A recent report, entitled “A New Vision for Europe’s Capital Markets” (the “Report”), sets out some key recommendations for how the EU securitisation market can be scaled up. The Report has been published by the High Level Forum on the Capital Markets Union (the “HLF”) which was established by the European Commission (the “Commission”). The recommendations cover some key areas of interest for market participants.

Background
Capital Markets Union has been an important part of the European regulatory agenda for some time, and was the subject of an Action Plan adopted by the Commission in September 2015. The HLF is composed of experts in the European capital markets, alongside a number of observers from European supervisory bodies and institutions. The views expressed in the Report are those of its members and not the Commission. Nonetheless, the views expressed in the Report are expected to inform the future work of the Commission.

The Report makes seventeen sets of recommendations in relation to different aspects of the EU markets. In this Legal Update, we have focused solely on the recommendations relating to the EU regulatory framework which applies to securitisation.

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For more information about the topics raised in this Legal Update, please contact Merryn Craske on +44 20 3130 3029, Neil Macleod on +44 20 3130 3252, Robyn Llewellyn on +44 20 3130 3990 or Jaime Lad on +44 20 3130 3927.

Learn more about our Structured Finance practice.

Visit us at mayerbrown.com.

On June 25, 2020, five federal financial regulatory agencies published the long awaited Final Revisions to the Volcker Rule (the “Final Revisions”) which revise certain aspects of the Volcker Rule (Section 13 of the Bank Holding Company Act) with respect to the identification and treatment of covered funds.  The Final Revisions follow three years of the agencies’ consideration of changes to the Volcker Rule, originally prompted by the June 2017 Treasury Report that solicited changes to ease the compliance burden on banks.  The Final Revisions are largely consistent with the notice of proposed rulemaking (the “NPR”) published 6 months ago, but with some important, and welcome, clarifications and other adjustments.  Many of the changes from the NPR contained in the Final Revisions are in response to industry requests designed to clarify and ease the compliance burden of banking entities subject to the Volcker Rule.

 

For those entities relying on the loan securitization exclusion under the Volcker Rule (the “LSE”), the Final Revisions added to the LSE an allowance to own up to 5% of non-loan debt instruments (such as corporate bonds).   This 5% bucket is calculated based on the par value of assets at the time of each acquisition. In a shift from the NPR, the Final Revisions limit the 5% non-complying assets bucket to debt securities (other than ABS or convertible securities). Although this change from the NPR technically narrows the non-complying assets bucket, the agencies helpfully clarified in the adopting release for the Final Revisions that all leases and leased property are permissible assets under the LSE. This clarification alleviates the need for further broadening of the non-complying assets bucket for typical ABS transactions while closing any gap in the NPR that would have permitted funds relying on the LSE to acquire equity securities.

 

The Final Revisions include a safe-harbor carve-out to the definition of “ownership interest” under the Volcker Rule in substantially the same manner as proposed in the NPR. The safe harbor applies to certain senior loan or other senior debt interests that satisfy three tests. The safe harbor provides greater clarity around certain debt interests that structured finance industry participants ordinarily would not consider to be an ownership interest.  Unfortunately, the agencies declined to provide further clarity around the meaning of “senior”.

 

The need for further clarification with respect to this safe harbor, however, is largely mitigated by the helpful change and clarifications to the definition of “ownership interest” in the Final Revisions and accompanying adopting release.  Importantly, and as requested by industry participants, the Final Revisions provide that the right to remove a collateral manager or similar entity for cause generally does not convert a debt instrument into an “ownership interest”, regardless of the existence of an event of default or acceleration event.  Although the Final Revisions include a list of specific “cause” events on the basis of which holders of debt instruments may remove a manager without their instruments being rendered “ownership interests”, we believe these are generally consistent with industry standards – and moreover the list includes a catch-all for other similar “cause” events that are not solely related to the performance of the covered fund or the investment manager’s exercise of investment discretion under the covered fund’s transaction agreements.  The adopting release also helpfully clarifies that the existence of a typical cash waterfall for the allocation of collections to an interest in an issuer is not a “right to share in income, gains or profits” that would result in the interest constituting an ownership interest in a covered fund.   We anticipate that these adjustments to the definition of “ownership interest” will enable banking entities to invest in CLOs and other ABS loans and debt instruments without the need to rely on a specific covered fund exclusion.  This should ease the compliance burden for banking entities that finance the securitization of loans.

 

The Final Revisions are effective as of October 1, just three months away.   The agencies considered a longer transition period but believe the nature of the changes permit an accelerated effective date.  We agree.  We will provide a full Legal Update on the Final Revisions in the coming days.

In recent weeks, the US federal housing agencies and government-sponsored enterprises (GSEs) that insure, guarantee, or purchase “federally backed mortgage loans” covered by Section 4022 of the CARES Act (Act) have continued their intense pace of issuing temporary measures, and updates to such measures, intended to implement the Act’s provisions applicable to such loans. These actions aim to provide assistance to mortgage loan borrowers facing financial hardship in connection with the COVID-19 outbreak during and after the forbearance period set forth in the Act. The agencies and GSEs also have issued several announcements regarding flexibility for servicers and originators of “federally backed mortgage loans” to address certain of the unintended consequences of the broad forbearance relief authorized by the Act.

This Legal Update summarizes some of the significant guidance related to the Act’s broad mortgage forbearance provisions and certain of the unintended consequences. Specifically, we provide details regarding: (1) updates to the federal housing agencies’ and GSEs’ foreclosure and eviction moratoria; (2) updates to the GSEs’ COVID-19 Payment Deferral option; (3) announcements by the US Department of Housing and Urban Development’s (HUD) Federal Housing Administration (FHA) and the GSEs regarding their insurance endorsement or purchase of mortgage loans that go into forbearance post-closing and prior to endorsement or purchase, subject to certain important conditions; and (4) the GSEs’ announcement that certain borrowers in forbearance are temporarily eligible for refinancing and new home purchases.

Extension of FHFA and HUD Foreclosure and Eviction Moratoria

Most recently, on June 17, 2020, both the Federal Housing Finance Agency (FHFA) and HUD announced extensions of the moratoria on foreclosure and eviction previously announced by Fannie Mae, Freddie Mac, and FHA to assist borrowers impacted by COVID-19. Specifically, both the announcement from FHFA and HUD’s Mortgagee Letter 2020-19 extend their existing foreclosure and eviction moratoria for single family mortgage loans through August 31, 2020. As with past extensions, HUD’s extension does not apply to vacant or abandoned properties, but continues to extend both the first legal action and reasonable diligence timelines applicable to foreclosure by 90 days from the expiration date of the moratorium.

COVID-19 Payment Deferral Updates

As discussed in our April 9 and April 21 Legal Updates regarding the federal housing agencies’ implementation of the Act’s requirements, determining how to establish loss mitigation options available to borrowers at the end of the forbearance period, which could last up to 360 days, is one of the key unanswered questions raised under Section 4022 of the Act. In response, the federal housing agencies and the GSEs have introduced specific loss mitigation options and waterfall requirements for borrowers impacted by COVID-19 and receiving mortgage payment forbearance.  For regulators and legislators that want servicers to provide borrowers at the time they seek forbearance with up-front disclosures of subsequently available loss mitigation options, the complexity that follows demonstrates the difficulty of achieving this objective.

One such loss mitigation tool announced by the GSEs was the COVID-19 Payment Deferral. Since announcing the new COVID-19 Payment Deferral option in May of 2020 in Lender Letter LL-2020-07 and Bulletin 2020-15, Fannie Mae and Freddie Mac have released additional guidance to assist servicers in implementing this option for borrowers impacted by the COVID-19 national emergency. Most recently, on June 10, 2020, the GSEs issued updated guidance to implement servicer incentives for COVID-19 Payment Deferrals, as well as incentives for other workout options. Below, we provide a description of the COVID-19 Payment Deferral option, including useful resources the GSEs have recently made available to implement this option, and briefly summarize the recent updates.

Overview of the COVID-19 Payment Deferral Option

The COVID-19 Payment Deferral is a retention workout option designed to assist borrowers who missed up to twelve months of forborne payments due to COVID-19 hardships that have been resolved and return their mortgage to a current status. To accomplish this workout option, the servicer defers the following amounts as a non-interest bearing balance on the loan: (i) up to twelve months of past-due principal and interest payments, (ii) out-of-pocket escrow advances paid to third parties, and (iii) servicing advances paid to third parties in the ordinary course of business and not retained by the servicer. The deferral balance is due and payable at maturity of the mortgage loan, or earlier upon the sale or transfer of the property, refinance of the mortgage loan, or payoff of the interest-bearing unpaid principal balance. All other terms of the mortgage loan must remain unchanged.

Beginning July 1, 2020, servicers must evaluate a borrower’s eligibility for a COVID-19 Payment Deferral by achieving Quality Right Party Contact (QRPC) (for Fannie Mae loans) or Limited QRPC as specified in Bulletin 2020-10 (for Freddie Mac loans). QRPC is a defined term that generally means creating a uniform standard for communicating with the borrower or his or her representative to determine the reason for delinquency, the occupancy status of the property, whether the borrower has the willingness and ability to repay, and to discuss available workout options.1 After discussing reinstatement and repayment plan options with the borrower, the servicer must evaluate the borrower for the COVID-19 Payment Deferral by confirming that the borrower (1) has resolved the COVID-19 hardship, (2) is able to continue making the existing contractual mortgage payment, and (3) is unable to afford a repayment plan or full reinstatement of the mortgage. Any late charges must be waived upon completion of a COVID-19 Payment Deferral. Fannie Mae additionally provides that all penalties, stop payment fees, or similar charges must be waived. Servicers also must confirm that borrowers meet certain additional requirements, such as ensuring the borrower has not previously received a COVID-19 Payment Deferral, which are set forth in Fannie Mae’s Lender Letter 2020-07 and Freddie Mac’s Bulletins 2020-15 and 2020-21.

The COVID-19 Payment Deferral is a modified version of the standard Payment Deferral solutions announced by Fannie Mae (in Lender Letter LL-2020-05) and Freddie Mac (in Bulletin 2020-06) on March 25, 2020. The COVID-19 Payment Deferral includes several significant differences from the standard Payment Deferral, including, among others, that: (i) the borrower’s delinquency must have been caused by a COVID-19-related hardship and the hardship must be resolved; (ii) the borrower must have been current or less than 31 days delinquent as of the National Emergency declaration date, March 1, 2020;2 (iii) the mortgage must be 31 or more days delinquent but less than or equal to 360 days delinquent as of the date of evaluation; and (4) there is no origination seasoning requirement. On May 28, 2020, Fannie Mae published a matrix setting forth the differences between its Payment Deferral and COVID-19 Payment Deferral to assist servicers in navigating the two options.

A servicer implementing the COVID-19 Payment Deferral option must comply with GSE requirements relating to borrower eligibility, evaluation, and solicitation practices, as well as documentation, timing, and other aspects of program administration, all of which are detailed in Fannie Mae’s Lender Letter 2020-07, as updated, and Freddie Mac Bulletins 2020-15 and 2020-21. Importantly, until the servicer implements a COVID-19 Payment Deferral, it must continue to evaluate the borrower for standard loss mitigation options. Once the servicer implements the COVID-19 Payment Deferral option, the servicer must evaluate the borrower according to the following hierarchy: COVID-19 Payment Deferral, Flex Modification,3 and then standard short sale or standard deed-in-lieu of foreclosure, as appropriate.

If the servicer is unable to establish QRPC for an otherwise eligible borrower while the borrower is on a COVID-19-related forbearance plan, the servicer must proactively solicit the borrower to offer a COVID-19 Payment Deferral within 15 days after the forbearance plan’s expiration. If the borrower is ineligible for a COVID-19 Payment Deferral, the servicer must solicit the borrower, if eligible, for a streamlined (i.e., with reduced eligibility requirements) Flex Modification within 15 days after the expiration of the forbearance plan. If the borrower is eligible for a COVID-19 Payment Deferral but fails to accept the offer within the required timeframe, the servicer must evaluate the borrower for a streamlined Flex Modification within 15 days after the expiration of the COVID-19 Payment Deferral offer. Finally, if the borrower defaults (as defined in the GSE announcements) after accepting a COVID-19 Payment Deferral, the servicer must evaluate the borrower for a streamlined Flex Modification.

In addition to the Lender Letters and Bulletins describing the program requirements for the COVID-19 Payment Deferral and the loss mitigation hierarchy for borrowers impacted by COVID-19, Fannie Mae and Freddie Mac have both issued Frequently Asked Questions (FAQ) documents. The GSEs continue to update these FAQs with additional information on evaluating borrowers for, and the implementation of, relief options related to the COVID-19 national emergency.

Recently Announced Updates to the COVID-19 Payment Deferral Option

On June 10, 2020, both Fannie Mae and Freddie Mac announced the servicer incentive amounts that the GSEs will pay for COVID-19 Payment Deferrals, as well as updated incentive amounts for other workout options. In Lender Letter 2020-09 and Bulletin 2020-21, the GSEs announced the following incentive payments:

  • Repayment Plan:  $500, effective for all repayment plans with a first payment due date under the repayment plan on or after July 1, 2020;
  • Payment Deferral/COVID-19 Payment Deferral:  $500, effective immediately for all payment deferrals, payable upon completion of the payment deferral;
  • Flex Modification:  $1,000, effective for all Flex Modifications completed with a Trial Period Plan effective date on or after July 1, 2020.

Both of the GSE announcements clarify that incentive fees will be cumulatively capped at a total of $1,000 per mortgage loan, regardless of whether the workout options were the result of the same hardship, and that workout options already begun prior to June 10, 2020, will not be subject to the cumulative incentive fee cap. Fannie Mae’s announcement includes examples of how to calculate the incentive fee for retention workout options under three different scenarios. Fannie Mae’s announcement also includes certain additional conditions that must be met for each of the workout options for the servicer to collect the incentive fee. Both announcements expressly state that existing incentive fees for liquidation workout options remain unchanged at this time.

In addition to the announcement regarding incentives, Fannie Mae’s June 10 reissuance of Lender Letter 2020-02 and Freddie Mac’s Bulletin 2020-21 clarified that servicers are not required to send a payment reminder notice to the borrower during an active forbearance plan term. Both announcements stated that this guidance applies: (i) without regard to whether the borrower’s monthly payment is reduced or suspended during the forbearance plan; and (ii) to forbearance plans for borrowers with any eligible hardship type, including a COVID-19-related hardship. This announcement should be welcomed by servicers, as sending such notices during the forbearance term could result in confusion for borrowers. The GSEs’ June 10 announcements also clarified that servicers are authorized to continue proactive solicitation for a Flex Modification based on the reduced eligibility criteria set forth in Freddie Mae’s Bulletin 2020-15 and prior versions of Fannie Mae’s Lender Letter 2020-07 when a borrower has defaulted on a COVID-19 Payment Deferral, at the servicer’s discretion, unless the property has a scheduled foreclosure sale date within 60 days of the evaluation date if the property is in a judicial state, or within 30 days of the evaluation date if the property is in a non-judicial state.

Fannie Mae’s Lender Letter 2020-07 also announced a revised payment deferral agreement that it updated in reference to the Act’s provisions. In an earlier update to Lender Letter 2020-07 issued on May 27, 2020, Fannie Mae announced, among other items, that it would reimburse the servicer for allowable out-of-pocket expenses in accordance with its Servicing Guide for COVID-19 Payment Deferrals, but noted that the servicer must request reimbursement of such expenses from Fannie Mae within 60 days of the completion of the COVID-19 Payment Deferral.

Insurance and Purchase of Loans in Forbearance

The number of loans going into forbearance pursuant to the Act shortly after the loan is originated, but before the loan is purchased by the GSEs or insured by FHA is another issue that has arisen as a result of the COVID-19 national emergency and the Act’s forbearance provisions.

To address this issue and provide liquidity options for lenders of such loans, both HUD and the GSEs have issued guidance on the conditions under which they will insure or purchase such loans. Most recently, HUD issued Mortgagee Letter 2020-16 on June 4, 2020, in which it announced that FHA would temporarily endorse mortgages with active forbearance plans submitted for FHA insurance on or after June 15, 2020, and through November 30, 2020. The guidance applies to all FHA Title II single-family forward mortgage programs, except non FHA-to-FHA cash-out refinances. Unfortunately, to obtain FHA insurance endorsement for such loans, the lender must agree to sign a “partial indemnification agreement” in connection with each of these loans.

For a loan to be eligible for FHA insurance endorsement when the loan involves a borrower who has experienced a financial hardship, directly or indirectly, as a result of COVID-19, the following requirements must be met:

  • The borrower has requested forbearance, or the mortgage is subject to a forbearance agreement for one or more payments due to relief provided to borrowers impacted by COVID-19;
  • At the time the forbearance was initiated, the mortgage was current;
  • At the time of the mortgage closing, the mortgage satisfied all requirements for FHA insurance; and
  • The mortgagee executes a two-year partial indemnification agreement.

According to the terms of the partial indemnification agreement, the amount of the partial indemnification will be equal to 20 percent of the initial loan amount. The mortgagee will responsible for paying this amount of losses incurred by HUD if the borrower fails to make two or more payments when due under the terms of the FHA-insured mortgage at any point within two years from the date of endorsement and the borrower remains in default until the filing of an FHA insurance claim. If the borrower enters into forbearance and subsequently brings the loan current, either pursuant to the terms of the mortgage or a permanent loss mitigation option, through the date that is two years from the date of endorsement of the mortgage, the indemnification agreement will terminate.

Both Mortgagee Letter 2020-16 and corresponding guidance published by HUD in FHA Info 2020-36 provide instructions on how to complete the FHA Connection process for loans submitted for endorsement while in forbearance, as well as instructions on completing and submitting the partial indemnification agreement to HUD. The Mortgagee Letter states that HUD will continue to monitor the impacts of this guidance on the markets and to the FHA Insurance Fund, and may adjust the level of partial indemnification accordingly for future indemnification contracts.

For mortgages submitted for FHA insurance endorsement pursuant to Mortgagee Letter 2020-16, and for which the lender is made aware of a change in employment status due to COVID-19 after the loan closing, the Mortgagee Letter permits the mortgagee to provide a separate addendum to the Mortgagee’s Certification stating that “the executed Mortgagee’s Certification excludes certification of knowledge of the borrower’s employment status as provided in the Form HUD-92900-A, page 4, paragraph (a).”  This is a positive development for mortgagees who elect to submit mortgages in forbearance that resulted from a change in job status for insurance endorsement, as it will prevent the mortgagee’s knowledge of employment status at the time of submission for endorsement from constituting an alleged false certification of the standard mortgagee certifications required for endorsement.

HUD’s announcement in Mortgagee Letter 2020-16 came on the heels of the GSEs’ prior announcements at the end of April that they would purchase loans that went into forbearance after closing but prior to sale to the GSEs, subject to several conditions including loan-level price adjustments of 500 basis points for first-time homebuyers and 700 basis points for all other eligible loans. Similar to FHA’s announcement, the GSEs made clear that cash-out refinance transactions in forbearance prior to sale are not eligible for purchase by the GSEs and require that the loans being purchased are no more than one month delinquent, as defined in Lender Letter 2020-06 and Bulletin 2020-12. Both of the GSEs have since extended the timeframes during which they will purchase such loans, first in a May 19 announcement in which FHFA announced that it was extending the ability of Fannie Mae and Freddie Mac to purchase qualified single-family mortgages in forbearance, and most recently on June 11, 2020, when Fannie Mae and Freddie Mac announced an additional extension. This GSE purchase authority, as extended, now applies to forborne loans with note dates on or after April 1, 2020, and on or before July 31, 2020, as long as (1) they are delivered to the GSEs by September 30, 2020, and (2) only one mortgage payment has been missed.4

Our colleague recently published an article regarding the negative policy implications of transferring the risk of loans going into forbearance from FHA and the GSEs to the originating lender.

Refinance and Home Purchase Eligibility for Borrowers Impacted by COVID-19 Forbearance

One additional question that has been at the center of the Act’s implementation is whether loans that are in a forbearance plan are eligible for refinance as an alternative to the loss mitigation options provided by the GSEs and federal housing agencies. This is particularly important in this national emergency, given the low interest rates available to mortgage borrowers and the high percentage of loans that are in a forbearance plan but remain contractually current as borrowers continue to make timely mortgage payments. To date, only the GSEs have provided guidance on this topic. Specifically, days after announcing the COVID-19 Payment Deferral program, FHFA announced on May 19, 2020, that borrowers in, or recently out of, forbearance will be eligible to refinance their existing loan or purchase a new home. Fannie Mae and Freddie Mac issued guidance setting out the requirements for borrower eligibility and seller due diligence, which we discuss in detail below. These temporary policies are effective until further notice and may be applied to loans in process and must be applied to loans with application dates on or after June 2, 2020.

The GSE guidance sets forth eligibility requirements for borrowers impacted by the COVID-19 pandemic who have either reinstated their existing loan, or are resolving a delinquency through a loss mitigation solution. Specifically, if the borrower resolved any missed payments through a reinstatement, the borrower will be eligible for a new mortgage loan. In this circumstance, if the reinstatement was completed after the application date of the new transaction, the lender must document and confirm the eligibility of the source of funds used for reinstatement, and such source must meet the GSEs’ eligibility requirements for sources of funds. Both Fannie Mae and Freddie Mac expressly state that proceeds of the new transaction may not be used to reinstate any mortgage.

If outstanding payments have been or will be resolved through loss mitigation, the borrower is eligible for a new mortgage loan if they have, as of the note date, made at least three qualifying timely payments as provided below:

  • Repayment Plan. A borrower subject to a repayment plan must either have (1) completed the repayment plan or (2) have completed at least three payments.5
  • Payment Deferral. A borrower subject to a payment deferral must have made at least three consecutive payments after the deferral took effect.
  • Loan Modification Trial Period Plan. A borrower subject to a modification must have completed the trial payment period.
  • Other Loss Mitigation Solution. A borrower subject to any other loss mitigation program must either have (1) successfully completed the program, or (2) completed at least three consecutive full monthly payments.6

Sellers must continue to review the borrower’s credit report to determine the status of all of the borrower’s mortgage loans. The seller also must conduct due diligence on each of the borrower’s mortgage loans, including co-signed mortgages and mortgages unrelated to the subject transaction, to determine whether they are subject to any of the above programs and whether payments are current.7

We understand that other federal housing agencies are considering guidance regarding refinancing federally insured or guaranteed loans. Given the importance of providing borrowers impacted by COVID-19 with as much flexibility as possible to resolve their hardships and return to current mortgage payments, we hope that such guidance will be forthcoming.

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As the COVID-19 national emergency continues to disrupt the residential mortgage market, we can expect the GSEs and federal housing agencies to continue to update the programs and guidance discussed above, as well as announce new requirements designed to address the unique circumstances presented by the pandemic.

Our prior Legal Updates discussing the federal housing agencies’ ongoing response to the COVID-19 crisis can be found on our Financial Regulatory COVID-19 Portal. We will issue Legal Updates to keep you up-to-date on any significant future announcements.

If you have any questions about recent announcements regarding the federal housing agencies’ and GSEs’ response to developments related to COVID-19, please contact Krista Cooley at 202.263.3315 or kcooley@mayerbrown.com.

In addition, if you wish to receive regular updates on the range of the complex issues confronting businesses in the face of the novel coronavirus, please subscribe to our COVID-19 “Special Interest” mailing list.


1 For complete definitions of QRPC and Limited QRPC, please refer to Section D2-2-01 of the Fannie Mae Servicing Guide, Section 9102.3(b) of the Freddie Mac Seller/Servicer Guide, and Freddie Mac’s Bulletin 2020-10.

2 If a borrower had a COVID-19-related hardship, but was 31 or more days delinquent as of the effective date of the National Emergency declaration (March 1, 2020), and the servicer determines that the borrower can maintain the existing monthly contractual payment, the servicer may seek approval for COVID-19 Payment Deferral from Fannie Mae or Freddie Mac.

3 In general, a Flex Modification targets a 20 percent payment reduction while bringing the loan current by adding to the unpaid loan balance any past due amounts, including unpaid interest, real estate taxes, insurance premiums, and certain assessments paid on the borrower’s behalf to a third party, and extending the loan term and/or reducing the loan’s interest rate.

4 With regard to VA-guaranteed loans, on April 27, 2020, the VA issued Circular 26-20-10, Change 1, in which it expressly stated that “the Secretary has the authority to delegate the responsibility to an approved lender to close loans on an automatic basis. Any loan closed under this authority is considered guaranteed as of the date of loan closing.” As a result, there is no gap in time between loan closing and issuance of the guaranty for VA-guaranteed loans.

5 Freddie Mac’s guidance additionally provides that the borrower must be performing under the repayment plan (i.e., no missed payments) and that the three payments must have been consecutive.

6 Freddie Mac’s guidance additionally provides that the borrower must be performing under the loss mitigation plan (i.e., no missed payments).

7 For the purposes of this policy, Fannie Mae and Freddie Mac define “current” to mean that the borrower has made all mortgage payments due in the month prior to the note date of the new transaction no later than the last business day of that month.

As rumored, the Consumer Financial Protection Bureau (“CFPB”) is proposing to revise its general qualified mortgage definition by adopting a loan pricing test. Specifically, under the proposal, a residential mortgage loan would not constitute a qualified mortgage (“QM”) if its annual percentage rate (“APR”) exceeds the average prime offer rate (“APOR”) by 200 or more basis points. The CFPB also proposes to eliminate its QM debt-to-income (“DTI”) threshold of 43%, recognizing that the ceiling may have unduly restrained the ability of creditworthy borrowers to obtain affordable home financing. That would also mean the demise of Appendix Q, the agency’s much-maligned instructions for considering and documenting an applicant’s income and liabilities when calculating the DTI ratio.

The CFPB intends to extend the effectiveness of the temporary QM status for loans eligible for purchase by Fannie Mae or Freddie Mac (the “GSE Patch”) until the effective date of its revisions to the general QM loan definition (unless of course those entities exit conservatorship before that date). That schedule will, the CFPB hopes, allow for the “smooth and orderly transition” away from the mortgage market’s persistent reliance on government support.

Background

Last July, the CFPB started its rulemaking process to eliminate the GSE Patch (scheduled to expire in January 2021) and address other QM revisions. For the past five years, that Patch has solidified the post-financial crisis presence by Fannie Mae and Freddie Mac in the market for mortgage loans with DTIs over 43%. The GSE Patch was necessary, the CFPB determined, to cover that portion of the mortgage market until private capital could return. The agency estimates that if the Patch were to expire without revisions to the general QM definition, many loans either would not be made or would be made at a higher price. The CFPB expects that the amendments in its current proposal to the general QM criteria will capture some portion of loans currently covered by the GSE Patch, and will help ensure that responsible, affordable mortgage credit remains available to those consumers.

Adopting a QM Pricing Threshold

Although several factors may influence a loan’s APR, the CFPB has determined that the APR remains a “strong indicator of a consumer’s ability to repay,” including across a “range of datasets, time periods, loan types, measures of rate spread, and measures of delinquency.” The concept of a pricing threshold has been on the CFPB’s white board for some time, although it was unclear where the agency would set it. Many had guessed the threshold would be 150 basis points, while some suggested it should be as high as 250 basis points. While the CFPB is proposing to set the threshold at 200 basis points for most first-lien transactions, the agency proposes higher thresholds for loans with smaller loan amounts and for subordinate-lien transactions.

In addition, the CFPB proposes a special APR calculation for short-reset adjustable-rate mortgage loans (“ARMs”). Since those ARMs have enhanced potential to become unaffordable following consummation, for a loan for which the interest rate may change within the first five years after the date on which the first regular periodic payment will be due, the creditor would have to determine the loan’s APR, for QM rate spread purposes, by considering the maximum interest rate that may apply during that five-year period (as opposed to using the fully indexed rate).

Eliminating the 43% DTI Ceiling

Presently, for conventional loans, a QM may be based on the GSE Patch or, for non-conforming loans, it must not exceed a 43% DTI calculated in accordance with Appendix Q. Many commenters on the CFPB’s advanced notice of proposed rulemaking urged the agency to eliminate a DTI threshold, providing evidence that the metric is not predictive of default. In addition, the difficulty of determining what constitutes income available for mortgage payments is fraught with questions (particularly for borrowers who are self-employed or otherwise have nonstandard income streams). While the CFPB intended that Appendix Q would provide standards for considering and calculating income in a manner that provided compliance certainty both to originators and investors, the agency learned from “extensive stakeholder feedback and its own experience” that Appendix Q often is unworkable. Continue Reading

In a new era of double-digit unemployment resulting from the COVID-19 pandemic, it may be tough for a mortgage lender to predict the amount and stability of someone’s income in order to determine qualification for a home loan. Neither past nor even present levels of income may be reliable indicators of income levels going forward, at least in the short run or until the economic dislocations are substantially behind us. That is why Fannie Mae and Freddie Mac (the “government-sponsored enterprises,” or “GSEs”) recently issued enhanced documentation requirements and considerations for verifying and predicting the income of a self-employed applicant for a mortgage loan. While the GSEs’ documentation requirements apply via contract to approved lenders/sellers, whether those requirements will morph into legal requirements under the Dodd-Frank Act’s “ability to repay” requirements is something to watch in the coming months.

Revised GSE Underwriting Requirements for Eligible Loan Purchases

A determination of whether an applicant has the ability to repay a loan from his or her income or assets is a basic component of loan underwriting – as required both by federal (and sometimes state) law, and by a lender’s investors or insurers. In addition, federal regulations prohibit a lender of closed-end residential mortgage loans from relying on any income that is not verified by reliable documentation. Predicting whether that income will continue into the future takes skill when lending to self-employed borrowers under any circumstances, and is particularly tricky during this unique coronavirus economy. The now-waning government stay-at-home orders and other quarantining efforts may or may not have affected a particular borrower’s business operations, and the scale and duration of those effects going forward are difficult to predict.

In response to that uncertainty, on May 28, 2010 Fannie Mae and Freddie Mac issued guidance requiring that self-employed borrowers must submit a year-to-date (“YTD”) profit and loss statement (“P&L”) that reports business revenue, expenses and net income. Continue Reading

Many of you have read about the power of the president to invoke the Defense Production Act to acquire products or direct the activities of suppliers based on a finding that it is necessary for the federal government to intrude into the commercial market for national security reasons. When the federal government uses this authority to acquire, or direct the production of, supplies (such as ventilators, N95 masks, and pharmaceuticals in the COVID-19 pandemic context), it uses contracts and negotiates, on an expedited basis, prices and terms. Mortgage servicers perhaps would fare better if their services were subjected to the Defense Production Act in order to address the global pandemic’s adverse impact on residential mortgage borrowers. At least then, servicers could seek to negotiate fair and timely compensation and reimbursement of advances in connection with their necessary role in implementing the Congressional mandate to provide forbearance for up to one year to residential mortgage borrowers with “federally backed mortgage loans. Instead, mortgage servicers are required to shoulder the short-term financial burden of the natural consequences of providing forbearance to such residential mortgage borrowers without, in the views of many, the benefit of just compensation from the federal government.

This Of Special Interest provides more detail on servicing advance requirements and servicer compensation in the context of forbearance required to be provided under the CARES Act.

This article was first published in and is reproduced with the kind permission of HousingWire.

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The Consumer Financial Protection Bureau (“CFPB” or “Bureau”) suffered an embarrassing setback in federal district court earlier this week, when a federal district judge denied the Bureau’s motion for entry of a consent judgment on the grounds that the proper party had not consented to entry of the judgment on behalf of the defendants. Back in September 2017, shortly before former Director Richard Cordray left the agency, the Bureau filed a complaint along with a consent judgment against 15 student loan securitization trusts (the “Trusts”). The complaint alleged that the Trusts, through servicers and sub-servicers, engaged in unfair and deceptive practices in connection with servicing and collection of private student loans. The action was filed the same day that the Bureau entered into an administrative consent order with one of the Trusts’ successor sub-servicers, Transworld Systems, Inc.

Oddly, rather than also enter an administrative consent order against the Trusts, the Bureau instead filed a complaint and motion for approval of a consent judgment in federal district court. The Bureau’s motion for entry of the proposed consent judgment stated only that the Bureau moved for the Court to approve and enter the judgment, which was described as having been “executed by Plaintiff [the CFPB] and Defendants National Collegiate Student Loan Trusts [the Trusts]”. The proposed consent judgment was signed by two attorneys from the law firm McCarter & English, LLP (“M&E”), purportedly on behalf of the Trusts. The motion said nothing about any dispute regarding M&E’s authority to act on behalf of the Trusts.

Within days of the Bureau’s filings, a number of Trust-related parties intervened in the matter to argue against entry of the proposed consent judgment on various grounds. Among those grounds was that the Owner Trustee of the Trusts had not consented to entry of the proposed consent judgment (because it believed the terms of the judgment violated the terms of the Trust agreements), and that the Trusts could only act through the Owner Trustee. In addition, with respect to one of the Trusts, the Trust instruments provided that consent of the Note Insurer to the Trust was also required for the Trust to enter into such a settlement.

After a lengthy period of discovery and briefing, the district court ruled that under the governing Trust documents and governing Delaware law, the Owner Trustee was the only party with the authority to bind the Trusts. The court found that the beneficial owners of the Trusts had initially directed the Owner Trustee to execute the proposed consent judgment, but the Owner Trustee refused to do so on advice of counsel that the beneficial owners’ instruction was invalid under the Trust agreements. The beneficial owners then instructed M&E to execute the proposed consent judgment. But because the Owner Trustee had not acted for the Trusts, the court held that M&E did not have the authority to agree to the proposed consent judgment on behalf of the Trusts.

In addition, the court found that, with respect to one of the Trusts, consent from the Note Insurer to the Trust was also required in order to bind the Trusts. The court noted that “the CFPB admits as much” and goes on to quote from the CFPB’s brief noting that the Note Insurer’s “approval does not appear to have been given in this case.”

In light of these findings, the district court denied the Bureau’s motion to enter the proposed consent judgment.

It is rare for a court to reject a proposed settlement in an enforcement action that is allegedly consented to by the government and the defendant. Typically, the entry of such judgments is a rubber stamp. It is probably rarer still for a court to find that a government agency “settled” a matter with parties that lacked authority to do so. This embarrassing outcome for the Bureau leaves it with contested litigation on its hands in a matter that it sought to settle years ago. In addition to denying the Bureau’s motion for entry of the proposed consent judgment, the district court has ordered the CFPB to respond to a pending motion to dismiss on the grounds that the Trusts are not “covered persons” and therefore not subject to the prohibition on unfair, deceptive and abusive acts or practices (UDAAP) in the CFPB’s organic statute. The CFPB’s response to that motion is due June 19.

The European Banking Authority (the “EBA”) has recently published its report on the feasibility of a framework for simple, transparent and standardised (“STS”) synthetic securitisations (the “EBA Report”). The EBA Report follows a discussion paper published by the EBA on 24 September 2019 (the “EBA Discussion Paper”). We considered some of the key aspects of the EBA Discussion Paper in a previous legal update.

The EBA has reaffirmed its recommendations in the EBA Discussion Paper for the establishment of a cross-sectoral framework for STS synthetic securitisation, limited to balance-sheet securitisations, and that for any synthetic securitisation to be STS, it should meet the specified STS criteria for such securitisations.  In addition, the EBA has given further consideration to whether STS synthetic securitisations could benefit from differentiated regulatory treatment and has concluded that this could be justified for senior tranches subject to certain conditions.

In this Legal Update, we consider the proposals contained in the EBA Report, including the extent to which they diverge from the draft proposals in the EBA Discussion Paper.

Read the Legal Update here.

For more information about the topics raised in this Legal Update, please contact Merryn Craske on +44 20 3130 3029, Chris Arnold on +44 20 3130 3610, Harjeet Lall on +44 20 3130 3272 or Robyn Llewellyn on +44 20 3130 3990.

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On Friday, the United States Office of the Comptroller of the Currency (“OCC”) finalized a regulation regarding the “Permissible Interest on Loans that are Sold, Assigned, or Otherwise Transferred” by national banks and federal savings associations. Initially proposed in November 2019, the regulation provides that interest on a loan that is permissible under provisions of federal banking laws establishing the interest authority of national banks and federal savings associations is not affected by a sale, assignment, or transfer of the loan—effectively permitting subsequent holders of loans originated by OCC-regulated entities to take advantage of the originators’ “Interest Exportation Authority.” The rule will be effective 60 days after publication in the Federal Register.

The OCC’s action represents a long-awaited next step in the national fallout from the Second Circuit’s 2015 Madden v. Midland Funding decision, which called into question the ability of purchasers of bank-originated loans to continue to charge interest at lawfully contracted-for rates. In Madden, the Second Circuit determined that National Bank Act preemption standards that typically protect national banks and federal savings associations from the application of state laws that “significantly interfere” with full exercise of their banking powers under federal law did not prevent the application of state usury laws to a non-bank purchaser of a bank-originated extension of credit. Many industry participants disagreed with the Madden outcome, which they viewed as taking too narrow a view of federal preemption and disregarding non-preemption bases for concluding that a purchaser should be entitled to enforce a validly-originated loan according to its terms (the “valid-when-made” doctrine). Nevertheless, state regulators and private plaintiffs brought usury claims—some of which remain pending—against lending programs involving the sale of bank-originated loans in the years following the Madden decision. For example, last year, two class action lawsuits were filed against the credit card securitization programs of two national banks alleging that the securitization entities purchasing receivables from the national bank were not permitted to collect interest at the rate charged by the national banks under Madden. Addressing underlying policy concerns and ongoing Madden litigation/enforcement, the OCC is now codifying the valid-when-made doctrine as a matter of federal law for loans originated by national banks and federal savings associations, and justifying its rulemaking, in part, by establishing that several other bank powers (including the Interest Exportation Authority and separate powers to enter into contracts and to sell, assign, or transfer loans) combine to support the proposition that the permissibility of the interest rate on bank-originated loans is not affected by subsequent transfers. The move follows industry efforts to mitigate Madden’s adverse effects on lending programs, including lobbying efforts by the Structured Finance Association through a task force for which Mayer Brown attorneys were among the co-chairs.

The OCC’s rule is a positive development for those seeking regulatory certainty for the secondary market in bank-originated loans and defending Madden claims. However, there are still important issues to be resolved before Madden and related litigation can be put to rest for good. First, the OCC’s rule may be challenged by state regulators or private plaintiffs, such that we may not have a final answer on its validity or scope for some time. Second, the Federal Deposit Insurance Corporation (“FDIC”) is still in the process of finalizing a companion proposal that would apply to loans originated by state-chartered, FDIC-insured banks, and that would address not only a “Madden fix,” but also broader issues as to the interest-related authorities of state banks. Now that the OCC has acted, one would expect the FDIC to act in relatively short order, though the breadth of the FDIC’s rulemaking requires some additional analysis by the FDIC.

Finally, we note that neither the OCC rule nor the FDIC proposal would address the related-but-distinct “true lender” issue (i.e., whether, in any given program involving a bank loan being acquired by a non-bank entity, the bank is the true lender such that the Interest Exportation Authority applies in the first place). While there have been attempts to reach legislative or regulatory resolutions to the “true lender” issue in the years since Madden, those efforts have not yet resulted in any changes to federal law that would clarify standards that should be applied to determine the true lender in litigation or enforcement against bank partnership programs.

Notwithstanding open questions, the OCC’s rule makes it clear that the lawful interest rate does not change when a purchaser acquires a loan originated by a national bank or federal savings association. Purchasers have the authority to charge interest at rates that were permissible for the originator; and state regulators, private plaintiffs, and courts should accept that the authority to sell a loan that retains its contracted-for interest rate after sale is a banking power recognized under federal law.

On May 20, 2020, the Federal Reserve Bank of New York (“FRBNY” or the “Fed”) announced the first subscription date, June 17, 2020, in connection with the Term Asset-Backed Securities Loan Facility (“TALF 2020”). The Fed also issued revised Frequently Asked Questions (“FAQs”) and the new Master Loan and Security Agreement (“MLSA”) for the program, along with other updated forms and documents. On May 26, 2020, the Fed again released revised FAQs and a revised issuer/sponsor certification, as further discussed below.

This Legal Update replaces our prior Legal Update published May 18, 2020, and provides a comprehensive summary of the current FAQs, MLSA and related TALF 2020 materials released to date.

Key Highlights in Recent Fed Releases

  • The first TALF loan subscription date will be June 17, 2020, with a settlement date of June 25, 2020;
  • Going forward, the Fed expects to provide two subscription dates per month, each available to all eligible asset classes;
  • Eligible NRSROs have been expanded to include DBRS and Kroll, as long as at least one qualifying rating is received from S&P, Moody’s or Fitch;
  • The forms for TALF borrower certifications as to inadequate credit accommodations, solvency and conflicts of interest have been provided on the TALF website, with further guidance in the FAQs;
  • Details on collateral review, issuer/sponsor certifications, auditor assurances and SBA loan documentation have been provided in the FAQs and in related forms on the TALF website;
  • The Fed updated its Borrower Due Diligence Policy and Conflicts of Interest Policy with specific guidelines and requirements, including with respect to due diligence on Material Investors and Control Persons of Borrowers, as well as the required contents of Conflicts of Interest Plans; and
  • Operational subscription and closing mechanics have been provided, including detailed timing and delivery requirements for all parties.

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For more information about the topics raised in this Legal Update, please contact James J. AntonopoulosAmanda L. BakerChristy L. FreerJulie A. GillespieCarol A. HitselbergerMelissa L. KilcoyneStuart M. LitwinLindsay M. O’NeilEric M. ReillyJan C. StewartRyan Suda or Angela M. Ulum.

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