In response to the current coronavirus (COVID-19) pandemic, federal, state, and local governments have taken various actions to limit or prohibit foreclosures and evictions during the public health emergency. Some of these actions also require forbearance in the enforcement of mortgage loans and leases.
Unfortunately, there is no uniformity among the various government actions to limit or prohibit foreclosures and evictions, and there is a good deal of duplication. Some are narrowly focused, and others apply broadly to properties within the applicable jurisdiction. Some apply only to consumer loans and leases, while others apply to both residential and business loans and leases. Some are voluntary programs that seek broad participation from financial institutions and mortgage servicers.
In addition, there is considerable variation in the duration of the restrictions, but most are set to expire within a 90- to 180-day timeframe. It should be noted, however, that the relevant government authority may extend the duration if circumstances warrant.
CARES Act
The CARES Act, which took effect March 27, contains a number of federal law requirements applicable to mortgages and leases. These do not apply to all mortgages and leases, but are limited to properties that are subject to federally backed mortgage loans or participate in certain federal housing or urban development programs. Federally backed mortgage loans include both residential and multifamily properties that are insured, guaranteed, supplemented, or assisted pursuant to various federal housing and programs, or purchased or securitized by Fannie Mae or Freddie Mac. Individual units of condominiums or cooperatives are included among the covered properties. Construction loans and “other temporary financings” are excluded.
A borrower with a federally backed one- to four-family residential mortgage loan experiencing financial hardship due to the COVID-19 pandemic may request forbearance, regardless of delinquency status. Upon receipt of a borrower’s request for forbearance, the forbearance must be granted for up to 180 days, and must be extended for a further 180 days at the request of the borrower. During the forbearance period, no additional fees, penalties, or interest may be charged, but amounts due still accrue.
Multifamily loan borrowers are also entitled to forbearance, but to a more limited extent. The borrower must be current on its payments as of February 1, 2020. Upon receipt of a request for forbearance, the servicer must document the financial hardship, provide forbearance for up to 30 days, and upon request of the borrower, extend the forbearance period for up to two additional 30-day periods. A multifamily borrower who receives forbearance may not issue a notice to vacate a residential unit during the forbearance period, and may not require a tenant to vacate before the date that is 30 days after the tenant is given a notice to vacate.
Further, under the CARES Act, servicers of covered one- to four-family residential loans are also prohibited from initiating foreclosure for the 60-day period beginning March 18, 2020. These foreclosure restrictions do not apply to vacant or abandoned properties.
The CARES Act also provides that no owner of a covered property may initiate eviction proceedings against a residential tenant for nonpayment of rent during the 120-day period after enactment of the statute; that is, until July 25, 2020. The owner is also prohibited from charging fees or penalties related to the nonpayment of rent. After the moratorium ends, if the owner does issue a notice to vacate to any tenant, the owner must give the tenant at least 30 days to vacate.
Other Federal Actions
It should be noted that shortly before the enactment of the CARES Act, the Federal Housing Finance Agency (FHFA) had already directed Fannie Mae and Freddie Mac to suspend foreclosures and evictions for at least 60 days due to the COVID-19 pandemic. The foreclosure and eviction suspension applies to homeowners with a Fannie Mae– or Freddie Mac–backed single family mortgage.
FHFA also announced that Fannie Mae and Freddie Mac will provide payment forbearance to single family borrowers, which will allow mortgage payments to be suspended for up to 12 months due to hardship caused by the coronavirus. Fannie Mae and Freddie Mac have also offered multifamily property owners mortgage forbearance, subject to the condition that they suspend all evictions for renters unable to pay rent due to the impact of COVID-19.
Further, on April 3, federal financial institution regulatory agencies, including the Consumer Financial Protection Bureau (CFPB), and state financial regulators issued a joint policy statement providing needed regulatory flexibility to enable mortgage servicers to work with struggling consumers affected by the COVID-19 pandemic. The statement informs servicers of the agencies’ flexible supervisory and enforcement approach during the COVID-19 pandemic regarding certain communications to consumers required by the mortgage servicing rules.
The policy statement was designed to make it easier for mortgage servicers to place consumers in short-term payment forbearance programs such as the one required by the CARES Act. The policy statement clarifies that the agencies do not intend to take supervisory or enforcement action against mortgage servicers for delays in sending certain early intervention and loss mitigation notices and taking certain actions relating to loss mitigation set out in the CFPB’s mortgage servicing rules, provided that servicers are making good-faith efforts to provide these notices and take these actions within a reasonable time.
On April 7, federal financial institution regulatory agencies (including the CFPB), in consultation with state financial regulators, issued a revised interagency statement encouraging financial institutions to work constructively with borrowers affected by COVID-19 and providing additional information regarding loan modifications. The revised statement also provides the agencies’ views on consumer protection considerations.
The agencies encourage financial institutions to work with borrowers and will not criticize institutions for doing so in a safe and sound manner. The agencies view prudent loan modification programs offered to financial institution customers affected by COVID-19 as positive and proactive actions that can manage or mitigate adverse impacts on borrowers, and lead to improved loan performance and reduced credit risk. Agency examiners will not criticize prudent efforts to modify terms on existing loans for affected customers.
State actions have followed a variety of different paths. In a number of states, governors have issued broad executive orders covering residential foreclosures and evictions. Some of these orders extend to commercial properties, and some extend to nonprofit or small business loans as well. Several actions also require lender or landlord forbearance. Further, some state orders are mandatory, while others are voluntary. In some states such as Alaska and Massachusetts, legislation has been enacted, or has been proposed and is working its way through the legislative process, but is not final.
In a number of states, including California, Connecticut, New Jersey, and Pennsylvania, governors have negotiated voluntary agreements with large groups of lenders providing for a moratorium on foreclosures, and in a few, forbearance as well. In at least one state, the governor issued orders delegating these decisions to local authorities. Where no statewide action has been taken, some municipalities or courts have issued orders suspending evictions or foreclosures or both.
The periods during which moratoriums or forbearance requirements are applicable differ widely. Some states that have issued moratoriums also have issued regulatory guidance encouraging or urging lenders and servicers to work constructively and proactively with borrowers, and in other states, such regulatory guidance has been the only action of substance on the matter.
Some state governors, in addition to other actions taken, have requested that financial institutions holding residential or commercial mortgages, equity loans, lines of credit, or business loans implement a process to work with the mortgagors or loan holders to avoid foreclosure or default arising out of financial hardship caused by the COVID-19 pandemic, or by any local, state, or federal government response to COVID-19.
The existing federal actions do not apply to commercial loans and leases, other than covered multifamily properties. State actions that may affect commercial property evictions or foreclosures, or both, have been taken (or are in the process of being enacted) in Arizona, California, DC, Iowa, Kansas, Maryland, Massachusetts, Nevada, New Hampshire, New York, Ohio, Oregon, and Wisconsin. A few of these affect only small businesses and others, like DC, also require rent moratoriums or forbearance.
Actions taken by (or being considered by) several other states are ambiguous as to whether they apply (or potentially will apply) to commercial properties—these include Alaska, Colorado, Louisiana, and Rhode Island. Many state actions lack clarity, for example, applying moratoriums to “small businesses” without defining what constitutes a small business.
Despite the agency assurances described above, the cumulative effect of these federal and state actions and the economic damage to borrowers resulting from the current crisis has created severe difficulties for servicers. Particularly troublesome is the obligation under most servicing agreements to cover scheduled payments to investors when borrowers fail to make payments to the servicer. In addition, state and federal moratoriums and other actions taken in response to the pandemic have sharply curtailed servicer remedies. When the flood of requests for forbearance or loan modifications is added, servicers are coming under extreme stress.
Servicers also need to be cautious about potential fair lending, unfair or deceptive acts or practices (UDAP) and unfair, deceptive, or abusive acts or practices (UDAAP) risks that may arise from their handling of forbearance and loan modification requests due to COVID-19. If servicers rush to offer forbearance and roll out loss mitigation programs, they could face potential fair lending and UDAP/UDAAP scrutiny after the crisis from both state and federal regulators. For example, there would be legal risk for a servicer to reach out only to a selected group of borrowers about a loss mitigation program based on geography, demographics or property value. Similar risks attach if the eligibility criteria for loss mitigation programs are subjective and discretionary. In short, servicers should give due consideration to fair lending and UDAP/UDAAP risks when working with borrowers impacted by COVID-19, even when acting on an expedited basis.
Many state and federal actions limit or prohibit foreclosures or evictions for covered properties during the COVID-19 pandemic. Several also require or encourage forbearance from the exercise of contractual remedies during the emergency. Nevertheless, few of them excuse borrower or tenant defaults.
It remains to be seen whether any further government action will be taken to address this issue, or whether lenders and landlords will be free to exercise applicable remedies for preexisting defaults once the current emergency is over. It also remains unclear as to whether additional government action will be taken to address borrower difficulties with other types of consumer loans, including automobile or other personal property loans.
There also may be some limits on government actions. Article 10 of the US Constitution states that no state shall pass any law impairing the obligation of contracts. Notwithstanding the absolute language of this provision, it has been clear, since a 1934 Supreme Court decision, that state moratoriums on foreclosure during a national emergency are permitted.[1] Since then the courts have developed a two-part test to determine whether state action limiting the enforceability of contracts will be upheld.
First, does the legislation impose a substantial impairment on the contract? Second, if there is an impairment, is the legislation reasonable and necessary to serve an important public purpose? It will be up to the courts to determine whether actions taken by government authorities to deal with the COVID-19 pandemic will meet these standards.
Taken together, these various government actions are somewhat complicated from a compliance perspective. The actions include a number of requirements that are sometimes repetitive; sometimes differ, especially the case across states; and in any event are not uniform across residential and commercial platforms.
In states that have set up voluntary moratoriums and forbearance programs, financial institutions that have not yet agreed to participate may feel pressured to join the initiative in order to show partnership with their customers and provide much-needed financial relief to borrowers, especially as this pandemic continues and additional employee furloughs and layoffs occur.
Additionally, the structure of such voluntary programs typically provides great flexibility to financial institutions, with the onus on the part of financial institutions to work constructively with consumers. While recognizing that financial institutions and their servicers are experiencing high volumes of borrower inquiries, the states that have set up such programs have implicitly cautioned mortgage servicers to be communicative and cooperative with consumers.
Financial institutions should, therefore, exercise careful diligence in ensuring that they comply with the various tenets of these government actions, but also make sure that their business operations and compliance and servicing departments are closely monitoring any additional developments within the states in which they do business, including at the local level.
For our clients, we have formed a multidisciplinary Coronavirus COVID-19 Task Force to help guide you through the broad scope of legal issues brought on by this public health challenge, which includes the Financial Services COVID-19 Task Force and the Real Estate COVID -19 Task Force to focus on the issues specifically impacting our real estate and financial services industry clients.
If you have any questions or would like more information on the issues discussed in this LawFlash, please the contact any of the following Morgan Lewis lawyers:
Real Estate Task Force
Jeannine T. Bishop
Marc A. Liverant
Financial Services Task Force
David I. Monteiro
[1] Many state constitutions contain similar restrictions. Federal action may be subject to the provisions of the Fifth Amendment stating that private property shall not be taken for public use without just compensation. In a 1935 decision the Supreme Court ruled that this can apply to legislation that causes the substantial impairment of a mortgage lender’s security.