Federal Financial Agencies Announce Flexibility in Enforcing Certain Mortgage Servicing Rules in Response to COVID-19

Federal Financial Agencies Announce Flexibility in Enforcing Certain Mortgage Servicing Rules in Response to COVID-19On Friday, April 3, the Consumer Financial Protection Bureau (CFPB), Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC) and the State Banking Regulators released a joint statement announcing increased flexibility in the agencies’ regulation and enforcement of certain mortgage servicing rules governing borrower communications in response to the COVID-19 emergency. The agencies also provided corresponding FAQs to further clarify the new approach and provide additional guidance to servicers in light of the short-term payment forbearance option included in the recently passed CARES Act.

The statement provides the following guidance and flexibility under the rules, effective as of April 3 and until further notice:

Acknowledgment Notices

  • Under existing Regulation X rules, servicers may offer borrowers short-term assistance without obtaining a complete loss mitigation application. A CARES Act short-term forbearance, which can be obtained solely by request and affirmation of hardship, falls within this category. The statement clarifies that requests for short-term options are considered incomplete loss mitigation applications under the rules and will require the standard acknowledgment notice, which is ordinarily required within five days of receipt of the application (12 CFR 1024.41(b)). The statement clarifies that if a servicer offers or provides a short-term option, agencies “do not intend to take supervisory or enforcement action” against servicers for providing the required notice after the five-day mark, provided the notice is sent before the end of the applicable short-term plan or program period.

Loss-Mitigation, Live Contact, and Early Intervention

  • Outside of short-term options, the current rules require that when a borrower submits a standard loss mitigation application, servicers must provide a series of notices at specific intervals. Similarly, for delinquent borrowers, servicers must attempt both live and written contact on a standardized timeline. Concerning those requirements, and regardless of whether borrowers are experiencing hardship, the agencies will provide similar leniency and do not intend to take supervisory or enforcement action against servicers for:
    • Delays in sending certain loss-mitigation notices under Regulation X, including the five-day acknowledgment notice, 30-day evaluation notice, and the appeals notice, as long as the servicer makes a good faith effort to provide the notices and take the corresponding actions required under the rules within a reasonable time (see 12 CFR 1024.41 (b)-(d), (h)(4), and (k));
    • Delays in making or attempting to make live contact with delinquent borrowers as required, as long as servicers make good faith efforts to establish contact within a reasonable time (see 12 CFR 1024.39(a)); and
    • Delays in sending the 45-day written early intervention letter to delinquent borrowers, as long as good faith efforts to provide the notice are made within a reasonable time (see 12 CFR 1024.39(b)).

Annual Escrow Statements

  • In efforts to mitigate the typically high call volume associated with borrower questions surrounding receipt of annual escrow statements, the agencies do not intend to take supervisory or enforcement action against servicers for delays in sending annual escrow statements, as long as servicers make good faith efforts to send the statements within a reasonable time.

Takeaways

The agencies’ release is clearly good – though not necessarily earth-shattering and game-changing – news for mortgage servicers. Based on our review of the agencies’ release, servicers should be mindful of the following takeaways:

  • Although the joint statement provides guidance concerning the CARES Act and notes additional flexibility, it does not impose any new regulatory requirements on servicers. For example, small servicers, as defined by Regulation X, are not subject to many of the requirements in the rules described in the statement. And a servicer does not need to comply with the early intervention requirements of Regulation X if a borrower is not considered delinquent for purposes of those requirements.
  • The statement resolves any lingering questions surrounding the CFPB’s view of what constitutes an incomplete loss mitigation application. In the statement, the CFPB asserts conclusively that, as a part of a servicer’s CARES Act forbearance process, a conversation with a borrower, wherein the borrower expresses interest in a forbearance plan and attests to his or her hardship, constitutes an incomplete loss mitigation application under the rules, triggering additional CFPB notice and process requirements. We have previously encouraged servicers to be mindful in recognizing when verbal borrower assistance requests meet the definition of loss mitigation applications under Regulation X.
  • While the flexibility provided by the agencies is helpful, the agencies do not provide clear guidance as to the manner in which a servicer can take advantage of the flexibility. Put another way, it simply isn’t clear how the CFPB will interpret whether a servicer has made “good efforts” to provide the requisite notice or conduct the requisite action “within a reasonable timeframe.”
  • While the guidance provides relief to servicers concerning agency supervision and enforcement, servicers should be aware it does not address any applicable civil liability attached to violations of the above-mentioned rules. Unless and until the agencies release guidance providing, for example, a moratorium on civil liability provisions, servicers should be aware of the potential litigation risk attached to delaying compliance of certain CFPB notices and processes in accordance with the agencies’ release.

Foreclosure in the Times of COVID-19: Some Texas Counties Halt Foreclosures for April Amid Coronavirus Concerns

Foreclosure in the Times of COVID-19: Some Texas Counties Halt Foreclosures for April Amid Coronavirus ConcernsMany of Texas’ largest counties have suspended foreclosures for the month of April amid coronavirus (COVID-19) concerns, including the state’s two largest counties, Harris and Dallas. Texas Gov. Greg Abbott, however, has yet to issue an executive order or make a general proclamation cancelling all foreclosures statewide. Likewise, the Texas Supreme Court has also declined to act on the issue. Creditors seeking to proceed on “foreclosure Tuesday” must therefore take into account local (and in the future possibly statewide) prohibitions on such sales when determining whether to proceed with pending foreclosures or re-noticing for future postings.

For most types of conventional commercial and residential mortgages, Texas is a non-judicial foreclosure state. Lenders can foreclose without a court order so long as the mortgage documents contain a power of sale clause (hence Texas is sometimes referred to as a “power of sale state”). Pursuant to Chapter 51 of the Texas Property Code, foreclosure sales are conducted on the first Tuesday of every month, generally at the courthouse steps (or at a place designated by that county). These sales are of particular concern for local officials during a pandemic, as the large crowds that gather to bid on these properties can number in the hundreds. Officials have also raised concerns about the ability of successful bidders to pay delinquent property taxes when tax offices remain closed during the health crisis.

Action had already been taken at the national level to suspend foreclosures and evictions for 60 days, pursuant to an order given to the Department of Housing and Urban Development by President Trump. Furthermore, the recently passed CARES Act places a 60-day moratorium (that started on March 18, 2020) on foreclosures of federally backed mortgages on homes.It allows homeowners to request and receive 180 days of forbearance on mortgage payments for these federally backed mortgages, with an option to extend for an additional 180 days. Similarly, Fannie Mae and Freddie Mac are providing payment forbearance to borrowers impacted by the coronavirus. It should be noted, however, that these bans do not apply across the board and do not affect the ability of lenders to foreclose on non-federally insured loans or commercial loans.

Some states, such as Indiana, Kansas, and New York (which is a judicial foreclosure state), have issued statewide bans on mortgage foreclosures. Texas, whose high-population zones have been more greatly affected by COVID-19 than the smaller, rural areas, has yet to follow suit. Instead, local governments are taking it upon themselves to issue guidance regarding “foreclosure Tuesday.” As of the date of this publication, Harris (Houston), Dallas, Bexar (San Antonio), Travis, and Hidalgo, and El Paso counties have suspended foreclosures for April. Tarrant County has suspended foreclosures on all properties with federally backed mortgages, consistent with the CARES Act. Other large areas in Texas, such as Collin, Denton, and Fort Bend counties, have yet to issue any orders regarding April foreclosures.

We note that these “bans,” when examined in detail, are actually an announcement that the individual county will not make county facilities available for sales to proceed. It is possible this ad hoc approach occurred because the individual counties were awaiting guidance from the governor or that the county judges simply overlooked the foreclosure issue. Moreover, it is unclear as to the authority of a county to refuse to make public facilities available in contravention of legislation nor whether some other means, such as Zoom, Skype, etc., could be used to allow sales to proceed.

The decision to deal with coronavirus on a local, ad hoc basis injects uncertainty into the ability of creditors to protect their rights in these times of upheaval. Until such time as Texas issues a statewide order governing foreclosure proceedings, those in the financial services industry will be forced to proceed with a “caveat lender” approach.

CFPB Offers Flexibility for Responding to Credit Reporting Disputes During COVID-19 Pandemic — But Private Litigants May Not

Credit Reporting Requirements and COVID-19 – CFPB and FHA Weigh InThe CFPB’s April 1, 2020, statement regarding credit reporting for loans affected by COVID-19 announced a “flexible supervisory and enforcement approach during this pandemic.” In addition to guidance regarding furnishing obligations while consumers are impacted by COVID-19, the bureau specifically announced relaxed enforcement standards for companies struggling to respond to consumer credit disputes within the statutory timelines due to the challenging conditions created by the COVID-19 pandemic.

This is certainly good news for furnishers of information, but there is a fly in the ointment: The CARES Act’s amendment to the FCRA itself does not extend any deadlines for responding to a consumer’s credit reporting dispute. While the CFPB might be relaxing standards, consumers – and the plaintiff’s bar – might not extend the same grace when asserting FCRA claims in private lawsuits.

As the CFPB notes, the FCRA generally requires furnishers of credit information to investigate and respond to a consumer’s dispute within 30 days of receipt of the dispute. Noting the “operational disruptions that pose challenges . . . in investigating consumer disputes,” the bureau announced that it “will consider a consumer reporting agency’s or furnisher’s individual circumstances and does not intend to cite in an examination or bring an enforcement action against a consumer reporting agency or furnisher making good faith efforts to investigate disputes as quickly as possible, even if dispute investigations take longer than the statutory timeframe.” The bureau also announced that it would “consider the significant current constraints on . . . time, information, and other resources” when assessing a furnisher’s decision to determine that a dispute is frivolous or irrelevant, thereby eliminating the need to respond.

The CARES Act, however, does not amend or supplant the FCRA’s 30-day deadline for responding to consumer disputes, and the FCRA provides consumers with a private right of action against furnishers who fail to timely comply with these provisions. Accordingly – the CFPB’s relaxed approach not withstanding – a furnisher’s failure to timely respond to a consumer’s credit dispute can still lead to liability in a private FCRA action brought by a consumer who was harmed by the furnisher’s failure to timely investigate and respond.

The benefits of practical and flexible enforcement should not be understated. Companies must be cognizant, however, that the benefits of relaxed regulatory supervision do not extend to private FCRA lawsuits brought by consumers. Companies that relax their procedures or timelines for responding to credit disputes do so at the risk of future litigation with consumers.

Credit Reporting Requirements and COVID-19 – CFPB and FHA Weigh In

Credit Reporting Requirements and COVID-19 – CFPB and FHA Weigh InWe’ve been tracking regulatory developments related to credit reporting for loans where borrowers have been affected by the coronavirus outbreak. On April 1, the CFPB issued a statement about credit reporting for loans affected by COVID-19. The statement announces the CFPB’s “flexible supervisory and enforcement approach during this pandemic” and seeks to reassure credit reporting agencies and furnishers that the “circumstances [they] face as a result of the COVID-19 pandemic and entities’ good faith efforts to comply with their statutory and regulatory obligations” (including obligations under the CARES Act) will be considered in any supervisory or enforcement context. The FHA followed with its issuance of Mortgagee Letter 2020-06, which addressed several COVID-19 loss mitigation issues, including credit reporting. Unfortunately, neither the CFPB’s statement nor the HUD Mortgagee Letter fully clarifies the confusing credit reporting requirements included in the CARES Act.

To recap, Fannie Mae, Freddie Mac, and the Veterans Administration were the first major federal entities to announce a change in policy for credit reporting for COVID-19-affected loans. Each instructed lenders offering forbearance to COVID-190-affected borrowers to suppress credit reporting for the affected accounts.

Congress then enacted the CARES Act, which implemented additional – and arguably, conflicting – credit reporting requirements for borrowers receiving forbearance due to COVID-19-related hardships for repaying federally related loans. The CARES Act amends the Fair Credit Reporting Act by adding a new subsection to Section 623(a)(1) of the FCRA (which concerns the “responsibilities of furnishers”). This new subsection (entitled “Reporting Information During COVID-19 Pandemic”) defines the term “accommodation” as including most forms of loss mitigation (including loan modification, forbearance, and deferral) granted to a consumer affected by the COVID-19 pandemic. The CARES Act then appears to mandate how furnishers must report credit information for borrowers receiving an accommodation during the “covered period” (generally, the period of the COVID-19 national emergency):

[I]f a furnisher makes an accommodation with respect to 1 or more payments on a credit obligation or account of a consumer, and the consumer makes the payments or is not required to make 1 or more payments pursuant to the accommodation, the furnisher shall—

(I) report the credit obligation or account as current; or

(II) if the credit obligation or account was delinquent before the accommodation—

(aa) maintain the delinquent status during the period in which the accommodation is in effect; and

(bb) if the consumer brings the credit obligation or account current during the period described in (aa), report the credit obligation or account as current.

Under the CARES Act, suppressing credit reporting does not seem to be an option. While furnishers do not generally have an obligation to furnish credit information (the FCRA only requires that they do not furnish information known to be inaccurate), the language added by the CARES Act implies a mandate to report (“the furnisher shall report…”).

But the CARES Act mandate carries some absurd results. For consumers who are current when they enter forbearance, they will continue to be reported as current during the forbearance period (so long as they make any payments required under the forbearance plan). That is generally consistent with current Metro 2 industry guidelines. But for consumers who were already delinquent when they began forbearance, the CARES Act mandate appears to be worse for consumers than existing industry practice. Under Metro 2, a consumer who is delinquent at the time that he or she enters forbearance would be reported as Code 11 (“current”), with a notation that the consumer is in forbearance. Under the CARES Act, that same consumer is instead reported as delinquent for the duration of the forbearance period unless he or she cures the delinquency. That is an especially odd result for loans owned or secured by Fannie Mae, Freddie Mac or insured by the VA, where the pre-CARES Act guidance mandated a suppression of reporting, which would generally be better for consumers than a delinquent status.

Given the odd result, furnishers questioned whether the act should be interpreted strictly. First, they have questioned whether credit reporting for COVID-19 affected loans is truly mandatory, in light of the long-established general rule that there is no affirmative obligation to provide credit reporting. It would be logical to assume that Congress did not intend to create a credit-reporting mandate, but instead only sought to clarify the requirements if a company did decide to report a consumer’s credit.

Second, furnishers have questioned whether, if the CARES Act does have a credit-reporting mandate, does it actually require furnishers to report accounts that were delinquent at the time of the beginning of the forbearance period as delinquent? The phrasing of that section of the act is odd; it states that if the furnisher offers the consumer an “accommodation,” it “shall report the credit obligation or account as current; or, if the credit obligation or account was delinquent before the accommodation,” then the furnisher shall maintain the delinquent status at the beginning of the forbearance period. Seeking to avoid the odd result of mandatory adverse credit reporting, some furnishers have interpreted this section as giving the furnisher the option to report any account in forbearance as current.

In short, furnishers would greatly benefit from further guidance. Unfortunately, the CFPB’s statement does not provide a definitive answer as to whether the CARES Act includes an actual mandate to provide credit reporting. The statement both recognizes that “companies generally are not legally obligated to furnish information to consumer reporting agencies,” and also describes the CARES Act as “generally requir[ing] furnishers to report as current certain credit obligations for which furnishers make payment accommodations to consumers affected by COVID-19 ….” Thus, the CFPB’s statement is broad enough to cover all three interpretations of the act: (1) credit reporting can be suppressed; (2) all accounts given an accommodation can be reported as current; or (3) furnishers must report delinquent accounts in forbearance as delinquent. Without specific guidance, the CFPB’s representation that it will not “cite in examinations or take enforcement actions against those who furnish information to consumer reporting agencies that accurately reflects the payment relief measures they are employing” is not determinative; whether the reporting is “accurate” in light of conflicting guidance is the very question at issue.

The FHA also weighed in on the credit reporting issue on April 1, issuing Mortgagee Letter 2020-06, which, among other issues, briefly addressed credit reporting for borrowers receiving forbearance for COVID-19-related hardships. But the Mortgagee Letter is no more helpful than the CFPB statement in providing clarity. It states that that “any Borrower who is granted a [FHA COVID-19 forbearance] and is otherwise performing as agreed is not considered to be delinquent for the purposes of credit reporting” – a mandate that is clear, but not in any real dispute, as it is clearly required under the CARES Act and consistent with existing industry practice. FHA then states that it “requires Servicers to comply with the credit reporting requirements of the Fair Credit Reporting Act (FCRA)” – again, not especially helpful – “however, FHA encourages Servicers to consider the impacts of the COVID-19 National Emergency on Borrowers’ financial situations and any flexibilities a Servicer may have under the FCRA when taking any negative reporting actions.” Once again, that general statement of “encourage[ment]” does not offer any guidance as to how to implement the odd apparent mandates of the CARES Act or square them with existing practice or other regulatory mandates.

In short, furnishers are in a difficult position right now. They will simply have to choose a credit reporting policy that best matches both the text of federal law and the announced goals of the federal regulatory bodies and other institutions until they receive further guidance.

Mortgage Servicers: Keep an Eye on the CFPB’s Advice to Borrowers Impacted by COVID-19

Mortgage Servicers: Keep an Eye on the CFPB’s Advice to Borrowers Impacted by COVID-19On March 31, 2020, the CFPB posted a “Guide to coronavirus mortgage relief options,” which provides instruction to mortgage loan borrowers who may be impacted by COVID-19 on when and how to go about obtaining assistance. While we have previously discussed compliance challenges that are likely to arise related to verbal loss mitigation applications and the obligations surrounding short-term forbearance and repayment plans, the CFPB’s borrower guide adds some additional considerations that are worth following. Specifically, the CFPB’s guide suggests that servicers should take the following actions:

  • Loss Mitigation Disclosures – Ensure that disclosures surrounding loss mitigation options are clear and completely convey the terms of the agreement.
  • Periodic Billing Statements – Validate that periodic billing statements are compliant while a borrower is performing under a loss mitigation option, and ensure that borrowers are made aware of why a monthly statement may not align with the terms of a loss mitigation plan.
  • Credit Reporting – Track and comply with all guidelines and restrictions on credit reporting during the COVID-19 pandemic, and ensure consumers understand how a servicer will report while a borrower is performing under a loss mitigation option.

The CFPB’s guide generally provides helpful information and background on the various initiatives that may provide borrowers with a path for relief, such as the forbearance option and foreclosure moratorium established via the CARES Act. The guide does an excellent job of providing consumers with a plain language explanation of if and when they may qualify for relief, and (from a servicer’s perspective) helpfully notes that “[i]f you can pay your mortgage, pay your mortgage.”

The CFPB’s guide ultimately gets into recommendations for how mortgage loan borrowers should go about trying to obtain relief. This includes calling the servicer and being prepared to explain:

  • Why the borrower is unable to make payments
  • Whether the problem is temporary or permanent
  • Details about income, expenses and other assets, such as cash in the bank
  • Whether the borrower is a servicemember with permanent change of station orders

The CFPB also suggests that borrowers ask the mortgage servicer:

  • What options are available to help temporarily reduce or suspend payments?
  • What forbearance, loan modification, or other options are available?
  • Can the servicer waive late fees?

As we’ve previously described, these conversations will likely qualify as loss mitigation applications under the framework established in Regulation X by the CFPB in 2014. Servicers must be prepared to recognize them as such, and then comply with the various obligations that stem from receiving an application, including acknowledging receipt and assisting the borrower in completing the application. As a part of this, servicers must also recognize the limitations Regulation X puts on the ability to offer certain types of loss mitigation options based upon an incomplete application. Regulation X generally prohibits servicers from offering loss mitigation options based upon an incomplete application, unless the option qualifies as a short-term repayment plan or a short-term payment forbearance plan, as those terms are defined in the rules. A short-term payment forbearance plan under Regulation X allows for the forbearance of payments due over periods of no more than six months, irrespective of the amount of time a servicer allows the borrower to make up the missing payments. A short-term repayment plan under Regulation X allows for the repayment of no more than three months of past due payments and allows a borrower to repay the arrearage over a period lasting no more than six months. Servicers who receive an incomplete loss mitigation application and offer loss mitigation options above, beyond, and/or different than the short-term options outlined above run the risk of violating Regulation X.

The CFPB’s guide then describes things that a borrower who is granted forbearance or other relief should do during and after the telephone conversation with the mortgage servicer. First, the CFPB suggests that borrowers request everything in writing:

Get it in writing

Once you’re able to secure forbearance or another mortgage relief option, ask your servicer to provide written documentation that confirms the details of your agreement and that you’re clear on what the terms are. With some forbearance programs, you may owe all of your missed payments at one time, or additional payments at the end of the mortgage might be required, so make sure you’re familiar with the final terms.

While Regulation X already requires that the terms of a short-term forbearance or repayment plan be disclosed promptly after it is offered, servicers may want to ensure that their forbearance disclosures adequately explain how the covered payments will be handled at the end of the term. For example, after completing a six-month forbearance plan, will the six payments immediately be due and payable? Or, will those payments be deferred to the end of the loan? Similarly, are other relief options potentially available towards the end of the plan to help resolve a delinquency that builds up? Since the CFPB is encouraging borrowers to make sure they understand how these plans work, they will likewise also expect that servicers proactively do their part in clearly explaining all the terms and what to expect. Now is the time to revisit existing disclosures and make sure they are adequate in light of the circumstances.

Finally, the CFPB suggests that borrowers do certain things while in the forbearance period or working under another mortgage relief option. This includes paying attention to monthly mortgage statements to make sure there aren’t any errors and keeping an eye on credit reports to make sure that information is reporting accurately. While servicers are already bound by detailed legal requirements when sending periodic billing statements or furnishing information about a mortgage loan to a credit reporting agency, the CFPB is pointing consumers to areas where there are likely to be challenges.

In the periodic billing statement context, the CFPB amended the commentary to Regulation Z in 2016 to explain how servicers can comply when a borrower is performing under a temporary loss mitigation option. Specifically, for the amount due requirement on a billing statement the CFPB noted that servicers could either display “the payment due under the temporary loss mitigation program or the amount due according to the loan contract.” Servicers who choose to display the payment amount due under the loan contract should ensure that they somehow notify borrowers that the billing statement may not reflect what was agreed upon for the borrower to pay (or not pay) each month under the terms of a loss mitigation option. Otherwise, servicers should expect to receive calls and inquiries from borrowers asserting inaccuracies on their monthly statements. For example, without some clarifying disclosure it seems likely that a borrower who is not expecting to pay anything under the terms of a forbearance plan could be confused when the monthly statement reflects the full amount being owed.

Similarly, servicers should be mindful of the restrictions on credit reporting that may be in place while a borrower is impacted by COVID-19. The GSEs and various states have been imposing guidelines and restrictions on credit reporting over the past few weeks. Therefore, in order to avoid future disputes and inquiries, servicers should ensure their systems are correctly handling forbearance plans and other assistance options and consider disclosing to borrowers at the outset how they will (or will not) report the status of a loss mitigation option during the term of the plan.

While servicers certainly have a lot on their plates at the moment, taking time now to ensure that high-risk aspects of a servicing business that could be impacted by the COVID-19 pandemic are functional and compliant could pay dividends in the future. Areas such as disclosures, periodic billing statements, and credit reporting are already being highlighted by the CFPB. Not only are compliance challenges in these areas going to be amplified over time, but the influx of customer complaints and inquiries can be staved off by addressing any weaknesses now.

Federal Reserve Implements Aggressive Liquidity Campaign as Growing Corporate Debt Threatens to Exacerbate COVID-19 Economic Toll

Federal Reserve Implements Aggressive Liquidity Campaign as Growing Corporate Debt Threatens to Exacerbate COVID-19 Economic TollIn response to the recent COVID-19 outbreak, Congress recently approved a $2 trillion stimulus package in an attempt to offset the potentially disastrous economic effects of COVID-19. Meanwhile, central banks are implementing increasingly drastic measures aimed at preserving the availability of capital during the looming recession, which appears increasingly imminent as the global economy remains in a standstill.

Corporate Debt Balloons to All-Time Highs

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity.” Never has that sentiment from A Tale of Two Cities been truer than today. On the heels of a twelve-year bull market run, party-goers are finally stampeding toward the exits as the world has become engrossed in a global pandemic and people everywhere are being ordered to stay at home. In turn, the pandemic has highlighted the extraordinary debt levels that companies have assumed over the past ten years.

The meteoric rise of private equity has helped fuel the investor stampede toward higher returns. Oftentimes, these private equity firms borrow billions at a time to purchase shares in publicly-traded companies. The domino effect soon becomes clear: If the price of the underlying investments providing the basis for the leveraged loan go down, companies may be unable to meet their ongoing debt obligations. The recent plummet in oil prices plunged nearly $110 billion in U.S. energy company bonds into distressed territory. But the risks are not limited to the oil and gas industry.

In July 2019, the Bank of England issued a Financial Stability Report detailing the challenges facing global banking institutions. The report included several examples of the burgeoning global debt load: In China, non-financial sector private debt has surpassed 200% of GDP; the sustainability of Italian government debt remains in question; trade tensions continue to weigh down economic growth; and corporate indebtedness has reached an all-time high. In fact, the report dedicated an entire section to the risks posted by leveraged corporate lending, noting that “[l]everaged loan holdings by open-ended investment funds are significantly higher than pre-crisis, and large-scale redemptions during stress could amplify price falls.”

More recently, the Financial Stability Board (“FSB”) published a report on December 19, 2019, entitled “Vulnerabilities associated with leveraged loans and collateralised loan obligations.” The report cited a rise in non-bank investors—think investment funds, insurance companies, pension funds, broker-dealers, and holding companies—with insurers holding the largest non-bank share of collateralized loan obligations, often with lower-rated tranches of loans. As the report notes, highly leveraged companies are more vulnerable to external shocks, leading to the current panic about the risk associated with holding corporate debt and subsequent sell-off.

The rise of exchange-traded funds (“ETFs”) has only amplified the sell-off in bond markets. For years, ETFs tracking various bond markets provided an easy way for unsophisticated investors to diversify their investments, and in turn, provided additional capital for the bond markets. During the recent COVID-19-induced panic, these ETFs began selling off in droves, further increasing the selling pressure that already existed in bond markets.

Central Banks Throw Debt Markets a Lifeline

In response to the growing liquidity crisis, on March 19, 2020, the European Central Bank announced a support regime called the “Pandemic Emergency Purchase Programme” to purchase at least 750 billion euros worth’ of public and private sector bonds. Although this program will help to ensure liquidity in the bond market, the program notably does not include purchases of bond ETFs. Shortly thereafter, ECB president Christine Lagarde announced on Twitter that “[t]here are no limits to [the ECB’s] commitment to the euro,” apparently indicating that the ECB would not limit its bond purchasers to the initial 750-billion-euro cap. Importantly, the lack of a spending cap on the program could leave it vulnerable to legal challenges moving forward.

The Federal Reserve initially responded to COVID-19 by cutting the federal funds rate to near zero. But that was only the tip of the iceberg. On the same day as the rollout of the ECB program, the Federal Reserve announced new “temporary U.S. dollar liquidity arrangements (swap lines)” with the central banks of nine additional countries in an effort to offset the recent illiquidity in markets worldwide. In addition, the Federal Reserve has announced a veritable alphabet soup of programs to counteract the effects of COVID-19, including:

  • Implementing unlimited quantitative easing, consisting of the Fed purchasing roughly $625 billion of bonds a week moving forward. If that trend continues, the Federal Reserve would own two-thirds of the Treasury market a year from now.
  • CPFF (Commercial Paper Funding Facility). If this program sounds familiar, it’s because the Fed introduced this program from 2008-2010 in response to the 2008 financial crisis. It is intended to increase the availability of credit during downturns by the Federal Reserve Bank of New York purchasing highly rated unsecured commercial paper directly from issuers.
  • PMCCF (Primary Market Corporate Credit Facility). Similar to the CPFF, the PMCCF is intended to ensure liquidity in the markets by purchasing eligible corporate bonds and loans directly from issuers.
  • TALF (Term Asset-Backed Securities Loan Facility). TALF allows the Fed to act “as a funding backstop to facilitate the issuance of eligible [asset-backed securities]” beginning on March 23, 2020. The TALF will “initially” allow for up to $100 billion in loans.
  • SMCCF (Secondary Market Corporate Credit Facility). Under the SMCCF, the Federal Reserve Bank of New York will purchase eligible individual corporate bonds and corporate bond portfolios.
  • MSBLP (Main Street Business Lending Program). The Federal Reserve has only announced that this program will soon exist, with details soon to follow. In essence, the MSBLP will support lending to eligible small-and-medium sized businesses.

Because the Fed is not allowed to purchase or lend against securities without government guarantees (such as Treasury securities or agency mortgage-backed securities), the Fed is funding a special purpose vehicle for each program and the Treasury will make the investments in each program. In turn, BlackRock Inc. has been tapped to purchase the securities and handle the day-to-day operations of the securities on behalf of the Treasury, which will own the underlying securities.

Looking Forward

If this sounds legally questionable, that’s because it probably is. These arrangements essentially merge the Fed and the Treasury together as a single entity to avoid limitations on how the Fed can invest in financial markets. In essence, these programs are nationalizing large portions of the financial market, similar to steps taken in 2008 but on a much, much larger scale.

At bottom, these drastic measures vest the executive branch with extraordinary capital-injection powers normally reserved for the Fed, which historically has operated independent of politics. It remains to be seen whether that will continue to be true. In light of the upcoming election, it appears more and more likely that these programs will be implemented aggressively to boost equities—and corporate debt levels—to loftier and loftier levels.

Federal Reserve Acts to Bolster Auto Finance, Credit Card, Student Lending Industries

Federal Reserve Acts to Bolster Auto Finance, Credit Card, Student Lending IndustriesIn an action somewhat lost amidst the unprecedented $2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the Federal Reserve’s Board of Governors announced a series of five “extensive new measures” to provide liquidity for certain sectors of the nation’s economy. One of those liquidity facilities, the reintroduced Term Asset-Backed Securities Loan Facility (TALF), promises to provide immediate relief to portions of the consumer financial services industry, including automobile finance, credit cards, and student loans.

The 2020 iteration of TALF, as authorized under Section 13(3) of the Federal Reserve Act, is in many ways similar to the 2008-2009 iteration. Twelve years ago, the Federal Reserve took action to provide non-recourse funding to collateralized lenders through the Federal Reserve Bank of New York. In 2020, TALF similarly promises to help meet the credit needs of collateralized lenders by enabling the issuance of asset-backed securities, thereby supporting the flow of credit to consumers and businesses, beginning March 23, 2020, and ending September 30, 2020 (with possible extensions). The Federal Reserve will initially offer up to $100 billion in loans with a term of three years, which will be fully secured by the related eligible asset-backed securities.

TALF’s connection to the consumer financial services industry is derived from the types of “eligible” asset-backed securities outlined in the Federal Reserve’s TALF term sheet. Of the eight eligible types of credit exposures, at least four enumerated eligible credit exposures implicate consumer finance: auto loans and leases, student loans, credit card receivables, and floorplan loans.

From a practical perspective, what does this infusion of funding mean for the auto finance, student lending, and credit card industries? TALF generally attempts to thaw the securities markets backed by those types of loan products. Asset backed securities markets generally account for a significant portion of the auto lending, student lending, and credit card marketplaces. The goal of TALF is, therefore, to ease fears that consumers and small businesses may default on auto loans, student loans, and credit cards in light of COVID-19, which would ordinarily drive the cost of funding loans much higher as investors demanded more compensation for the risk of holding related securities.

The net result of this program should be that auto loans, student loans, and credit card loans should continue to benefit from a liquid secondary market that might have otherwise become illiquid during the ongoing COVID-19 pandemic. From a business perspective, the continued access to the secondary market should mean lenders in these market segments will have the continued ability to provide credit to millions of consumers. For example, in its 2008-2009 iteration, TALF allowed lenders to offer three million auto loans, one million student loans, and millions of credit card loans that would have been otherwise unavailable. The net benefits to consumers are significant as well, including increased access to affordable lines of credit. And, in the context of auto lending, the ability for dealers to continue to access floorplan credit lines will remain critical to moving inventory and, therefore, increasing originations of auto loans.

It will be interesting to see how the 2020 iteration of TALF compares in impact to the previous version. Perhaps the impact will be in many ways unnoticed, given the Federal Reserve’s extraordinarily quick action to prevent particular secondary markets from drying up. Either way, the intent of the legislation is to give auto lenders, student lenders, and credit card lenders the continued ability to originate loans to consumers during COVID-19, which should help the consumer financial services industry counter some of the business challenges it had otherwise anticipated.

Coronavirus Economic Stabilization Act of 2020: Implications for Consumer Financial Services

Coronavirus Economic Stabilization Act of 2020: Implications for Consumer Financial ServicesOn Friday, President Trump signed the Coronavirus Economic Stabilization Act of 2020 (CARES Act). The significant legislation directs more than $2 trillion into fighting the COVID-19 pandemic and stimulating America’s economy for the duration of the pandemic. This blog summarizes some of the provisions that are most relevant to financial institutions that make or service consumer loans.

Credit Reporting

The CARES Act amends the Fair Credit Reporting Act (FCRA) to include a section specifically addressing credit reporting during the COVID-19 pandemic. The amendment applies only where an accommodation is made. “Accommodation” is defined as an agreement to defer one or more payments, accept a partial payment, forbear delinquent amounts, modify a loan or contract, or provide any other assistance to a consumer who is affected by COVID-19 during the covered period. The “covered period” runs from January 31, 2020, and to 120 days following the enactment of the act or 120 days after the declaration of emergency related to the COVID-19 pandemic terminates, whichever comes later.

If an accommodation is made for one or more payments and the consumer either makes the payment or is not required to make the payment pursuant to the terms of the accommodation, the furnisher must report the account as current. If the account was delinquent prior to the accommodation, the account can continue to be reported as delinquent unless or until the account is brought current during the accommodation period, at which point the account must be reported as current. An account that has been charged-off is excluded from these requirements.

Forbearance and Foreclosure Moratorium for Federally Backed Loans

A borrower with a federally backed mortgage loan who is experiencing financial hardship that is either directly or indirectly due to COVID-19 may request forbearance for up to 360 days by submitting a request to the loan servicer. Borrowers must affirm that they are experiencing financial hardship due, either directly or indirectly, to the COVID-19 emergency. A federally backed mortgage loan is a loan that is secured by a lien (either a first lien or a subordinate lien) on residential real property designed for one to four families that is:

  • FHA-insured;
  • Insured under section 255 of the National Housing Act;
  • Guaranteed under section 184 or 184A of the Housing and Community Development Act of 1992;
  • Guaranteed or insured by the Department of Veterans Affairs;
  • Made, guaranteed, or insured by the Department of Agriculture; or
  • Owned or securitized by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac).

The initial forbearance request can be granted for a period of up to 180 days. The forbearance can then be continued for an additional 180 days at the borrower’s request. Either the initial or extended period may be shortened at the request of the borrower. During the forbearance, no fees, penalties, or interest – beyond those that were already scheduled or calculated as if the borrower had made all contractual payments on time and in full under the terms of the mortgage contract – may accrue.

In order to request forbearance, a borrower need only submit an attestation providing that COVID-19 has caused a financial hardship. While a drafting error omitted the definition of covered period, earlier drafts defined the “covered period” as the earlier of the termination of the COVID-19 national emergency or December 31, 2020.

In addition to the forbearance provisions discussed above, a servicer of a federally backed mortgage loan may not initiate, move for judgment or order of sale, execute a foreclosure-related eviction, or execute a foreclosure sale for the 60-day period starting on March 18, 2020. The moratorium does not apply if the property is vacant or abandoned.

Forbearance for Multifamily Federally Backed Loans

Multifamily borrowers with federally backed loans also have the option of requesting forbearance for up to 90 days. Fannie Mae and Freddie Mac have already issued guidance regarding the forbearance program.

In the multifamily context, a federally backed loan is any loan that is secured by a first or subordinate lien for real property designed for five or more families and:

  • Made (in whole or in part), insured, guaranteed, supplemented, or assisted in any way by any office or agency of the federal government;
  • Made under or in connection with a housing and urban development program or any other housing or related program administered by the Secretary of HUD; or
  • Owned or securitized by Fannie Mae and Freddie Mac.

Temporary financing (e.g., construction loans) are excluded. The “covered period” for multifamily forbearance terminates when the COVID-19 national emergency is terminated or on December 31, 2020, whichever is earlier.

In response to either an oral or written request from a multifamily borrower, the servicer must (1) document the financial hardship; and (2) provide forbearance for up to 30 days. The forbearance can be extended for up to two additional 30-day periods at the borrower’s request, so long as the extension request is made during the covered period and at least 15 days prior to the end of the current forbearance period. The forbearance can also be terminated by the borrower at any time.

Any multifamily borrower who receives forbearance may not evict or initiate eviction proceedings against a tenant in the property financed by the loan for which forbearance was sought solely for nonpayment of rent or other fees and charges or charge the tenant any late fees, penalties, or other charges for late payment of rent. Multifamily borrowers are similarly barred from issuing notices to vacate to the tenant during a forbearance period. A notice to vacate may be served after the expiration of the forbearance period, but only if the vacate date is at least 30 days out and does not violate the 120-day eviction ban set forth below. Finally, multifamily borrowers may not charge any late fees, penalties, or other charges to tenants due to the nonpayment of rent.

Moratorium on Evictions

Irrespective of whether forbearance is requested, the lessor of a property that participates in a covered housing program of the Violence Against Women Act of 1994 or the rural housing voucher program under section 542 of the Housing Act of 1949, or has a federally backed mortgage loan or multifamily loan as described above may not initiate eviction proceedings for nonpayment of rent or charge fees, penalties, or other charges for nonpayment of rent for a 120-day period beginning on the date the act is enacted.  Lessors likewise cannot require a tenant to vacate during this 120-day period. For all vacate notices served after 120 days, tenants must be provided at least 30 days to vacate.

Student Loans

Student loan borrowers who have federally owned loans will receive a six-month deferral of principal and interest payments (through September 30, 2020). Additionally, employers can provide up to $5,250 annually toward an employee’s student loan or other education expenses on a tax-free basis for payments made before January 1, 2021. Finally, students who have left school due to COVID-19 will have that school term excluded from counting toward lifetime subsidized loan eligibility and Pell Grant eligibility. Relatedly, students who have left school as a result of COVID-19 do not have to return the Pell Grants or federal student loans.

$454 Billion Liquidity Facility

The Federal Reserve may use up to $454 billion to establish programs or facilities for the purpose of providing liquidity to the financial system and eligible businesses, states, or municipalities by (1) directly purchasing obligations or other interests, (2) purchasing obligations or other interests in the secondary market, or (3) making loans. The Secretary of the Treasury is responsible for establishing the terms, conditions, and rates of any loans made under this program. Any program or facility that provides direct loans is subject to the following requirements:

  • The borrower, with limited exceptions, may not repurchase stocks or purchase stock in a parent company until 12 months after the loan is repaid;
  • The borrower may not pay dividends or make other capital distributions with respect to the business’ common stock until 12 months after the loan is repaid; and
  • The borrower must comply with certain limits on executive compensation that impact employees or officers who made more than $425,000 in the 2019 calendar year.

Additionally, the requirements of section 13(3) of the Federal Reserve Act apply to any programs or facilities established using the $454 billion and are only available to businesses that are created and organized in the United States or that have significant operations (including a majority of its employees) based in the United States.

In addition to the program discussed above, the Secretary of the Treasury must attempt to establish a program or facility that provides financing to lenders that make direct loans to eligible businesses, including nonprofit organizations, with between 500 and 10,000 employees. The loans would generally have a 2% interest rate and would not require principal and interest payments for the first six months of the loan. Borrowers using this program or facility would have to make a good-faith certification that:

  • The loan is necessary, as a result of the uncertainty of economic conditions, to support the ongoing operations of the recipient;
  • The loan will be used to retain at least 90% of its workforce at full compensation and benefits until September 30, 2020;
  • The borrower intends to restore at least 90% of the workforce that existed as of February 1, 2020, and to restore all compensation and benefits to the workforce within four months of the termination of the public health crisis;
  • The borrower is domiciled in the United States, created or organized in the United States, and has significant operations, including a majority of its employees located in the United States;
  • The borrower is not a debtor in a bankruptcy proceeding;
  • The borrower, with limited exceptions, will not pay dividends with respect to common stock or repurchase stocks or the stocks of any parent company while the loan is outstanding;
  • The borrower may not outsource or offshore jobs during the term of the loan and for two years after the loan is repaid;
  • The borrower will not abrogate existing collective bargaining agreements for the term of the loan and two years after the loan is repaid; and
  • The borrow must remain neutral in any union organizing effort for the term of the loan.

Congress and the administration are already working on at least one additional stimulus package, Stimulus Four, and it is expected to include corrections and clarifications to the CARES Act and previous stimulus efforts, as well as additional relief/stimulus efforts. Bradley’s Banking and Financial Services Practice Group and Governmental Affairs Practice Group are actively monitoring and engaging with Congress and the administration on these issues.

If you have any questions about the CARES Act, please contact Christy Hancock, Mike Gordon, Lee Gilley, Alex McFall or Brian Epling in the Banking and Financial Services Practice Group at Bradley. Also, if you would like to engage in the COVID-19 policy process, please contact David Stewart in our Governmental Affairs Practice Group.

Congress’ Third Major Coronavirus Legislation Makes Bankruptcy Relief for Potential and Current Individual Debtors Easier

Congress’ Third Major Coronavirus Legislation Makes Bankruptcy Relief for Potential and Current Individual Debtors EasierOn Friday March 27, 2020, President Trump signed into law the third major piece of coronavirus-related legislation in the last several weeks – the Coronavirus Aid, Relief, and Economic Security Act (CARES). The new law contains several amendments to the Bankruptcy Code. One of these amendments increases the maximum indebtedness for a “small business debtor” to $7.5 million and is discussed in a recent Bradley email alert. The other amendments are discussed herein.

New Definition for “Current Monthly Income”

The most notable change is the amendment to the definition of “current monthly income.” The new law simply exempts from “current monthly income” any “payments made under Federal law relating to the national emergency declared by the President under the National Emergencies Act with respect to the coronavirus disease 2019 (COVID-19).” The phrase “current monthly income” is used at various places in the Bankruptcy Code, including in the so-called “means test” for determining whether or not a debtor is eligible for Chapter 7 liquidation or instead must seek relief under another chapter of the Bankruptcy Code that requires repayment. This means potential Chapter 7 debtors will not be forced into Chapter 11 or 13 to repay some or all of their debts as a result of payments received under the new law.

Amending and Extending Confirmed Plans

“Current monthly income” is also incorporated into the Bankruptcy Code’s definition of “disposable income,” which is (1) the amount a debtor is required to pay to unsecured creditors in a Chapter 13 plan if the trustee or an unsecured creditor objects to the debtor’s proposed plan, and (2) the minimum amount an individual debtor must pay into a Chapter 11 plan. This amendment ensures that debtors are allowed to keep payments received under the new loan instead of paying them into their bankruptcy plans.

The other change is an amendment to the bankruptcy statute governing a debtor’s ability to modify a confirmed Chapter 13 plan. The new law allows a plan to be amended upon a debtor’s request “if the debtor is experiencing or has experienced a material financial hardship due, directly or indirectly, to the coronavirus disease 2019 (COVID-19) pandemic,” subject to court approval. It also allows a Chapter 13 plan to be extended up to seven years (compared to an existing maximum plan period of five years) from the date of the first payment under the plan, subject to court approval. This amendment should allow Chapter 13 debtors to reduce their monthly payments to the trustee and remain under the protection of the Bankruptcy Code.

Limited Timeline for Relief

All of the above changes are effective only for one year from March 27, 2020, after which they will be automatically stricken from the Bankruptcy Code.

More Information

Congress and the administration are expected to work on at least one additional stimulus package, Stimulus Four, and it is expected to include corrections and clarifications to the CARES Act and previous stimulus efforts, as well as additional relief and stimulus efforts. Bradley is actively monitoring and engaging with Congress and the administration on these issues. If you have any questions about the CARES Act, please contact either Glenn Glover (Bankruptcy), David Stewart (Governmental Affairs), or Robert Maddox (Financial Services).

CFPB Eases Reporting Requirements

CFPB Eases Reporting RequirementsOn March 26, the CFPB announced an easing of certain reporting requirements in order to allow financial services companies to focus on responding to consumers during the COVID-19 pandemic. The CFPB postponed several different reporting requirements relating to the Home Mortgage Disclosure Act (HMDA), credit cards, and prepaid accounts. In an unusual step for the bureau, the CFPB issued a policy stating that it “does not intend to cite in an examination or initiate an enforcement action” against any entity that fails to submit the otherwise-required data. Director Kathleen Kraninger noted that easing companies’ reporting burdens “supports consumers by allowing financial companies to focus their resources on assisting consumers.”

HMDA Reporting – The CFPB’s HMDA statement postponed the quarterly data reporting that would have been required by May 30, 2020, pursuant to HMDA and Regulation C. The CFPB stated that additional guidance will follow regarding when institutions must resume HMDA reporting and noted that entities must continue to collect the data for future submission.

Credit Cards and Prepaid Accounts – The CFPB issued a second statement relaxing reporting requirements for credit card and prepaid account issuers. Specifically, the CFPB temporarily suspended:

  • Annual submission of certain information concerning agreements between credit card issuers and institutions of higher education (and certain affiliated organizations), as required by the Truth in Lending Act (TILA), 15 U.S.C. § 1637(r), and Regulation Z, 12 CFR 1026.57(d)(3);
  • Quarterly submission of consumer credit card agreements, as required by TILA, 15 U.S.C. § 1632(d)(2), and Regulation Z, 12 CFR 1026.58(c);
  • Collection of certain credit card price and availability information from a sample of credit card issuers under TILA, 15 USC §1646(b)(1) et seq.; and
  • Submission of prepaid account agreements and related information required by Regulation E, 12 CFR 1005.19(b).

As with HMDA, the CFPB intends to issue additional guidance about when and how entities should submit this required information.

Postponement of Other Data CollectionThe CFPB is also postponing two surveys: (1) a survey seeking compliance cost information in connection with the pending small business lending rulemaking under Section 1071 of the Dodd-Frank Act; and (2) a survey relating to Property Assessed Clean Energy (PACE) loans.

Finally, the CFPB issued an additional statement reiterating prior guidance that encourages companies to work constructively with customers affected by the pandemic. In addition, the bureau signaled flexibility in scheduling examinations and other supervisory activities in light of current disruptions. The CFPB made no specific pledges to refrain from supervisory or enforcement activity regarding industry responses to the crisis, but instead noted that it “will consider the circumstances that entities may face as a result of the COVID-19 pandemic and will be sensitive to good-faith efforts demonstrably designed to assist consumers.”

Takeaways

Regulated entities will undoubtedly welcome the CFPB’s temporary relaxing of administrative burdens, although institutions need to be prepared to report the information at a later date. Perhaps the most noteworthy aspect of the CFPB’s announcement is the explicit commitment not to cite in an exam or bring an enforcement matter against an entity that fails to report the otherwise-required data. Such commitments are rare from the CFPB, but they provide valuable assurance to the industry. As the industry continues to respond to the COVID-19 pandemic – including, for example, by providing government-encouraged or required consumer relief – additional CFPB commitments can be critical to ensuring that regulated entities provide relief to as many consumers as possible.

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