of March 1, 2020. FHA describes the Partial Claim as “a zero interest, no fee, junior lien on the borrower’s property that will become payable when the borrower sells their home, pays off their mortgage, or their mortgage otherwise terminates.” FHA also notes that there are other options available for borrowers who do not qualify for the Partial Claim, and provides ways for borrowers to obtain more information. We previously addressed the Partial Claim and other FHA loss mitigation options.

- Mortgage Banking Group

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Aggressive FTC enforcement agenda highlighted in Ballard Spahr webinar

For our webinar last Thursday, “Consumer Protection: What’s Happening at the FTC,” we were joined by special guest speakers Andrew Smith, Director of the FTC’s Bureau of Consumer Protection, and Malini Mithal, Associate Director of the FTC’s Division of Financial Practices. Chris Willis, Practice Leader of Consumer Financial Services Litigation at Ballard Spahr, also participated in the webinar, and Alan Kaplinsky, Practice Leader of the firm’s Consumer Financial Services Group, moderated the webinar. The webinar’s overall takeaway was to dispel any misconception that under the Trump Administration, the FTC has retreated from its role in enforcing consumer financial laws. Our guests made clear that the FTC has been pursuing an aggressive enforcement agenda under the Trump Administration and plans to continue to engage in robust enforcement going forward and to seek substantial remedies in appropriate cases.

Highlights of the webinar include the following:

  • COVID-19 pandemic response. The FTC’s focus has been on protecting consumers from COVID-related scams. With regard to scams, Andrew Smith indicated that the FTC has so far sent about 200 warning letters to companies alleged to be making false or misleading advertising claims about their services related to available government financial assistance or about the benefits of health or other products.
  • Artificial intelligence. Andrew discussed his April 2020 blog post, “Using Artificial Intelligence and Algorithms,” which addressed how companies can manage the consumer protection risks of AI and algorithms. Andrew indicated that the blog post resulted from his conversations with European regulators about their efforts to apply the principles of transparency, explaining decisions, fairness, and accountability to the use of AI. He wrote the blog post to address what these principles mean in the context of laws enforced by the FTC, specifically the ECOA, FCRA, and FTC Act Section 5 (UDAP). With regard to accountability, Andrew noted that there is increasing attention to privacy issues arising from the use of AI and algorithms. In his blog post, Andrew indicated that a company should consider both inputs to its AI models and outcomes. In response to Chris Willis’ question asking whether Andrew was suggesting that companies have a legal obligation to test outputs, Andrew indicated that he did not intend to suggest the existence of such a legal obligation or any other new legal obligations. He confirmed that a company only has a legal obligation to use AI tools that are empirically derived and demonstrably and statistically sound. He also commented that proxy-based self-testing of AI outcomes is a way that companies can manage the consumer protection risks arising from the use of AI and algorithmic models.
  • Small business lending. Malini Mithal indicated that the FTC is looking closely at small business financing, with a particular focus on merchant cash advances. As a general matter, the FTC is concerned about whether companies are engaging in deceptive conduct, providing clear pricing/fee disclosures, and giving attention to customer complaints. With regard to merchant cash advances, she indicated that abusive collection practices is a priority issue for the FTC.
  • Fintech. Malini indicated that the FTC has used the telemarketing sales rule to challenge the activities of online lenders in handling payments and, in addition to payments issues, will continue to focus on deception and attention to consumer complaints.
  • Data security. Andrew indicated that the FTC brought 9 data security enforcement actions in 2019. He highlighted that such actions, in addition to targeting companies with direct consumer relationships, were brought against service providers (i.e., a company that maintained customer and employee data for marketing companies and a company that held consumer financial information for auto dealers.) Andrew indicated that service providers will continue to be an area of FTC interest. He also indicated that data security actions in 2020 are likely to be against companies where the company has employed a vendor that failed to adequately protect consumer data and has not adequately monitored the vendor or taken other steps to prevent consumer harm. Andrew reported that the FTC plans to hold a virtual workshop in July 2020 regarding its efforts to update the GLBA safeguards rule.
  • Lead generation. Malini indicated that the FTC’s focus is not limited to the activities of lead generators but extends to intermediary lead buyers as well as lead buyers who use the leads to solicit consumers. She noted that in a recent enforcement action against a lead buyer, the FTC sought to impose liability on the buyer for the lead generator’s unlawful practices where the buyer allegedly failed to review the lead generator’s marketing materials and scripts and ignored consumer complaints.
  • Payment processing. Andrew indicated that the FTC has a number of pending cases dealing with payment processors and is committing significant resources to this area. Recent cases have involved claims that payment processors used “dummy accounts” to facilitate fraud by merchants and ignored red flags such as high numbers of chargebacks.
  • Credit reporting. Andrew indicated that more FTC enforcement actions involving background and tenant screening companies should be expected and that such actions are likely to involve issues relating to accuracy of information.
  • Privacy. Andrew indicated that the Children’s Online Privacy Protection Act will be an FTC enforcement priority and developing a COPPA rule proposal will be a regulatory priority. He also indicated that the FTC expects to continue to take action against companies that misrepresent their privacy practices and companies that misrepresent their adherence to the E.U./U.S. privacy shield.

- Barbara S. Mishkin

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CFPB Updates FAQs to Discuss Consumer Assistance by Financial Services Providers During COVID-19 Pandemic

The CFPB issued two sets of FAQs that discuss assistance that financial services providers can offer consumers during the COVID-19 pandemic.

One set of FAQs is directed at providers of checking, savings, or prepaid accounts. The FAQs deal with an account provider’s ability to change account terms and the ways account providers can provide immediate relief to consumers. In its responses, the CFPB reminds providers that they can offer consumers immediate relief by changing account terms without advance notice under Regulations E or DD where the change in terms is clearly favorable to the consumer. The Bureau includes as examples that a provider can eliminate ATM fees or that pursuant to the Federal Reserve Board’s April 2020 interim final rule deleting the six-per-month transfer limit on savings accounts, a provider can eliminate transfer fees on savings accounts without providing advance notice. It also notes that providers can use their discretion (as long as not done in a discriminatory manner) to waive or reduce fees on a case-by-case basis. The Bureau suggests that as a way of avoiding telephone queues, providers consider implementing waivers on their own initiative rather than wait for the consumer to contact the provider. It comments that this approach could facilitate consumer access to economic impact payments (under the CARES Act).

The other set of FAQs is directed at creditors offering open-end credit (that is not home-secured). Two of the FAQs similarly deal with a creditor’s ability to change account terms. In its responses, the CFPB reminds creditors that they can offer consumers immediate relief without advance notice under Regulation Z by reducing any charges or making an APR reduction as part of a temporary hardship arrangement. It also discusses how a creditor can take advantage of the flexibility Regulation Z provides to avoid giving advance written notice of the terms of a hardship arrangement and the terms that will apply at the end of the arrangement where the arrangement is entered into by telephone. The Bureau comments that while not required, creditors can remind consumers when a forbearance period is nearing its end as a way of reducing consumer confusion and complaints.

A third FAQ addresses how creditors can engage with consumers to assist them during the pandemic. The Bureau suggests that creditors consider highlighting to consumers how they can use online resources or email to communicate with the creditor, adding additional communications or materials when sending periodic statements, and making consumers aware of the Bureau’s resources for consumers. The Bureau also discusses electronic delivery of required disclosures and obtaining consumer consent to electronic provision of disclosures.

- Alan S. Kaplinsky

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CFPB Enters Into Partial Proposed Settlement Of Lawsuit Against Companies and Individuals Involved in Offering Student Loan Debt Relief Services

The CFPB announced that it has entered into a proposed settlement with several of the defendants in the lawsuit it filed in January 2020 in a California federal district court that alleges the defendants obtained consumer reports unlawfully, charged unlawful advance fees, and engaged in deceptive conduct.

The defendants included Chou Team Realty, LLC, which does business as Monster Loans (Monster Loans), and Thomas Chou and Sean Cowell (the “Settling Defendants”). The individual Settling Defendants both allegedly exercised substantial managerial responsibility for and control over Monster Loans’ business practices at the time of the alleged violations. In its complaint, the Bureau alleges that Monster Loans and a sham company, obtained consumer reports in the form of prescreened lists on the pretense that they planned to use the reports to offer mortgage loans to consumers when, in fact, they provided the reports to other defendant companies not participating in the settlement that used the reports to market student loan debt relief services.

The Bureau claims that (1) the Settling Defendants violated the FCRA by using or obtaining consumer reports without a permissible purpose to market student loan debt relief services, (2) Monster Loans substantially assisted the non-settling debt relief defendant companies in violating the Telemarketing Sales Rule (TSR) and the Consumer Financial Protection Act (CFPA), and (3) the individual Settling Defendants invested in the non-settling debt relief defendant companies and received profits from such companies. (The basis for the Bureau’s TSR and CFPA claims included allegations that the debt relief defendant companies misrepresented their services and unlawfully collected advance fees for debt relief services.)

The proposed stipulated judgment includes the following monetary provisions:

  • An $18 million judgment is entered against Monster Loans for the purpose of providing consumer redress to consumers charged fees by the debt relief defendant companies.
  • Of this judgment, Settling Defendant Chou is jointly and severally liable for $403,750 and Settling Defendant Cowell is jointly and severally liable for $406,150.
  • Upon payment of $200,000 by Monster Loans and $403,750 by Chou, the remainder of the judgment is suspended.
  • Monster Loans must pay a $1 civil money penalty, Chou must pay a $350,000 penalty, and Cowell must pay a $100,000 penalty. (The $1 penalty is based on Monster Loans’ “limited ability to pay as attested in its financial statements.”)

The proposed settlement also provides that the Settling Defendants are permanently banned from (1) using or obtaining prescreened consumer reports for any purpose, (2) using or obtaining consumer reports for any business purposes other than underwriting or otherwise evaluating mortgage loans, and (3) offering or providing debt relief services or assisting others, or receiving any remuneration or other consideration from, the offering or providing of such services.

The Bureau’s press release about the proposed settlement indicates that its claims against the other defendants remain pending in the court.

- John L. Culhane, Jr.

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Did You Know?

New Jersey Extends Annual Report Filing Deadline for Mortgage Lenders and Mortgage Brokers

The New Jersey Department of Banking and Insurance recently issued Bulletin No. 20-23 to extend the deadline for filing annual reports required of mortgage lenders and mortgage brokers, among other regulated entities. This grant of extension allows mortgage lenders and mortgage brokers to file an annual report by June 1, 2020, instead of the regular due date of May 1. However, for the next annual report, mortgage lenders and mortgage brokers must file by May 1, 2021 in accordance with the usual deadline.

NMLS Temporarily Extends Window for Licensees to Complete Fingerprinting Process

Effective since May 11, the window for NMLS licensees to complete fingerprinting requirements has been temporarily extended by 60 days. Licensees will now have a total of 240 days to complete the requirement, instead of the standard 180 days. The extension of 60 days will apply to any expiration window that is currently open or subsequently opened. The additional 60 days will also apply to expiration windows that have expired since March 17.

According to NMLS, approximately 60% of Fieldprint electronic fingerprint locations are open. NMLS also reminds individuals that they cannot attend fingerprinting appointments if they are experiencing COVID-19 symptoms or knowingly have COVID-19.

- Aileen Ng

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Looking Ahead

MBA Live - Legal Issues and Regulatory Compliance Conference

Virtual Conference, Online | May 26-27, 2020

Applied Compliance: Implementing Loan Originator Compensation

May 27, 2020, 1:00 PM ET

Speaker: Richard J. Andreano, Jr.

Complying Under Temporary Authority and Licensing Issues

May 27, 2020, 3:00 PM ET

Speaker: Stacey L. Valerio

 

Ballard Spahr Webinar

June 3, 2020, 12:00 PM - 1:00 PM ET

Credit Union and Community Banks Mortgage Regulatory Update
Part II – Mortgage Banking COVID Developments

Speakers: Richard J. Andreano, Jr., Reid F. Herlihy, & Amanda E. Phillips

 

RESPRO27

Virtual Conference, Online | June 23-24, 2020

Social Media – Staying Compliant While Staying Connected

Speakers: Richard J. Andreano, Jr. and Kim Phan

  

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.