June 2021 OBA Legal Briefs

• CFPB to mortgage servicers: “Hear us NOW”
• Changes in UCCC amounts effective July 1, 2021

CFPB to mortgage servicers: “Hear us NOW”

By Andy Zavoina

The Consumer Financial Protection Bureau issued Bulletin 2021-02 on April 1, 2021. This was no April Fools’ joke, because the bulletin is entitled “Supervision and Enforcement Priorities Regarding Housing Insecurity.” I focus on the words “enforcement, priorities and insecurity.” This bulletin is telling mortgage servicers (which includes your bank servicing its own mortgage loans) not only to prepare for the onslaught of mortgage loan problems that will arise in the near future, but also that plans need to be made now to work with troubled borrowers. If there is not enough communication and cooperation with the borrowers, then there may be a price to pay, so have your house in order.

Bulletin 2021-02 refers to Reg X, RESPA because § 1024.41 of the regulation addresses loss mitigation procedures. The CFPB expects banks to address loss mitigation in its policy and procedures. The Mortgage Servicing Examination Procedures from the CFPB indicate, “Examiners should review policies, procedures, complaints, and obtain a sample of servicing records of consumers who are delinquent or at imminent risk of default to assess loss mitigation activity. If consumer complaints or document review indicates potential concerns in these areas, examiners also may conduct interviews of consumers from the sample who sought loss mitigation in the prior year and ask questions relevant to each topic area below.” This is part of what we expect the CFPB to emphasize in the coming year and other agencies will likely act in a similar manner, though perhaps not as aggressively. Still, your bank needs to comply with RESPA, and while the Loss Mitigation section states, “Nothing in § 1024.41 imposes a duty on a servicer to provide any borrower with any specific loss mitigation option,” this Bulletin is intended to drive home the fact that the CFPB is consumer-protection driven and that is its priority, just as it was when it was created during the Obama administration.

To emphasize this point I will use civil money penalties. During the Obama administration and under Director Cordray, the CFPB imposed $1.84 billion in CMPs annually, but under the Trump administration and most recently under Director Kraninger annual CMPs were reduced to $650 million. Acting Director Uejio has vowed to bring back the aggressive consumer protectionism the CFPB was first known for.

The CFPB cited many reasons supporting its position that lenders must be ready to assist troubled borrowers. It indicated specifically that it will be watching how mortgage servicers respond to loss mitigation requests. The CFPB wants to avoid many of the complaint issues the industry had years ago when borrowers complained they could not get consistent answers from a lender, had to restart the process many times, would be handed off from one person to another, never seeing real progress on their request, and other problems. As a preemptive strike the Bulletin states that servicers need to dedicate sufficient resources and staff to the coming problem.

The CARES Act was enacted in March 2020 and since then 6.9 million borrowers participated in a forbearance program. Certain mortgages which are federally backed were entitled to forbearance programs regardless of their default status. Private investors offered their own programs, which may be similar but not exact duplicates.  In January 2021 there were more than 2.1 million borrowers in these programs over 90 days past due on their mortgages. It is believed the problems will be exacerbated as forbearance programs end and need to be replaced with loss mitigation programs. Mortgages which were in forbearance early on, in March and April 2020, will be released in September and October 2021.

Certainly, there are borrowers past due and not in forbearance programs. As of January 2021, approximately 242,000 more borrowers were more than 90 days in arrears. Regulators anticipate a very high volume of requests for loss mitigation programs.

All these borrowers are at a heightened risk of facing foreclosure as the protection programs and foreclosure moratoriums end. These borrowers will be seeking solutions to their problems. The CFPB is actively marketing to these borrowers that they need to seek solutions with their servicer – those they make payments to. “We must not lose sight of the dangers so many consumers still face,” CFPB Acting Director Dave Uejio said in a statement as the CFPB works to ease the process and protect homeowners. “Millions of families are at risk of losing their homes to foreclosure in the coming months, even as the country opens back up.” Delinquent homeowners are being urged to act now with their lenders rather than wait. Those in forbearance programs are reminded they are not required to repay their skipped payments in a lump sum once the forbearance period ends. If a borrower is able to resume payments at the pre-pandemic amount, the process should be seamless. Many federally backed loans will allow borrowers to resume payments as usual and add those missed payments during forbearance on to the loan at maturity. Dealing with balloons or extended amortizations is a topic for another day, but hopefully it is addressed when the servicer enters into the agreement with the borrower. Borrowers are reminded there may be options available, such as maintaining their pre-pandemic payment amount or increasing the monthly payments going forward until the missed payments are equaled out. The servicer may track these additional payment amounts and hold them, hold them until there is a full payment or apply them as they are paid with that amount reduced from a running ledger of the missed payments. Servicers need to be sure they know how these amounts will be handled in the event of a transfer of servicing, sale and payoff of the loan or a refinance. Borrowers may be eligible to request extensions of their forbearance program, as many programs allow up to 18 months total.

As borrowers are getting messages about these options, so must employees at the bank/servicer who will work these mortgages. They must be aware of the established policy and procedures to be used, and the solutions available to the troubled borrower. What steps do you follow to handle these borrowers to evaluate their financial condition and take them from “making up payments” to bona fide loss mitigation programs?

Being forewarned is being forearmed. When examining a bank, the CFPB has said it “intends to consider a servicer’s overall effectiveness at achieving such goals, along with other relevant factors, in using its discretion to address violations of Federal consumer financial law in supervisory and enforcement matter.” What does that statement say to you? The Bureau will help those who are helping consumers avoid foreclosure and implies the inverse may be true as well. The Bulletin states, “The Bureau plans to monitor servicers’ engagement with borrowers at all stages in the process in the coming months and prioritize mortgage servicing oversight work in deploying its enforcement and supervision resource.”  It goes on to say it “recognizes that some homeowners will not be able to resume making payments on their mortgages and that some foreclosures are unavoidable; nonetheless, the Bureau will hold mortgage servicers accountable for complying with Regulation X with the aim of ensuring that homeowners have the opportunity to be evaluated for loss mitigation prior to the initiation of foreclosure.” If you have not reviewed the Reg X § 1024.41 in some time, it may be worth a review. There are many things that are recommended more than required, but the bank needs to determine what it should do and may do, based on its risk and exposure.

Although this is centered around the CFPB Bulletin, there is little doubt the other banking agencies would agree with its spirit and intent. The CFPB is committed to using its authority to ensure that troubled homeowners receive all the legal protections available to them to avoid foreclosure. It will use all its available tools to protect homeowners and assist servicers who are working to reduce foreclosures.

What might some things be that a bank may want to address involving mortgage borrowers?

• I would consider enhancing the complaint management process to elevate mortgage payment and servicing complaints. These are often high in the overall volume of complaints anyway, but a renewed emphasis to resolve issues and monitor them is in order. Staff members will be burdened with delinquent mortgage workouts and need to expedite problems to deal with this.
• Consider adding to the “hello – goodbye” servicing transfer notices to include information about loss mitigation programs.
  • Programs that may be available
  • Whom a borrower should contact if they have a payment problem
  • If they are in loss mitigation, how any transfer will impact the requirements on the borrower
  • If they have a request for assistance pending, is that being transferred, and will more information be required as a result?
  • What arrangements may need amending as a result?
  • Does the bank want to offer all this information or a simple “contact us if…” statement?
• Which staff require additional training to work with delinquent or potentially delinquent mortgage borrowers?
• Will additional staff be required based on any expectations of the mortgage portfolio? Be prepared to justify any decision to management and/or examiners.
• What will the workflow be for applications for assistance? Are the procedures sufficiently detailed as to qualifications, availability of requests, consistency in handling and making decisions on requests?
• Are there predetermined means of communications with borrowers so they stay informed about the status of their requests and any trial payment periods needed before finalizing a modification?
• Are all plans communicated to delinquent borrowers in a clear and understandable manner, so they know which are available to them?
• Did the bank reach out to these borrowers proactively?
• Is the bank tracking the accounts that are severely delinquent, included in a loss mitigation or workout program, and unavoidable foreclosures that had to be completed? Was there documentation of what the bank attempted to do to avoid foreclosure?
• Are borrowers with limited English proficiency being contacted appropriately to their primary language?
• Once any plan is in place, ensure the correct loan status is reported to the credit reporting agencies the bank typically reports to.
• Are there controls in place to ensure compliance with RESPA and other consumer protection requirements?
  • This may include analysis of fair lending concerns, proper use of all incomes claimed by a borrower so that retirements, public assistance, and part-time income sources are not discounted.
  • Are borrower requests tracked for complete and timely responses?
  • Are borrowers who are currently in a loss mitigation or workout program being contacted proactively to renew any agreements or ensure they continue to meet required qualifications before any termination or required milestone requiring their action arrives?
  • When borrowers contact the bank, are they being served in a timely manner, are there unusual delays in responding to the borrowers or even answering their calls and avoiding extended hold periods during calls?
  • Is there a designated requirement for consistency of contact so the same banker is working with the borrower and is that being followed?
  • Are there second reviews for denied requests by delinquent borrowers?

The CFPB published a blog post (April 5, 2021, “Mortgage Servicer Communication: Strategies during the COVID-19 pandemic”) on mortgage servicer communication practices during the COVID-19 pandemic. The blog discussed the need for servicers to understand their borrowers preferred methods of contact which is the key to effectively reaching these borrowers. Servicers should use all available tools to reach borrowers, including non-traditional methods such as:

• Identifying your borrowers’ preferences for communications.
• Using multi-media channels to meet those identified preferences such as text, personalized email, or snail mail, each based on applicable restrictions.
• Developing and using self-service web-based tools and customer portals that help borrowers identify loan assistance options available to them.
• Providing communications such as videos or emails that are tailored to a borrower’s specific options and are specific to them, based on who owns their loans, (i.e. FHA, VA, Fannie Mae or Freddie Mac.)
• Using more attention-getting methods of delivering information such as via FedEx or UPS as these may be more likely to be opened and read than “junk mail” from the post office.
• Providing information in multiple languages to assist limited English proficiency borrowers.

Communication methods are changing. The blog noted, “…the J.D. Power 2020 U.S. Primary Mortgage Servicer Satisfaction Study found early in the pandemic, most homeowners (62%) reported their financial institution’s website as their first line of information. Customer portals, customer-based self-service mobile applications, and web interfaces are being widely used by homeowners. However not all servicers offer online resources or customer-interface portals. A recent survey by Fannie Mae (Mortgage Lender Sentiment Survey: Special Topics Report COVID-19 Mortgage Servicing Challenges) found that just 69% of their servicers have a website with mortgage relief resources. Online self-service options have the advantage of being able to scale up more easily than traditional call centers, providing servicers with additional flexibility to handle spikes in homeowner requests—62% of servicers reported their website has helped reduce call center volume.”

While this article has focused on the CFPB, you are not insulated from preparing for action if you have another primary regulatory agency. The OCC published its “Semiannual Risk Perspective for Spring 2021” and it focused on four risk issues with two being very much on point for this topic (my expanded notations are in italics below):

1. Compliance risk is elevated as banks’ expedited efforts to implement assistance programs continue to challenge established change management, product, and service risk management practices.
   This is in line with the challenges the CFPB has discussed but is less threatening, in my opinion. It does denote that banks are going to have to be more adaptive to the needs of borrowers and flexible during tight economic times.
2. Credit risk is elevated and transitioning as the economic downturn continues to affect some borrowers’ ability to service debts. Assistance programs and federal, state, and local stimulus programs have suppressed past-due levels.
   Child credits will be paid beginning in July, and this will be of assistance to many borrowers. But other stimulus efforts will be ending. Additional unemployment benefits are scheduled to end in September, but some states are terminating the federal assistance program early as demands on businesses are increasing, but workers are not going back to work. Whether the unemployment income, a lack of childcare, other factors or any combination thereof, many believe this is contributing to a slow economy and potentially worsening the effects on loans in the longer term.
3. Strategic risks associated with banks’ management of Net Interest Margin (NIM) compression and efforts to improve earnings is elevated. Banks attempting to improve earnings may implement measures including cost cutting, increasing credit risk (both credit and investments) or extending duration.
4. Operational risk is elevated due to a complex operating environment and increasing cybersecurity threats.

At the end of the day the bank should believe it has served all its borrowers well and fairly, even if they are suffering economically. Working out loans is nothing new, but in a post-pandemic environment after such a long period when past due loans have grown exponentially but were not subjected to the same methods of remediation there is a bottle neck. There is a growing need for foreclosures; however, consider that foreclosures lead to other real estate owned and the need to sell that property and to reduce losses. Even when the housing market is a sellers’ market as it is in many areas today, it is still very easy to lose money when selling foreclosed properties. To avoid losses, the bank needs to use a combination of resources including people, both in-house and outsourced as needed, technology and automated processes.  In the long term, working with all borrowers who want to work with the bank and stay in their homes can lead to the best outcome for all parties.

Reg X servicing changes proposed – what should you prepare for?

On April 9, 2021, the CFPB published 42 pages of proposed changes to Reg X in the Federal Register (86 FR 18840). The comment period was short and expired on May 10, 2021. As of May 22, 2021, there were 211 comment letters. A quick scan indicated 149 (70 percent) were from individuals and most comments were favorable to the changes.

As proposed, these amendments would establish a pre-foreclosure review period. This would generally prohibit servicers from making the first notice or filing, as required by applicable law for any judicial or nonjudicial foreclosure process, until after December 31, 2021, if the loan is secured by a borrower’s principal residence. This restriction would be in addition to existing § 1024.41(f)(1)(i), which prohibits making the first notice or filing before the loan is 120 days delinquent. The objective is to provide an opportunity for borrowers affected by the pandemic to be reviewed, to determine if a loss mitigation program would be helpful to them before a filing for foreclosure.

The Federal Register also noted the CFPB is considering and is therefore seeking comment on a potential additional exemption that would allowing servicers to make the first notice or filing before December 31, 2021, if the servicer (1) has completed a loss mitigation review of the borrower and the borrower is not eligible for any non-foreclosure option or (2) has made certain efforts to contact the borrower and the borrower has not responded to the servicer’s outreach.”

The CFPB also proposes to permit servicers to offer certain streamlined loan modification options made available to borrowers with COVID–19-related hardships based on the evaluation of an incomplete application. This is subject to five criteria:

1. The modification is for a borrower experiencing a COVID-19 related hardship.
2. The modification may not cause the borrower’s monthly principal and interest payment to increase and may not extend the term of the loan by more than 480 months from the date the loan modification is effective.
3. Any amounts the borrower may delay paying until the mortgage loan is refinanced, sold, or the modification matures, must not accrue interest.
4. The servicer may not charge any fee in connection with the modification and must waive all existing late charges, penalties, stop payment fees, or similar charges promptly upon the borrower’s acceptance of the loan modification.
5. Acceptance of an offer of the modification must end any preexisting delinquency on the mortgage loan or the modification must be designed to end any preexisting delinquency on the loan upon the borrower satisfying the requirements for completing a trial loan modification plan and accepting a permanent modification.

The servicer must contact the borrower at least 30 days before their current forbearance period ends to determine if more assistance is needed such as with a loss mitigation program. The servicer would then assist in the application and evaluation of the request.

They are also proposing to define “COVID–19-related emergency” to mean a financial hardship due, directly or indirectly, to the COVID–19 emergency as defined in the Coronavirus Economic Stabilization Act.

Changes in UCCC amounts effective July 1, 2021

By Pauli D. Loeffler

Sec. 1-106 of the Oklahoma Uniform Consumer Credit Code  in Title 14A (the “U3C”) makes certain dollar limits subject to change when there are changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers, compiled by the Bureau of Labor Statistics, U.S. Department of Labor.  You can download and print the notification from the Oklahoma Department of Consumer Credit by clicking here.   It is also accessible on the OBA’s Legal Links page under Resources once you create an account through the My OBA Member Portal. You can access the Oklahoma Consumer Credit Code and the changes in dollar amounts for prior years on that page as well.

Increased Late Fee

The maximum late fee that may be assessed on a consumer loan is the greater of (a) five percent of the unpaid amount of the installment or (b) the dollar amount provided by rule of the Administrator for this section pursuant to § 1-106. As of July 1, 2021, the amount provided under (b) will increase by $.50 to $27.00.

Late fees for consumer loans must be disclosed under both the UC3 and Reg Z, and the consumer must agree to the fee in writing. Any time a loan is originated, deferred, or renewed, the bank can obtain the borrower’s written consent to the increased late fee set by the Administrator of the Oklahoma Department of Consumer Credit.  However, if a loan is already outstanding and is not being modified or renewed, a bank has no way to unilaterally increase the late fee amount if it states a specific amount in the loan agreement.

On the other hand, the bank may take advantage of an increase in the dollar amount for late fees if the late-fee disclosure is worded properly, such as:

“If any installment is not paid in full within ten (10) days after its scheduled due date, a late fee in an amount which is the greater of five percent (5%) of the unpaid amount of the payment or the maximum dollar amount established by rule of the Consumer Credit Administrator from time to time may be imposed.”

§ 3-508B Loans

Some banks make small consumer loans based on a special finance-charge method that combines an initial “acquisition charge” with monthly “installment account handling charges,” rather than using the provisions of § 3-508A with regard to maximum annual percentage rate. Section 3-508A includes provisions for a “blended” rate by tier amounts under (1)(a) as well as the alternative of using a flat 25% APR under (1)(b). Section 3-508A is NOT subject to annual adjustment without statutory amendment.

The permitted principal amounts for § 3-508B is adjusting from $1,590.00 to $1,620.00 for loans consummated on and after July 1, 2021.

Sec. 3-508B provides an alternative method of imposing a finance charge to that provided for Sec. 3-508A loans. Late or deferral fees and convenience fees as well as convenience fees for electronic payments under § 3-508C are permitted, but other fees cannot be imposed. No insurance charges, application fees, documentation fees, processing fees, returned check fees, credit bureau fees, or any other kind of fee is allowed. No credit insurance even if it is voluntary can be sold in connection with in § 3-508B loans. If a lender wants or needs to sell credit insurance or to impose other normal loan charges in connection with a loan, it will have to use § 3-508A instead.  Existing loans made under § 3-508B cannot be refinanced as or consolidated with or into § 3-508A loans, nor vice versa.

As indicated above, § 3-508B can be utilized only for loans not exceeding $1,620.00. Further, substantially equal monthly payments are required. The first scheduled payment cannot be due less than one (1) calendar month after the loan is made, and subsequent installments due at not less than 30-day intervals thereafter. The minimum term for loans is 60 days. The maximum number of installments allowed is 18 months calculated based on the loan amount as 1 month for each $10.00 for loan amounts between $161.95 and $540.00 and $20 for loan amounts between $540.01 – $1,620.00.

Lenders making § 3-508B loans should be careful and promptly change to the new dollar amount brackets, as well as the new permissible fees within each bracket for loans originated on and after July 1st. Because of peculiarities in how the bracket amounts are adjusted, using a chart with the old rates after June 30 may result in excess charges for certain small loans and violations of the U3C provisions.

Since §3-508B is “math intensive,” and the statute whether online or in a print version does NOT show updated acquisition fees and handling fees. You will find a modified version of the statute with the 2021 amounts toward the bottom of the Legal Links page here. Again, you will need to register an account with the OBA to access it.

The acquisition charge authorized under this statute is deemed to be earned at the time a loan is made and shall not be subject to refund, but if the loan is prepaid in full, refinanced or consolidated within the first sixty (60) days, the acquisition charge will NOT be deemed fully earned and must be refunded pro rata at the rate of one-sixtieth (1/60) of the acquisition charge for each day from the date of the prepayment, refinancing or consolidation to the sixtieth day of the loan. The Department of Consumer Credit has published a Daily Acquisition Fee Refund Chart for prior years with links on this page, but had not done so for 2021 at the time this article was written. Note that if a loan is prepaid, the installment account handling charge shall also be subject to refund. A Monthly Refund Chart for handling charges for prior years can be accessed on the page indicated above, as well as § 3-508B Loan Rate (APR) Table. I expect the charts and table for 2021 to be added shortly.

§ 3-511 Loans

I frequently get calls when lenders receive a warning from their loan origination systems that a loan may exceed the maximum interest rate. Nearly always, the banker says the interest rate does not exceed the alternative non-blended 25% rate allowed under § 3-508A according to their calculations. Usually, the cause for the red flag on the system is § 3-511. This is another section for which loan amounts may adjust annually. Here is the section with the amounts as effective for loans made on and after July 1, 2021, in bold type.

Supervised loans, not made pursuant to a revolving loan account, in which the principal loan amount is $5,400.00 or less and the rate of the loan finance charge calculated according to the actuarial method exceeds eighteen percent (18%) on the unpaid balances of the principal, shall be scheduled to be payable in substantially equal installments at equal periodic intervals except to the extent that the schedule of payments is adjusted to the seasonal or irregular income of the debtor; and

(a) over a period of not more than forty-nine (49) months if the principal is more than $1,620.00, or

(b) over a period of not more than thirty-seven (37) months if the principal is $1620.00 or less.

The reason the warning has popped up is due to the italicized language: The small dollar loan’s APR exceeds 18%, and it is either single pay or interest-only with a balloon.

Dealer Paper “No Deficiency” Amount

If dealer paper is consumer-purpose and is secured by goods having an original cash price less than a certain dollar amount, and those goods are later repossessed or surrendered, the creditor cannot obtain a deficiency judgment if the collateral sells for less than the balance outstanding. This is covered in Section 5-103(2) of the U3C. This dollar amount was previously $5,300.00 and increases to $5,400.00 on July 1, 2021