During this unprecedented time of disruption and change due to the COVID-19 pandemic, lending institutions are seeking to provide much needed relief to their customers with respect to their mortgage and other loan payments, but the process is complex.  Regulatory guidance on processing loan modifications and other relief options is being updated almost daily, and the passage and implementation of the Coronavirus Aid, Recovery and Economic Security Act (the “CARES Act”) and other state mandated orders have impacted the way lenders can provide relief. This article provides a summary of the current regulatory response to COVID-19 with respect to forbearance, loan modifications, and other relief options related to mortgage and home equity loans.

• Joint Statement on CRA Consideration for Activities in Response to COVID-19

On March 19, the Federal Reserve Board, FDIC, and OCC released a joint statement encouraging financial institutions to work with affected customers and communities, particularly those that are low- and moderate-income. The agencies stated that they will, pursuant to the Community Reinvestment Act (CRA), provide “favorable consideration of certain retail banking services, retail lending activities, and community development activities” related to the COVID-19 crisis.  The agencies emphasized that “prudent efforts to modify the terms on new or existing loans” for affected low- and moderate-income customers and small businesses “will receive CRA consideration and [will also] not be subject to examiner criticism.”

• Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus

On March 22, 2020, the Federal Reserve Board, FDIC, NCUA, CFPB, OCC and State Banking Regulators issued a joint interagency statement on loan modifications and reporting, encouraging financial institutions to work constructively with borrowers affected by COVID-19 and providing additional information regarding loan modifications and troubled debt restructurings (“TDRs”).  In essence, the statement provides that prudent efforts to adjust or alter terms on existing loans in affected areas will not be subject to examiner criticism.  According to the statement, the participating agencies “will not criticize institutions for working with borrowers and will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as troubled debt restructurings (TDRs).”  Additionally, agencies “will not criticize financial institutions that mitigate credit risk through prudent actions consistent with safe and sound practices” and “will not criticize institutions that work with borrowers as part of a risk mitigation strategy intended to improve an existing non-pass loan.”

Accounting for Loan Modifications

According to the statement, the agencies have confirmed with the Financial Accounting Standards Board (FASB) that “short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not to be considered TDRs.”  These short-term (e.g., six months) modifications include “payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.”

Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented.  Examiners will exercise judgment in reviewing loan modifications, including TDRs, and will not automatically adversely risk rate credits that are affected by COVID-19, including those considered TDRs. Regardless of whether modifications result in loans that are considered TDRs or are adversely classified, agency examiners will not criticize prudent efforts to modify the terms on existing loans to affected customers.

Residential Mortgage Loans and Risk Based Capital Rules

Efforts to work with borrowers of one-to-four family residential mortgages, “where the loans are prudently underwritten, and not past due or carried in nonaccrual status, will not result in the loans being considered restructured or modified for the purposes of their respective risk-based capital rules.”  Although NCUA’s Risk-Based Capital rule does not go into effect until January 1, 2022, the NCUA agrees with the guidance regarding working with borrowers of one-to-four family residential mortgages.

Past Due Reporting

For loans not otherwise reportable as past due, “financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral. A loan’s payment date is governed by the due date stipulated in the legal loan documents. If a financial institution agrees to a payment deferral, this may result in no contractual payments being past due, and these loans are not considered past due during the period of the deferral.

Nonaccrual Status and Charge-Off

The Statement provides that financial institutions should “refer to the applicable regulatory reporting instructions, as well as its internal accounting policies, to determine if loans to stressed borrowers should be reported as nonaccrual assets in regulatory reports. However, during the short-term arrangements discussed in this statement, these loans generally should not be reported as nonaccrual. As more information becomes available indicating a specific loan will not be repaid, financial institutions should refer to the charge-off guidance in the instructions for the Consolidated Reports of Condition and Income.”

Discount Window Eligibility

Loans that have been restructured as described under the Interagency Statement will continue to be eligible as collateral at the FRB’s discount window based on the usual criteria.

• Joint Statement Encouraging Responsible Small-Dollar Lending in Response to COVID-19

On March 26, 2020, the Federal Reserve Board, FDIC, CFPB, NCUA and OCC issued another interagency statement encouraging financial institutions to offer responsible small-dollar loans to both consumers and small businesses.  “Such loans can be offered through a variety of loan structures that may include, for example, open-end lines of credit, closed-end installment loans, or appropriately structured single payment loans.” Financial institutions may, but are not required to, consult with their primary federal regulator about small-dollar loan products that they offer or plan to offer to customers affected by COVID-19. The statement encourages financial institutions to “consider workout strategies designed to help borrowers who are experiencing financial difficulties, while mitigating the need to re-borrow.”  Financial institutions are reminded that, for all products, they should offer loans in a manner that is “consistent with safe and sound practices, provides fair treatment of consumers, and complies with applicable statutes and regulations, including consumer financial protection laws.”

• Coronavirus Aid, Relief, and Economic Security Act (CARES Act)

The CARES Act, which was passed was passed by the U.S. Senate on March 25, 2020, the U.S. House of Representatives on March 27, 2020 and signed by President Trump later that day, provides significant relief options to financial institutions hoping to help their customers through the COVID-19 pandemic.  The Act allows financial institutions to provide guaranteed loans to businesses and self-employed individuals through the U.S. Small Business Administration’s paycheck protection program, providing lenders an opportunity to assist members with payroll, benefits, and other eligible expenses.  The Act also offers relief from accounting requirements and impairments resulting from loan modifications for borrowers affected by the coronavirus pandemic.  Additionally, it provides temporary relief from the implementation of the FASB’s current expected credit losses methodology

Relief from Foreclosure

The CARES Act provides foreclosure relief for “federally-backed loans,” which means loans (for 1–4 family properties) purchased, securitized, owned, insured, or guaranteed by Fannie Mae or Freddie Mac, or owned, insured, or guaranteed by FHA, VA, or USDA.  About one-third of residential mortgages are not federally backed and thus not covered by the CARES Act. These homeowners (and tenants) will have to rely on future federal action or current and/or future state orders, or on voluntary actions by mortgage servicers.  For instance, On April 1, 2020, the Pennsylvania Supreme Court ordered that no state official may effectuate an eviction, ejectment, or other displacement from a residence for nonpayment of rent or a loan from March 19, 2020 through April 30, 2020.

Under Section 4022(a)(2) of the CARES Act, a servicer of federally backed mortgage loan may not initiate any judicial or nonjudicial foreclosure process, move for a foreclosure judgment, order a sale, or execute a foreclosure-related eviction or foreclosure sale.  The provision lasts for not less than the sixty-day period beginning on March 18, 2020. Importantly, this provision is not limited to borrowers with a COVID-19 related hardship.

Section 4022(b), (c)(1) of the CARES Act provides that homeowners with federally backed mortgage loans affected by COVID-19 can request and obtain forbearance from mortgage payments for up to 180 days, and then request and obtain additional forbearance for up to another 180 days. During a period of forbearance, no fees, penalties, or interest shall accrue on the borrower’s account beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the terms of the mortgage contract.  The covered period appears to be during the emergency or until December 31, 2020, whichever is earlier.

The CARES Act provides for different forbearance rights for owners of multi-family property (5 or more units), and also provides that tenants are protected from eviction if the owner seeks such forbearance (Section 4023).  Moreover, pursuant to Section 4024, during the 120-day period beginning March 27, 2020, the lessor of a “covered dwelling” may not file a court action for eviction or charge additional fees for nonpayment of rent.  After that 120-day period, the lessor cannot require the tenant to vacate until it gives the tenant a thirty-day notice to quit. A covered dwelling is one where the building is secured by a federally backed mortgage loan or participates in certain federal housing programs.

• Mortgage Forbearance Relief

On March 18, 2020, the United States Department of Housing and Urban Development (HUD) and the Federal Housing Finance Agency (FHFA) each ordered a 60-day moratorium on foreclosures and evictions for loans insured by the Federal Housing Administration or owned by Fannie Mae or Freddie Mac.  HUD followed that by issuing Mortgagee Letter 2020-04, which further explains that the moratorium applies to the initiation of foreclosures and to the completion of foreclosures in process. Evictions of persons from properties secured by FHA-insured Single Family mortgages are also suspended for a period of 60 days. Additionally, deadlines of the first legal action and reasonable diligence timelines are extended by 60 days.

Just as the Senate took up the CARES Act, Fannie Mae and Freddie Mac announced that their servicers may offer the new payment deferral loss mitigation option beginning July 1, 2020 (it had originally been slated to roll out by January 1, 2021). For borrowers who experience a temporary financial hardship – whether COVID-19-related or otherwise – and have taken advantage of loan payment forbearance but cannot fully reinstate their loans when the forbearance period ends, or afford to repay the forborne amounts alongside their usual monthly mortgage payments, servicers may offer to defer up to two months of forborne payments as a non-interest-bearing balance to be repaid when the loan matures or is otherwise paid off.

Fannie’s program is described in Lender Letter 2020-05 (issued March 25, 2020), and Freddie’s is described in Bulletin 2020-06 (also issued March 25, 2020). Freddie Mac also issued Bulletin 2020-07, containing additional COVID-19-related guidance, including, among other reminders: updated reporting and property inspection and preservation requirements; clarified requirements for streamlined Flex Modifications; and outreach and collection techniques. Fannie Mae similarly updated its earlier Lender Letter 2020-02.

• CFPB Response

On March 26, 2020, the CFPB issued several statements in furtherance of its previously issued joint statements with the other agencies, as detailed above, to encourage lenders to work constructively with borrowers and other customers affected by COVID-19 to meet their financial needs.

Statement on Supervisory and Enforcement Practices Regarding Quarterly Reporting Under the Home Mortgage Disclosure Act

In this statement, the CFPB announced that it will not require quarterly Home Mortgage Disclosure Act (HMDA) and Regulation C reporting from mortgage lenders. Rather, lenders should continue to collect the data and await further instruction regarding when to commence new quarterly submissions.

Statement on Supervisory and Enforcement Practices Regarding Bureau Information Collections for Credit Card and Prepaid Account Issuers

In this statement, the CFPB noted that it is also postponing reporting of certain information related to credit card and prepaid accounts under the Truth in Lending Act, Regulation Z, and Regulation E, as well as data collection regarding certain pending rulemakings.

Statement on Bureau Supervisory and Enforcement Response to COVID-19 Pandemic

Finally, in this statement the CFPB stated that “[t]he Bureau encourages prudent efforts undertaken in good faith that are designed to meet the exigent needs of financial institutions’ borrowers and other customers. To that end, when conducting examinations and other supervisory activities and in determining whether to take enforcement action, the Bureau will consider the circumstances that entities may face as a result of the COVID-19 pandemic and will be sensitive to good-faith efforts demonstrably designed to assist consumers.”