CARES Act Mortgage Relief, TRID Liability, TRID Lender Credit FAQs, and a new HMDA Threshold Final Rule

There certainly has been a lot going on since I’ve written last, so I will cover a few topics in this post. As you know, on March 27, 2020, the President signed into law the CARES Act (Public Law No. 116-136), the COVID-19 pandemic relief legislation, which has some pertinent provisions for the mortgage industry.  There have also been important issuances from the CFPB regarding the CARES Act, and other guidance regarding regulatory relief worth noting.  In addition, the CFPB issued a final rule on April 16, 2020 increasing the HMDA thresholds for both open and closed-end loans.  The CFPB also issued new TRID FAQS regarding lender credits back in late February 2020.  I briefly review all of this in this post.  I also provide some thoughts on how TRID liability can become an issue for lenders and investors in the expected recession resulting from COVID-19.

1.  The CARES Act and CFPB Guidance

A.  CARES Act Forbearance and Foreclosure Moratorium

Of particular note in the CARES Act (Act) is section 4022, which generally provides two important protections for “federally backed mortgage loans”: (1) a moratorium on initiating foreclosures until May 17, 2020; and (2) required forbearance upon borrower request for up to two 180-day periods.  The term “federally backed mortgage loan” means any first or subordinate-lien loan secured by 1-4 family residential real property (including individual units of condominiums and cooperatives) that is: (1) FHA-insured; (2) guaranteed or insured by VA or the Department of Agriculture; (3) guaranteed, insured, or made by the Department of Agriculture; or (4) purchased or securitized by Fannie Mae or Freddie Mac.

To obtain forbearance, the Act requires that borrowers submit a request to their servicer “affirming that the borrower is experiencing a financial hardship during the COVID–19 emergency.”  The servicer must grant the requested forbearance for a period of up to 180 days, and also upon request provide a 180-day extension.  The servicer is not permitted to accrue fees, penalties, or interest beyond the amounts scheduled under the loan.  The servicer is not permitted to require any documentation other than the borrower’s “attestation,” and is not permitted to charge any fees.  The borrower requests must be made during the covered period (which is not clearly defined in this provision in the final legislation).  There are legitimate questions as to how some of these requirements and restrictions may be interpreted by the industry, and ultimately by courts should lawsuits be brought.

In addition, for federally backed mortgage loans, servicers are not permitted to initiate judicial or non-judicial foreclosure during the period from March 18, 2020 to May 17, 2020.  There is an exception for certain vacant or abandoned property.   Keep in mind that state and local governments may have instituted their own foreclosure moratoriums or other requirements or restrictions during the COVID-19 pandemic.

The CARES Act also added another protection to the Fair Credit Reporting Act (FCRA) with respect to consumer reporting of borrower accommodations during the pandemic.  The legislation provides that during the covered period (defined as the period beginning January 31, 2020 to the later of 120 days after the date of enactment - March 27, 2020 - or 120 days after the President’s COVID-19 emergency declaration terminates), if a furnisher makes an accommodation and the consumer complies with the accommodation, the furnisher must report the debt as current.  If the debt was delinquent before the accommodation, the furnisher must maintain the delinquent status, except if the consumer brings the account current, in which case it must be reported as current.  But this protection generally does not apply to an account that has been charged-off.  The CFPB issued a policy statement on April 1, 2020 that provides guidance on this newly added provision, as well as other regulatory relief under FCRA, which is available here: https://www.consumerfinance.gov/documents/8688/cfpb_credit-reporting-policy-statement_cares-act_2020-04.pdf.  

The CFPB and federal banking agencies on April 3, 2020 issued a joint statement regarding compliance with the mortgage servicing rules when working with consumers affected by COVID-19.  The statement confirms that when a consumer makes a forbearance request under the Act, “it still constitutes an ‘incomplete loss mitigation application’ for purposes of Regulation X, so servicers still must provide the required loss mitigation notices and comply with the other applicable regulatory requirements.”  Note that this statement is assuming the loan or borrower is subject to the rule, which may not be the case in all circumstances.  The guidance does note that the agencies plan to provide flexibility in their supervisory and enforcement functions if the requirements, such as the requirement to send an initial acknowledgement notice of an incomplete loss mitigation application within five days, are not strictly met but a good faith attempt has been made.   The statement is available here: https://www.consumerfinance.gov/documents/8705/cfpb_interagency-statement_mortgage-servicing-rules-covid-19.pdf. 

The CFPB also issued Frequently Asked Questions (FAQs) on April 3, 2020 to respond to likely questions regarding the interaction between the CFPB’s mortgage servicing rules and requests for forbearance under the Act, as well as voluntary forbearance programs provided outside of the Act’s requirements.   The FAQs clarify with more detail the flexibility the CFPB plans to provide with respect to the specific requirements under the mortgage servicing rules.  The FAQs are available here: https://www.consumerfinance.gov/documents/8706/cfpb_mortgage-servicing-rules-covid-19_faqs.pdf. 

The agencies also issued a statement on April 7, 2020 that reiterates that agency supervisory and enforcement activities will take into account “good-faith efforts demonstrably designed to support consumers and comply with consumer protection laws.”  The statement is available here: https://www.consumerfinance.gov/documents/8708/cfpb_interagency-statement_loan-modifications-reporting-covid-19_2020-04.pdf.

B.  CFPB Guidance Regarding Other Regulatory Relief

The CFPB has also provided regulatory relief from its rules for other products, such as for government use of prepaid accounts and for remittance transfers, which are available here, respectively: https://www.consumerfinance.gov/about-us/newsroom/cfpb-paves-way-consumers-receive-economic-impact-payments-quicker/ and https://www.consumerfinance.gov/about-us/newsroom/cfpb-guidance-remittance-transfers-during-covid-19-pandemic/.

The CFPB has also issued a joint statement with the federal banking agencies regarding existing flexibility in appraisal standards, which is available here: https://www.consumerfinance.gov/about-us/newsroom/federal-banking-agencies-to-defer-appraisals-evaluations-for-real-estate-transactions-covid-19/. 

II.  TRID Liability in the Likely Economic Recession

I also want to make a brief point about the potential for borrower defaults and repurchase demands in an economic recession, which is becoming a real possibility because of the high levels of unemployment that are occurring as a result of the COVID-19 pandemic and government responses. 

As I’ve written about before, because the TILA-RESPA Integrated Disclosure (TRID) rule implements both the Truth in Lending Act (TILA), which carries civil liability for disclosure violations, and the Real Estate Settlement Procedures Act (RESPA), which does not, it is not immediately clear from the regulatory text itself whether a violation will be subject to civil liability.  In addition, only some TRID violations have the potential for statutory damages, rather than actual damages, under TILA.  Discerning which type of liability applies to particular TRID violations requires a thorough and thoughtful analysis.

With the risk of many borrower defaults, there may be an increase in the potential for borrower lawsuits based on TRID violations.  In addition, after all of the federal and state foreclosure moratoriums and other programs (e.g., forbearance) have expired, there may be an increasing number of foreclosure cases across the country in which TRID violations may be raised as a defense to foreclosure.  Further, investors may look to put back defaulted loans based on material or even minor TRID violations. 

This means that real questions regarding the type and extent of TRID liability, or even whether any TRID violations actually occurred, may come to the forefront in legal disputes.  Having led the original final TRID rule while a Senior Counsel and Special Advisor at the CFPB, I can tell you that the question of the type of liability under TRID for certain violations is not an easy one.  I have written about TRID liability on our blog in the past, including here. It may be prudent for investors and lenders to begin analyzing their potential TRID liability now, before the storm hits.

III.  TRID FAQs on Lender Credits

On February 26, 2020, the CFPB issued FAQs regarding the treatment of lender credits under TRID.  Much of the FAQs are basic information that most compliance professionals who deal with the rule would know.  But there are some interesting issues raised in the guidance.  I will address one of those issues here.

The FAQs discuss how to disclose lender credits on the Loan Estimate and Closing Disclosure, including for “no cost” loans.  In doing so, the CFPB describes a concept of whether a closing cost is “absorbed” by a lender or charged to a consumer and offset by a credit.  The CFPB gives an example of a creditor absorbing an “appraisal fee, credit report fee, flood determination fee, title search fee, lender’s title insurance policy premiums, attorney fees for loan documentation, and recording fees,” and states that the creditor would not be required to disclose such absorbed costs on the Loan Estimate, but would be required to disclose them on the Closing Disclosure in the “Paid by Others” column. 

This guidance raises some questions.  The CFPB does not define an “absorbed” cost, or provide guidance on determining a cost is “absorbed.”  How broadly should this new concept of “absorbing” a cost be interpreted?  Is this different from costs that are considered “overhead” by lenders?  If a lender does not track such “absorbed” costs on a transaction basis, how is the lender to disclose such amounts on the Closing Disclosure?  Unfortunately, these more specific questions may only be answered by the CFPB in a supervisory or enforcement context, or by the courts in lawsuits.

IV.  HMDA Threshold Final Rule

On April 16, 2020, the CFPB issued a final rule that increases the thresholds for HMDA reporting for both closed-end and open-end loans. 

A.  Closed-End Threshold

The rule increases the threshold for being required to report closed-end loans from the current 25 closed-end loans in each of the two preceding calendar years to 100.  This amendment becomes effective July 1, 2020, meaning that some institutions will become newly excluded from the reporting requirement this July.  The rule allows such institutions the option to report 2020 data.   The Bureau stated in the final rule preamble that it, “believes that increasing the closed-end threshold to 100 will provide meaningful burden relief for lower-volume depository institutions while maintaining reporting sufficient to achieve HMDA’s purposes.”  The Bureau acknowledged that while this increase will reduce reporting, it estimated that information covering approximately 96% of loans currently reported by depository institutions and 99.9% of loan currently reported by non-depository institutions will continue to be reported. 

B.  Open-End Threshold

The final rule sets the permanent open-end threshold to 200 open-end lines of credit, effective January 1, 2022, when the temporary threshold of 500 open-end lines of credit expires.  The Bureau stated in the preamble that, “the permanent threshold of 200 open-end lines of credit balances the benefits and burdens of covering institutions engaged in open-end mortgage lending by retaining significant coverage of the open-end market while excluding from coverage smaller institutions whose limited open-end data would be of lesser utility in furthering HMDA’s purposes.”

Please contact me at rich@garrishorn.com if you would like to discuss any of the issues in this post.