Lynn Woosley is a Senior Director with Treliant. She is a seasoned executive with extensive risk management experience in regulatory compliance, consumer and commercial credit risk, credit and compliance risk modeling, model governance, regulatory change management, acquisition due diligence, and operational risk in both financial services and regulatory environments.
The national pandemic response produced a long list of relief measures for consumers and businesses. To handle the high demand for small business loans, forbearance, and other accommodations, lenders and loan servicers also got some respite from regulatory requirements. As many of these provisions are rolled back, what should lenders and servicers be doing now?
Recapping Relief Measures
COVID relief targeted both borrowers and lenders as Congress passed the CARES Act and the American Rescue Plan Act, and as regulatory agencies implemented their responses. Among other changes:
- Homeowners with loans backed by Fannie Mae, Freddie Mac, the Federal Housing Administration, Veterans Administration, or U.S. Department of Agriculture could receive up to 18 months of forbearance.
- Federally backed multifamily loans were also eligible for forbearance periods if the borrowers provided tenant protections.
- To mitigate the spread of COVID-19 within crowded shared living quarters and to minimize homelessness, the Centers for Disease Control and Prevention (CDC) implemented a prohibition of evictions for nonpayment of rent.
- The CARES Act mandated that furnishers making pandemic-related borrower accommodations report the credit obligation as current during the accommodation period if the borrower was current before the accommodation. For borrowers who were delinquent prior to the accommodation, the furnisher cannot advance the delinquency stage.
- The Small Business Administration (SBA) Paycheck Protection Program (PPP) loan was created, and the Economic Injury Disaster Loan (EIDL) program was expanded.
- Banks were temporarily relieved from some of the requirement to classify modified debt as a Troubled Debt Restructuring (TDR).
- Federal financial services regulators offered financial institutions temporary relief from some regulatory requirements.
While lenders were granted regulatory relief to handle the operational and compliance burdens of providing this much-needed support to consumers and businesses, it was only temporary.
In late March, the Consumer Financial Protection Bureau (CFPB) rescinded several policy statements related to pandemic regulatory relief and withdrew as a signatory to the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus and the Interagency Statement on Appraisals and Evaluations for Real Estate Related Financial Transactions Affected by the Coronavirus.
“Companies should have had sufficient time to adapt to the pandemic and should now be able adequately to comply with the law and respond to enforcement actions or supervisory activities without the flexibility afforded under the statement,” the CFPB said in announcing the changes.
The net effect of the agency’s changes is to:
- Require quarterly reporting under the Home Mortgage Disclosure Act for institutions subject to such reporting;
- Restore reporting related to credit card and prepaid account information under Regulations Z and E;
- Resume citing violations of Regulation V, Regulation Z, and E-SIGN; and
- Recommence filings under Regulation J.
These changes are coming as the CFPB is also warning mortgage servicers to be prepared for a surge in homeowners needing assistance as their pandemic relief expires, stating that, “Unprepared is unacceptable.”1
Four Ways to Prepare for What Comes Next
Now that the end to relief is coming, lenders and servicers will face a new set of challenges. You should analyze loans and accommodations as described in detail below, in these four key areas:
- Assisting homeowners as forbearance ends;
- Identifying the consumer protection risks of your COVID response;
- Analyzing your response’s fair lending and servicing impacts; and
- Reviewing PPP accuracy.
Assisting Homeowners as Forbearance Ends
If you are a mortgage servicer, you must prepare for a significant influx of borrowers whose forbearance periods are ending. In the time that remains, servicers should proactively contact borrowers and begin working with them to prevent avoidable foreclosures. Servicers should also evaluate whether current staffing levels are sufficient for expected volumes.
Identifying Consumer Protection Risks
Review your borrower accommodation activities to ensure there are no undetected consumer protection risks. It may be helpful to consider the lessons learned from the CFPB’s COVID-19 Prioritized Assessments. In the agency’s Winter 2021 Supervisory Highlights,2 the CFPB identified several consumer protection risks related to loan accommodations:
- In both mortgage and non-mortgage accommodations, lenders and servicers had provided inaccurate information to consumers regarding the length of accommodation periods, interest accrued, due dates, and amounts owed.
- Some mortgage servicers provided inaccurate information regarding post-forbearance repayment options.
- Some mortgage servicers implied consumers had to pay fees to receive a forbearance.
- In mortgage and non-mortgage accommodations, lenders or servicers sometimes failed to process requests for assistance in a timely fashion, causing borrowers to incur unwarranted delinquencies, fees, negative credit reporting, or account closures.
- Servicers sometimes sent collection and default notices, assessed late fees, or initiated foreclosures for borrowers whose mortgages were enrolled in CARES Act forbearance plans.
- In some cases, mortgage servicers enrolled borrowers in unwanted forbearances, or enrolled qualified borrowers in less favorable plans than CARES Act forbearances.
- Student loan servicers sometimes used less favorable natural disaster forbearance provisions instead of CARES Act forgiveness and interest relief provisions.
- Some student loan servicers provided borrowers incorrect forbearance offers, provided inaccurate information regarding rehabilitation or forgiveness programs; or failed to inform borrowers of all their accommodation options.
- When borrowers in a forbearance plan made voluntary payments, some student loan servicers allocated those payments incorrectly.
- Some lenders and servicers processed preauthorized funds transfers improperly by either suspending them prematurely or continuing to make withdrawals for loans in forbearance or deferral.
When reviewing your pandemic accommodations, pay particular attention to credit bureau furnishing and dispute resolution. The Winter 2021 Supervisory Highlights noted that furnishers often reported accommodations incorrectly under the CARES Act. In addition, some consumer reporting companies and furnishers failed to investigate disputes in a timely fashion. Credit card lenders sometimes failed to resolve billing disputes within regulatory timeframes.
Analyzing Fair Lending and Servicing
Consider the fair lending and fair servicing impacts of your COVID response. If you answer “yes” to any of the following questions, your pandemic response may warrant further review for fair and responsible banking risks:
- If your institution originated PPP loans, did you prioritize underserved and rural small businesses?
- Does a geographic distribution analysis of PPP lending show gaps in lending patterns that could be indicative of redlining?
- When considering your borrower accommodations, were they offered equally to all demographic groups and geographies that you serve?
- Are there gaps in the geographic distribution of borrower assistance or servicing outcomes on a prohibited basis?
- Did borrowers complain that they did not understand the accommodation plans offered to them?
- Did servicers try to steer borrowers into reinstatements (also called lump-sum repayments) at the end of CARES Act forbearances?
Reviewing PPP Accuracy
PPP lenders should consider reviewing loan and forgiveness applications to ensure that requests are appropriately documented and that data is accurate and complete. Since there were numerous PPP rule changes, it may be useful to ensure that loans complied with the rules in place at the time they were evaluated.
In addition, given the widespread news reports of PPP fraud, lenders should consider validating borrower eligibility. If there are problem loans in your portfolio, it is generally better for you to identify those loans yourself, rather than having the SBA or another regulator discover them. Should your review indicate potential fraud, your customer due diligence processes may need to be enhanced.
In short, now is a great time to inoculate your institution’s pandemic response against compliance errors and regulatory criticism.