As posted in ABA’s Industry Insights, October 2020
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law as a response to aid Americans impacted by the COVID-19 pandemic. The act contains, among other requirements, provisions relating to financial services relative to credit reporting and mortgage forbearance. With these additional requirements, this has prompted many to question whether regulators will in the future look back and review the servicing activities of lenders during the time of the pandemic and assess compliance with these new requirements.
In response to the new requirements applicable to furnishers of credit information and servicers of certain types of mortgages added by the CARES Act, the Federal Reserve Board (“Board”) has issued examination procedures that provide guidance to examiners reviewing compliance with Sections 4021, 4022, and 4023 of the CARES Act. In addition, the Conference of State Bank Supervisors separately issued procedures designed to evaluate a mortgage servicer’s policies and procedures for ensuring compliance with the forbearance requirements of the CARES Act.
What you need to know as you prepare for your next examination is discussed in the sections that follow.
Federal Reserve CA 20-11: CARES Act Examination Procedures
The issuance of examination procedures by the Board on July 7, 2020 signals that servicers should prepare for a specifically focused look-back on how well operational processes and systems for credit reporting and mortgage servicing complied with CARES Act provisions. In releasing CA 20-11, the Board stated that “it will take into account the unique circumstances impacting borrowers and institutions resulting from the COVID-19 emergency.”
The message to supervised institutions is that the examination focus will be on “good-faith efforts demonstrably designed to support consumers and comply with consumer protection laws.” This focus is consistent with, and echoes the message communicated through an Interagency Statement addressing regulatory expectations for loan modifications and reporting.1 Through the Interagency Statement, the agencies encouraged financial institutions to work prudently with borrowers who may not be able to make their mortgage payments due to the impact of the COVID-19 pandemic. The agencies also stated that loan modification programs are viewed as a positive action that can mitigate the adverse economic effects on borrowers due to the pandemic.
The Board anticipates that such examinations will focus on identifying issues, correcting deficiencies, and ensuring appropriate remediation to consumers. Moreover, supervised institutions demonstrating good faith efforts to support borrowers while also fulfilling legal and regulatory requirements and showing responsiveness to recommendations for corrective action will not be subject to public enforcement action.
In the face of the economic slowdown brought on by the pandemic, financial institutions were pressed to rapidly implement these provisions as an emergency response to meeting the financial needs of consumers. The Board’s issuance of CA 20-11 is a clear statement of intent that examinations of credit reporting and mortgage servicing activities during the COVID-19 pandemic will be conducted. Accordingly, financial institutions will need to be prepared. From an industry perspective, the examination procedures provide a view of how the Board will review and assess compliance.
In addition to determining a financial institution’s compliance with the credit reporting and mortgage servicing provisions of the CARES Act, the objectives of the examination include conducting an assessment of the quality of compliance risk management systems, including the adequacy and effectiveness of the financial institution’s compliance management system through review of examination history and supervisory correspondence, board and management reporting and oversight, internal controls such as policies, procedures, employee training, intake and management of credit reporting and mortgage servicing-related consumer complaints, and process workflows and scripts for implementing the credit reporting and mortgage servicing provisions of the CARES Act. Examiners will be determining the reliance that can be placed on the financial institution’s control environment in monitoring for and ensuring compliance with the credit reporting and servicing provisions of the CARES Act.
The examination is structured and grouped into three modules: Module 1 – Credit Reporting; Module 2 – Mortgage Servicing, Single Family Properties; and Module 3 – Mortgage Servicing, Multifamily Properties. More information regarding each of these modules is presented in the below sections.
Module 1 - Credit Reporting
Section 4021 of the CARES Act, Credit Protections During COVID-19, temporarily amends Section 623(a)(1) of the Fair Credit Reporting Act (“FCRA”). Under this amendment, a furnisher of credit information that makes an accommodation for one or more payments on a consumer credit obligation must report the obligation or account as current, provided that the account was:
- Current before the accommodation and the consumer makes the payments pursuant to the accommodation;
- Current before the accommodation and the consumer is not required to make one or more payments pursuant to the accommodation; or
- Delinquent before the accommodation and the consumer brings the credit obligation or account current during the period in which the accommodation is in effect.2
Note that this amendment does not apply if the consumer credit obligation or account was already charged off.
The furnisher must maintain the delinquent status of the credit obligation or account during the period in which the accommodation is in effect if the credit obligation or account was delinquent before the accommodation. In other words, if at the time of the accommodation, the furnisher was reporting the credit obligation or account as 30 days past due, the furnisher must continue to report the credit obligation or account as 30 days past due for the duration of the accommodation, unless the consumer brings the credit obligation or account current during the accommodation.3
The examination procedures follow the points listed above for how servicers will be reviewed for compliance with respect to the effectiveness and accuracy of processes maintaining account status and for reporting credit information. Thus, transitioning to a temporary reporting plan presents operational challenges requiring focused oversight and ongoing monitoring to ensure successful fulfillment of these provisions. Managing the timing aspects of these new CARES Act requirements while ensuring that all manual and automated processes are appropriately established and producing a correct result will be critical. Moreover, successfully managing customer disputes simultaneously with all applicable regulatory compliance requirements will remain paramount.
Module 2 - Mortgage Servicing, Single Family Properties
Section 4022 of the CARES Act directly addresses helping homeowners struggling to make mortgage payments due to the economic slowdown caused by the pandemic. These provisions cover “Federally backed mortgage loans,” (federally backed mortgage loans) which are defined under the Act as any loan that is secured by a first or subordinate lien on residential real property designed principally for the occupancy of from one to four families that is:
- Insured by the Federal Housing Administration or under the National Housing Act4;
- Insured under Section 255 of the National Housing Act (Home Equity Conversion Mortgage or HECM)5;
- Guaranteed under Section 184 or 184A of the Housing and Community Development Act of 1992 (Indian Home Loan Guarantee Program and Native Hawaiian Housing Loan Guarantee Program)6;
- Guaranteed or insured by the Department of Veterans Affairs;
- Guaranteed or insured by the Department of Agriculture;
- Made by the Department of Agriculture7; or
- Purchased or securitized by the Federal Home Loan Mortgage Corporation 8 (Freddie Mac) or the Federal National Mortgage Association9 (Fannie Mae).
Covered mortgage borrowers experiencing financial hardship due to the COVID-19 pandemic can request forbearance for a federally backed mortgage loan, regardless of delinquency status. Upon receiving a request for forbearance by a borrower, the servicer is required to grant forbearance for up to 180 days. The servicer shall extend the duration of the forbearance for an additional period of up to 180 days.
Examiners are guided to review consumer complaints and hold discussions with management. They will be reviewing policies and procedures and other controls to determine, among other considerations:
- That upon receiving borrower requests for forbearance, the servicer refrained from considering the borrower’s delinquency status;10
- That the servicer refrained from requesting additional documentation;11
- That provision of forbearance was granted for up to 180 days in response to an appropriate request by the borrower, and that the servicer provided an extension of the forbearance for up to an additional 180 days in response to a request by the borrower12; and
- That the servicer refrained from charging any fees, penalties, or interest beyond the amounts scheduled or calculated under the terms of the mortgage contract.13
Note that this relief provision only applies to federally backed mortgage loans as defined above. This limitation creates additional compliance risks relating to forbearance, because as a threshold matter it must be determined if the mortgage loan so qualifies as a federally backed mortgage loan.
Module 3 – Mortgage Servicing, Multifamily Properties
Section 4023 of the CARES Act addresses mortgage servicing of a different category of federally backed mortgage loans (multi-family federally-backed mortgage loans)—eligible mortgage loans that are secured by a first or subordinate lien on residential, multifamily real property designed principally for the occupancy of five or more families. Additionally, the loan is:
- Made in whole or in part, or insured, guaranteed, supplemented, or assisted in any way by any officer or agency of the Federal Government;
- Under or in connection with a housing or urban development program administered by the Secretary of Housing and Urban Development or housing or related program administered by any other such officer or agency; or
- Is purchased or securitized by Freddie Mac or Fannie Mae.
This includes any multifamily property secured loan, the proceeds of which are used to prepay or pay off an existing loan secured by the same property. However, Section 4023 includes a number of additional requirements that apply. Coverage under the CARES Act does not extend to temporary financing such as a construction loan.14
The CARES Act established effective dates for mortgage forbearance during the covered period, which spans from the date of enactment of the CARES Act and ends on the earlier of the termination date of the COVID-19 national emergency, or December 31, 2020. 15 If, during the covered period, a multifamily borrower with a multifamily, federally backed mortgage loan experiences financial hardship directly or indirectly resulting from the COVID-19 emergency, the borrower may request a forbearance.16 To qualify for forbearance, the multifamily borrower must be current, submit an oral or written request for forbearance to the mortgage servicer, and affirm that he/she is experiencing a financial hardship during the COVID-19 emergency.17
It is the responsibility of the mortgage servicer to document the financial hardship and to provide the forbearance for up to 30 days. Forbearance can be extended for up to two, additional 30-day periods at the request of the borrower, provided that the request for an extension is made during the covered period and at least 15 days prior to the end of the forbearance period. The borrower retains the option to discontinue the forbearance at any time.18 The examination procedures note that this provision of the CARES Act does not specifically prohibit the servicer from imposing additional fees, penalties, or interest in connection with the forbearance.
Examiners will review the adequacy and coverage of policies and procedures for ensuring compliance with the multifamily, federally backed mortgage forbearance provisions of the CARES Act. In addition, examiners will review consumer complaints and conduct discussions with management to determine whether the financial institution appropriately:
- Provided a forbearance to the multifamily borrower who submits an appropriate request and affirmation and was current on his/her payments as of February 1, 2020;19
- Documented the multifamily borrower’s financial hardship;20
- Provided the forbearance for the appropriate initial time period or extended time period based on an appropriate request by the multifamily borrower;21 and
- Discontinued the initial or extended forbearance period at the multifamily borrower’s request.22
Note that Section 4023(d) includes additional provisions intended to provide relief to renters. It specifically provides that the borrower cannot for the duration of the forbearance “evict or initiate the eviction of a tenant from a dwelling unit located in or on the applicable property solely for nonpayment of rent or other fees or charges…” (including late rent fees, related penalties or other charges). Section 4023(e) further prohibits a borrower from issuing a notice to vacate to tenants during the forbearance period and requires 30 days minimum advance notice to the tenant thereafter. Because these restrictions on eviction or notice to vacate only apply to multifamily, federally backed mortgage loans, there has been confusion by renters who reportedly continue to receive eviction requests or vacate notices.
CSBS CARES Act Examination Procedures
In parallel to the Federal Reserve, the Conference of State Bank Supervisors (“CSBS”) issued CARES Act compliance examination procedures (CSBS CARES Act examination procedures) designed to evaluate servicer policies, procedures, and processes for managing communications and processes for borrowers requesting forbearance. The key components of the CSBS CARES Act examination procedures are described in the sections that follow.
Through this phase of the examination, examiners will review servicers’ policies and procedures for compliance with the forbearance provisions of the CARES Act. The objective of this part of the examination is to determine that the servicer did not steer borrowers from requesting a forbearance plan or, in any manner, limit the amount of assistance a borrower was eligible to receive. This entails reviewing scripts provided to customer service employees responsible for interfacing directly with borrowers. The procedures ask first whether the servicer uses Fannie/Freddie call center script content.23 If not, the examination steps that follow determine for the presence of the following script language elements:
- Language that defaults to a 180-day forbearance period if agreement in the length of the forbearance is not otherwise reached between the servicer and borrower;
- Whether the script is clear in stating that no additional interest, fees or penalties will be added to the account during the forbearance period; and
- That the servicer will continue reporting the borrower’s loan as current, or in the case of a delinquent loan, will continue to report the loan with the same delinquent status and not report the loan as being further delinquent as a result of entering forbearance.
The CSBS CARES Act examination procedures guide examiners to determine whether the servicer has established a policy specifically addressing CARES Act forbearance. If the servicer formalized policy language to govern compliance with the CARES Act, expect examiners to determine whether:
- Borrowers with a federally backed loan who request a forbearance were granted a CARES Act forbearance, if they attested to having a COVID-related hardship;
- Borrowers with a federally backed loan who requested a forbearance were granted a CARES Act forbearance, regardless of their loan status (e.g., current or delinquent);
- Forbearance terms extended for at least two 180-day periods if requested by the borrower;
- No additional documentation (beyond affirming the hardship) was required to qualify a borrower to enter forbearance;
- When exiting forbearance, that borrowers were given a repayment option other than a lump-sum repayment, if unable to repay in full immediately after the forbearance period ended;
- The servicer provided forbearance periods shorter than 180-days in length or defaulted to 180 days;
- Policy addresses credit reporting requirements for a CARES Act forbearance accommodation and the manner of reporting relative to borrower delinquency status at the time of the accommodation;
- Servicers used templates for CARES Act forbearance borrower offer letters; and
- Servicers use or have template COVID-related assertions or attestations.
For servicers that did not establish policy language specific to the requirements of the CARES Act, examiners are then directed to review existing forbearance policy language and to determine whether it creates inconsistencies with respect to the following:
- Granting forbearance to any requesting borrower attesting to a COVID-19 related hardship;
- Forbearance terms lasting for at least two 180-day periods, if requested; and
- Requiring additional documentation for a borrower to qualify for forbearance.
For servicers that did not adopt specific policy language addressing CARES Act forbearances, the CSBS CARES Act examination procedures encourage examiners to verify compliance with the CARES Act through a file-level transactional review, which is considerably more invasive and spans a broader range of legal and regulatory requirements.
COVID-related Consumer Complaints
Review of consumer complaints is a critically important part of compliance examination. Servicers slated to undergo a CARES Act compliance exam should identify all COVID-related consumer complaints received on or after March 2020 and review the file for completeness of the information gathered, analysis conducted, root cause identification and remediation, response provided to the complainant, and the overall timeliness of the entire process. These factors will all be subjected to examiner scrutiny should the time come for an examination. Some points of particular interest examiners will consider:
- Whether a template was used for correspondence or call scripts established to address COVID-related consumer complaints concerning forbearance or foreclosure that comply with Sections 4021 and 4022 of the CARES Act; and
- That the servicer resolved COVID-related consumer complaints concerning forbearance or foreclosure in compliance with Sections 4021 and 4022 of the CARES Act.
It is to be expected that examiners will select and review consumer complaints to make these determinations. If COVID-related complaints are not identified, the examination will pivot to reviewing the servicer’s response to consumer complaints relative to loss mitigation requests received on or after March 2020, through a review of the servicer’s loan files. Examiners are directed to select files for those borrowers who submitted a complaint related to payment assistance or loss mitigation. Recognizing these requirements, servicers should be aware of any complaints, any trends specific to COVID, and ensure that all complaints relating to forbearance, collections and foreclosure activities are appropriately categorized.
COVID-related Training Material
The final area of focus for the CSBS CARES Act compliance procedures looks at the content of the training provided to employees relative to the requirements of Sections 4021 and 4022 CARES Act. Examiners will determine whether servicers require CARES Act training for all employees who directly interface with consumers, and that any such training is tracked to ensure employees successfully completed the training.
The CARES Act created an additional layer of responsibilities for furnishers of credit information and servicers of mortgage loans for consumers economically impacted by the COVID-19 pandemic. These new requirements create additional complications because they only apply to federally backed mortgage loans and multifamily, federally backed mortgage loans. In preparing for a CARES Act exam, servicers should work ahead and conduct an assessment of credit reporting workflows and controls to ensure that status reporting for borrowers requesting an accommodation are properly coded, updated periodically, and correctly reported in accordance with CARES Act provisions. In addition, examiners will review the quality of the servicer’s compliance risk management systems for ensuring that policies and procedures are current in accordance with CARES Act credit reporting and mortgage servicing provisions.
Preparing for a CARES Act compliance examination will require that servicers demonstrate the reliance that can be placed on the internal controls, policies, and procedures for fulfilling compliance and legal obligation with the provisions of the CARES Act. Where program gaps or violations are noted, servicers are advised to ensure that processes for effecting corrective action are well established and ready to address issues as they arise.
In addition to the technical requirements of the CARES Act, and associated exam procedures, there will be an expectation of fairness in how servicers respond to the needs of the borrower. Given the economic impact of the pandemic, including historic levels of unemployment, there are heightened numbers of vulnerable consumers, and many are seeking accommodation under CARES Act provisions or via other available hardship programs. It is critical that banks and servicers consistently and fairly serve all customers. Ongoing monitoring and testing to verify that standards have been applied consistently will likely be a separate expectation that banks and servicers should anticipate. Deviations from policy and established procedures can result in disparate treatment of customers. Well-established processes for conducting testing and ensuring follow up and remediation of any potential issues in a timely manner should well benefit any bank or servicer in the face of examiner scrutiny.
Continuous oversight, review, analysis and trending of consumer complaints provides critically important insights regarding control failure requiring remediation. Close attention to complaints and understanding what the complaint data is communicating regarding areas of heightened risk can be highly beneficial for any bank or servicer preparing for a CARES Act compliance examination.
Nothing warns financial institution compliance officers and team members that it is time to prepare for the possibility of an examination like an official announcement and publication of examination procedures by regulators, as has happened here. Though 2020 has been and will be remembered as a terribly challenging year for banks and servicers, the CARES Act compliance examination procedures suggest that these institutions will not get a pass on compliance simply due to the challenging circumstances of the pandemic. Careful review of the examination procedures—and thoughtful response and planning—will be an important initiative to embrace to ensure a successful CARES Act compliance examination experience.
1 Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus, April 7, 2020.
2 Fair Credit Reporting Act Section 623(a)(1)(F)(ii)
3Fair Credit Reporting Act Section 623(a)(1)(F)(ii)(II)
4U.S, Department of Housing and Urban Development, Mortgagee Letter 2020-06
512 U.S.C. §1715z–20
612 U.S.C. §1715z–13a, 1715z–13b
7USDA Implements Immediate Measures to Help Rural Residents, Businesses and Communities Affected by COVID-19, USDA Stakeholder Announcement, April 8, 2020
8Bulletin 2020-10, Temporary Servicing Guidance Related to COVID-19, Freddie Mac Single Family
9Lender Letter 2020-02, Impact of COVID-19 on Servicing, Fannie Mae
10CARES Act Section 4022(b)(1)
11CARES Act Section 4022(c)(1)
12(CARES Act Section 4022(b)(1) and (c)(1) and (b)(2)
13CARES Act Section 4022(c)(1)
14CARES Act Section 4023(f)(2)(A)
15CARES Act Section 4023(f)(5)
16CARES Act Section 4023(a)
17CARES Act Section 4023(b)
18 CARES Act Section 4023(c)
19CARES Act Section 4022(b)(1)
20CARES Act Section 4023(c)(1)(A)
21CARES Act Section 4023(c)(1)
22(CARES Act Section 4023(c)(2))
23https://singlefamily.fanniemae.com/servicing/covid-19-forbearance-script-servicer-use-homeowners and https://sf.freddiemac.com/content/_assets/resources/pdf/covid-19_forbearance-servicer-script.pdf