In the space of a week, everything has changed. Many people are restricted to their homes as we all engage in social distancing to flatten the curve. While everyone is trying to adjust to the new reality, these changes are presenting a number of unique challenges to the mortgage industry. In response to these extraordinary circumstances, state and federal mortgage regulators are modifying the way they do business, imposing additional requirements on entities they regulate, and providing guidance to industry on a rolling basis.
While the whole country is facing these issues, various state regulators are taking different approaches to addressing them, which results in an ever-changing and quickly-evolving regulatory landscape for the companies they regulate. We here at WBK are monitoring this guidance, remain in close contact with state and federal regulators, and are prepared to assist with regulatory challenges facing our clients.
We have put together the information in this special alert to give you a broad overview of the things we are hearing from regulators as well as the types of questions we have been getting from our clients in the industry, briefly addressing: (1) federal agencies’ responses to the crisis; (2) additional requirements that state regulators are imposing; (3) a relaxation of certain requirements by state regulators; (4) how state regulators are managing their workload in light of COVID-19; and (5) other practical issues.
There is a lot more going on in this area than we can include in a single special alert, however. For that reason, WBK has set up a dedicated webpage to serve as a resource for you, with coverage of these and other issues on an ongoing basis. It is available at: https://www.thewbkfirm.com/coronavirus or http://www.CoronaMortgageLaw.com. We will be adding materials to that site on an ongoing basis, so check back frequently. Please also join us for a special WBK webinar, “Mortgage Banking in the Time of Coronavirus,” on Wednesday March 25th at 2 p.m. ET.
Federal agencies and the GSEs have taken a number of steps in response to the COVID-19 crisis, including an updated Interagency Statement on Pandemic Planning from the FFIEC. We discuss some of the key developments below.
Loss Mitigation and Foreclosure/Eviction Relief
One of the first things many agencies did was to remind servicers of the loss mitigation options, including but not limited to forbearance, which were already on the books and apply to this situation. Along these lines, HUD issued FHA INFO # 20-18, on March 9, 2020, reminding all FHA-approved mortgagees and servicers of loss mitigation program options that should be offered to distressed borrowers, including those impacted by COVID-19.
On March 18, 2020, the Federal Housing Finance Agency (FHFA) announced that it directed Fannie Mae and Freddie Mac to suspend foreclosures and evictions for at least 60 days in response to the coronavirus national emergency. The foreclosure and eviction suspension applies to homeowners with a Fannie Mae- or Freddie Mac-backed single-family mortgage. (Fannie Mae’s COVID-19 page is available here, and Freddie Mac’s is available here.) On the same day, the Federal Housing Administration (FHA) also announced an immediate foreclosure and eviction moratorium for all FHA-insured single-family mortgages for a 60-day period, via FHA INFO #20-21. The VA has not mandated, but strongly encourages, a foreclosure moratorium in VA Circular 26-20-8, also issued March 18th.
States have also been active in this area, as noted below.
On March 13, 2020, FHA issued FHA INFO #20-20, announcing a temporary partial waiver of servicing requirements regarding face-to-face (in-person) contact with borrowers. Under the same notice, FHA assured mortgagees and other interested stakeholders of its continued business operations throughout the evolving crisis, although the new work environment may lead to possible delays.
On March 16, the Department of Veteran’s Affairs (VA) released Circular 26-20-7, “Special Relief for those Potentially Impacted by COVID-19,” which provides guidance for veterans, lenders, servicers, and appraisers on the VA Home Loan Program in connection with the spread of COVID-19.
In addition to disseminating the updated Interagency Statement on Pandemic Planning, the federal depository regulators have issued specific COVID-19 guidance, including:
- FDIC Frequently Asked Questions for Financial Institutions Affected by the Coronavirus Disease 2019
- OCC Bulletin 2020-15 on Working With Customers Affected by Coronavirus and Regulatory Assistance
- A Joint Statement on CRA Consideration for Activities in Response to COVID-19 (FDIC, OCC, FRB)
- Relaxed rules regarding capital and liquidity buffers
- NCUA Letter 20-CU-02 on NCUA Actions Related to COVID-19
There is a good compilation of state regulator responses that the NMLS has put together, which can be found here.
Additional Regulatory Requirements
Certain states are imposing additional regulatory requirements or reminding licensees of requirements currently in place. This has been principally focused on disaster recovery/business continuity reporting, as well as foreclosure and eviction relief.
In an example of the former, the Massachusetts Division of Banks issued a reminder to licensees, on March 11, 2020, that they should have business continuity plans in relation to a pandemic outbreak and its potential impact on the delivery of financial services. Going even further (and one day earlier), the New York Department of Financial Services (DFS) issued letters to industry advising that it is requiring each regulated institution to submit two documents: a response to the DFS describing the institution’s “plan regarding managing the potential financial risk arising from COVID-19”; and a “plan of preparedness to manage the risk of disruption to its services and operations.” Responses are to be provided to the DFS as soon as possible and in no event later than thirty (30) days from the date of the March 10, 2020, Industry Letters, that is by April 9, 2020.
A number of states have also been implementing generalized foreclosure and/or eviction moratoria, whose applicability is much broader (in those jurisdictions) than the agency- or investor-specific moratoria mentioned above.
Regulators Are Relaxing Regulatory/Licensing Requirements
Many state regulators have made the decision to allow MLOs to conduct business from unlicensed locations, including residences, but, in most cases, only if certain conditions are met. The conditions vary widely from state to state and can include some or all of the following: (1) additional data security requirements; (2) prohibition on meeting with consumers at the unlicensed location; (3) a prohibition on advertisements that include the unlicensed location’s address; (4) prohibition on storing physical business records at the unlicensed location; (5) prior notice to the regulator of the unlicensed locations from which business will be conducted; and (6) additional disclosures to consumers.
Regulators Working Remotely
One major area of concern in this environment where regulators, not unlike industry, are moving to a remote work environment, is the ability of regulators themselves to review and approve filings in a timely manner. Some business objectives and transactions require not only that certain filings be submitted to regulators, but also that the regulators approve the filings. Not surprisingly, certain regulators report that they are short staffed and that the current circumstances may result in delays to approvals of certain filings; others have reported that business continues as usual; and still others report that their employees are working remotely, but that they are fully functional and expect to continue to process filings and continue their work in a timely manner. WBK is monitoring this issue closely and remains in regular contact with state regulators.
Other Practical Considerations
In addition to the things regulators are saying (and doing), clients are faced with a significant number of practical problems resulting from the crisis. Anecdotal evidence suggests that verifications of employment may already be harder to complete, and the increase in people out of work (or in fear of being out of work for a significant period of time) poses a challenge for underwriting. Soon, underwriters may also have to determine how to assess uncertainty and/or any lack of liquidity in the housing market itself and how that may affect appraisals and collateral more generally.
Appraisers may not be willing to do an interior appraisal (and in some areas may not even be permitted to do a drive-by appraisal), and consumers understandably may not want an appraiser coming into their home. Some loans products may not require an appraisal, but this is an issue that will need to be addressed at an agency/investor level if the situation lasts a significant amount of time. There are similar problems with closings, although in states that permit e-notarization, there can be work-arounds.
Issues with recording security instruments are also popping up (with some recording offices closed, and not all jurisdictions permitting fully-online recording). This raises potential problems with the timing of releasing funds from closing. Gap coverage is sometimes available if the borrowers will sign an indemnity agreement, but lenders need to pay careful attention to what their coverage is and how their closing instructions read.
In jurisdictions where the government is needed for other certifications (such as for smoke detectors), any interruption in the government’s ability to provide those services throws up additional roadblocks for getting loans closed.
Many of these issues can be mitigated with longer lock periods, but the effectiveness of that approach may be tested by the length of this crisis.
Finally, cybersecurity is more important than ever. With large numbers of both lender employees and borrowers working remotely and increasingly more things being done online, the risk of phishing attacks, wire transfer fraud, and other cybersecurity issues is something that everyone should be paying attention to. In addition to doubling down on your cybersecurity defenses, remember to keep educating both staff and applicants/borrowers about how you will and will not communicate, and how to spot suspicious communications or potential breaches.
These challenges come at an interesting time, with interest rates at or near historic lows and many lenders already experiencing significant application volume. What this crisis will mean for refinance loans (both loans in process and new applications) is not fully clear, although it is possible that government agencies will create streamlined refinances to help impacted borrowers take advantage of lower rates to reduce the chance of default (as we saw following the last financial crisis). But as we focus our energies on the issues squarely facing us, it is worth keeping an eye on the types of innovations that often come from unique and challenging situations. Will those innovations speed up some of the technological disruption that we have already seen? Or will they take it and our industry in new directions? We will come back to these and other questions many times over the coming weeks and months. Please know that we are here for you and will continue to be here for you throughout. Together, we will help safeguard the American dream of homeownership in these challenging times.
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This is the first in what will be a series of WBK updates on what companies in the mortgage industry need to know because of COVID-19, available at https://www.thewbkfirm.com/coronavirus or www.CoronaMortgageLaw.com and in our weekly WBK Financial Services Update. Please join us for the WBK webinar “Mortgage Banking in the Time of Coronavirus” on Wednesday March 25th at 2 p.m. ET.