Oh what a year it has been in the mortgage servicing world! In 2020, our COVID-19 Compliance Roundtable met weekly to discuss emerging compliance issues under the CARES Act, federal agency guidance, state laws and orders, and the many operational hurdles regarding residential mortgage loans that servicers are facing. We've summarized the key trends and notable differences in approach that we've seen to date:
As we close 2020, credit reporting continues to be an area fraught with confusion. It is also likely to be a hot spot for regulatory inquiry and potential litigation in 2021, as the guidance on credit reporting is less than clear and operationally difficult. Six months later, the CFPB's June 16, 2020, FAQ 10 on credit reporting after the accommodation ends has yet to be cleared up, leaving servicers with uncertainty on how to address post-forbearance defaults that are not cured.
The landscape surrounding COVID-19 deferrals is a bit chaotic, as the GSE guidance and CFPB Interim Final Rule present a lot of ambiguity and challenges. As a result, the industry appears to be taking varying approaches to deferrals, with poll results showing differing approaches in terms of whether deferrals should be effectuated by formal, executed agreements; whether deferral agreements should be recorded in the county land records; how deferred balances should be reflected on periodic billing statements; and what fees/charges must be waived in order for servicers to take advantage of the CFPB's Interim Final Rule. As the industry (hopefully) begins to move away from forbearances in 2021, there will be an increased focus on deferrals and other loss mitigation solutions designed to cure the delinquencies caused by forbearances. It will be important for servicers to ensure they have a robust and compliant process in this regard.
The saying "the devil is in the details" certainly applies to forbearances. In general, servicers were collectively liberal in granting forbearances with no documentation for CARES Act-eligible loans and little-to-no documentation for other loans. Servicers were also collectively very proactive about reaching out to customers to advise them of their rights in a variety of ways. However, companies have differed on key operational details such as effective-dating forbearance start dates, auto-extending forbearances when borrowers do not respond, "stopping the clock" on a forbearance period if a borrower makes a payment during the forbearance, and calculating interest on payoff statements for forbearance loans. These differences are generally driven by a lack of clarity from the federal agencies, leaving individual servicers to their own determinations of what constitutes best practices. In some instances, companies are also forced to develop their own position as to when the CARES Act "covered period" for single family forbearance ends, due to lack of clarity in the law itself. Therefore, at this time, our clients differ on how long they plan to offer CARES Act forbearances, but all are concerned about resolving forbearances after they end.
If we're asking the Magic 8 Ball about foreclosures and COVID-19, the response would be "Reply hazy, try again" or "Outlook not so good" if you're feeling pessimistic. Foreclosures on federally backed mortgage loans have been on moratoriums since March 2020 and are not currently scheduled to end until January 31, 2021 for Fannie Mae and Freddie Mac loans or February 28, 2021 for FHA-insured loans. In the meantime, servicers have been cautious about initiating foreclosure on privately held loans, even where permitted by state law. Until the moratoriums are lifted, servicers are sending breach letters on new defaults, and some are sending a "re-breach" or other delinquency reminder to those loans rolling off forbearances that were not brought current. The industry is universally concerned about a rise in foreclosures in 2021 when forbearance help runs out.
CARES Act litigation is starting to trickle in, with 90% of responders saying, "we expect its coming." The few claims that have been filed thus far range from allegations about eligibility for forbearance and length of initial forbearance periods to complaints that fees were improperly charged during the forbearance.
The "show must go on" and normal servicing activities are still needed during COVID-19. Servicer responses show differences in opinion on how to handle escrow items for post-forbearance loans and servicers are responding differently to the CFPB's recent guidance on collection of escrow shortages as well. Companies also continue to consider the LIBOR transition coming at the end of 2021, which will become a more prevalent issue in 2021. Servicers also struggle with nuanced issues such as how to address PMI cancellation when a borrower takes a deferral, state-mandated servicing notices, and calculating 1098 interest for HUD Partial Claims.
What other trends are you seeing? We at Bradley would love to hear from you, and we will continue to monitor these issues and more into 2021.
To read the full COVID-19 Mortgage Servicing Trend Report Year End Review, click here.
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