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FHFA announces CFPB final rule
On June 29, FHFA announced that Fannie Mae and Freddie Mac (GSEs) will not be permitted to make a first notice or filing for foreclosure that would be prohibited by the CFPB’s “Protections for Borrowers Affected by the COVID-19 Emergency Under the Real Estate Settlement Procedures Act (RESPA), Regulation X” final rule prior to the rule’s effective date. As previously covered by a Buckley Special Alert, the Bureau’s final rule, which takes effect August 31, obligates a servicer to continue specifying, with substantial detail, any loss mitigation options that may help borrowers resolve their delinquencies. GSEs are required to follow the CFPB’s new protections a month before the CFPB rule takes effect, which will protect borrowers from foreclosure and provide certainty for servicers regarding GSE expectations. According to FHFA, “[s]ervicers will still be able to make a notice or filing for foreclosure on abandoned properties and those that had a foreclosure referral prior to March 2020, along with certain other exceptions.” FHFA’s action eliminates the gap between the expiration of its current moratoriums for single family foreclosures and real estate owned (REO) evictions that will expire on July 31 (covered by InfoBytes here) and the effective date of the CFPB’s rule, which is a month later.
Supreme Court says FHFA unconstitutionally structured, leaves net worth sweep intact
On June 23, the U.S. Supreme Court issued a split opinion in Collins v. Yellen (previously Collins v. Mnuchin), holding that FHFA’s leadership structure, which only allows the president to fire the FHFA director for cause, is unconstitutional. The Court’s determination follows its decision in Seila Law LLC v. CFPB (covered by a Buckley Special Alert), in which the Court held that a similar clause in the Dodd-Frank Act that requires cause to remove the director of the CFPB violates the constitutional separation of powers. In Collins, the Court stated, “[a] straightforward application of our reasoning in Seila Law dictates the result here. The FHFA (like the CFPB) is an agency led by a single Director, and the [Housing and Economic Recovery Act of 2008 (Recovery Act)] (like the Dodd-Frank Act) restricts the President’s removal power.”
Last July, the Court agreed to review the U.S. Court of Appeals for the 5th Circuit’s en banc decision (covered by InfoBytes here) issued in a 2016 lawsuit brought by a group of Fannie Mae and Freddie Mac (GSEs) shareholders against the U.S. Treasury Department and FHFA. The shareholders claimed that the Recovery Act, which created the agency, violated the separation of powers principal because it only allowed the president to fire the FHFA director “for cause,” and that FHFA acted outside its statutory authority when it adopted a third amendment to the Senior Preferred Stock Purchase Agreements, which replaced a fixed-rate dividend formula with a variable one requiring the GSEs to pay quarterly dividends equal to their entire net worth minus a specified capital reserve amount to the Treasury Department (known as the “net worth sweep”). Following the en banc rehearing, the appellate court reaffirmed its earlier decision that FHFA’s structure violates the Constitution’s separation of powers requirements. However, the opinions differed on the appropriate remedy, with nine judges concluding that the remedy should be severance of the for-cause provision, not prospective relief invalidating the net worth sweep, stating that “the Shareholders’ ongoing injury, if indeed there is one, is remedied by a declaration that the “for cause” restriction is declared removed. We go no further.”
While the split Court agreed with the 5th Circuit that the agency’s structure violates the Constitution’s separation of powers, the justices left intact the net worth sweep. “Although the statute unconstitutionally limited the President’s authority to remove the confirmed Directors, there was no constitutional defect in the statutorily prescribed method of appointment to that office. As a result, there is no reason to regard any of the actions taken by the FHFA in relation to the third amendment as void,” Justice Samuel Alito wrote for the majority. “It is not necessary for us to decide—and we do not decide—whether the FHFA made the best, or even a particularly good, business decision when it adopted the third amendment,” the Court added. “[W]e conclude only that under the terms of the Recovery Act, the FHFA did not exceed its authority as a conservator, and therefore the anti-injunction clause bars the shareholders’ statutory claim.” The Court remanded the case to determine “what remedy, if any, the shareholders are entitled to receive on their constitutional claim.”
Various concurring and dissenting opinions were issued as well. While concurring, Justice Elena Kagan noted that “[s]tare decisis compels the conclusion that the FHFA’s for-cause removal provision violates the Constitution. But the majority’s opinion rests on faulty theoretical premises and goes further than it needs to.” Justice Sonia Sotomayor dissented, writing: “[t]he Court has proved far too eager in recent years to insert itself into questions of agency structure best left to Congress. In striking down the independence of the FHFA Director, the Court reaches further than ever before, refusing tenure protections to an Agency head who neither wields significant executive power nor regulates private individuals.”
Shortly after the ruling, President Biden appointed Sandra L. Thompson as acting FHFA Director, effective immediately. Thompson has served at FHFA since March 2013 as Deputy Director of the Division of Housing Mission and Goals where she oversaw FHFA’s housing and regulatory policy, capital policy, financial analysis, fair lending, as well as all mission activities for the GSEs and the Federal Home Loan Banks. Former Director Mark Calabria issued a statement noting his respect for the Court’s decision and the authority of the president to remove the FHFA director.
Waters urges foreclosure moratoria extension
On June 21, Chairwoman of the House Financial Services Committee Maxine Waters (D-CA) sent a letter to several federal agencies “urging them to administratively extend their moratoria on foreclosures at least until the CFPB is able to finalize and implement its pandemic recovery mortgage servicing rule.” As previously covered by a Buckley Special Alert, the Bureau issued a proposed rule in April that would broadly halt foreclosure initiations on principal residences from August 31, 2021 until 2022, and change servicing rules to promote consumer awareness and processing of Covid-relief loss mitigation options. The proposed rule also would create new and detailed obligations for communicating with borrowers to ensure they are aware of their loss mitigation options for pandemic-related hardships.
The letter, which was sent to the secretaries of HUD, the Department of Agriculture, the Department of Veterans Affairs, as well as the director of FHFA and the acting director of the CFPB, stresses that many homeowners will face the risk of foreclosure when the emergency federal foreclosure mortarium expires on June 30, as the Bureau’s proposed rule is not expected to take effect until August. This gap in critical protections, Waters cautions, “could result in servicers expediting efforts to initiate foreclosures before a final rule takes effect, especially for borrowers who have not been able to access forbearance options during the pandemic[.]” The letter requests not only an extension of the current foreclosure moratoriums but also urges the Bureau to finalize the rule (or issue an interim final rule if necessary) as soon as possible to prevent unnecessary foreclosures and ensure homeowners have the opportunity to finalize affordable loan modifications. Additionally, Waters urges the Bureau to alert servicers of the consequences should they, among other things, fail to notify homeowners about their post-forbearance options, unnecessarily delay reviewing loan modification applications, engage in improper foreclosure-related activity, unlawfully discriminate against borrowers, or provide inaccurate, adverse information to credit reporting agencies.
FHFA further extends foreclosure moratorium
On June 24, FHFA announced that Fannie Mae and Freddie Mac (GSEs) will extend their moratorium on single-family foreclosures and real estate owned (REO) evictions until July 31. The current moratoriums were set to expire June 30. The foreclosure moratorium applies only to homeowners with a GSE-backed, single-family mortgage, and the REO eviction moratorium applies only to properties that have been acquired by the GSEs through foreclosure or deed-in-lieu of foreclosure transactions. Additional details on Covid-19 forbearance plan terms and payment deferrals are covered by InfoBytes here and here. The extensions are implemented in Fannie Mae Lender Letter LL-2021-02 and Freddie Mac Guide Bulletin 2021-23. The same day, the CDC also announced an extension of its current moratorium on residential evictions for non-payment of rent through July 31, also stating in the announcement that “this is intended to be the final extension of the moratorium.”
1st Circuit holds Fannie, Freddie not “government actors” despite FHFA control
On June 8, the U.S. Court of Appeals for the 1st Circuit stated that Fannie Mae and Freddie Mac (GSEs) can continue non-judicial foreclosures in states that permit them, holding that the GSEs are not “government actors” despite being controlled by FHFA. According to the opinion, the plaintiffs obtained mortgages that were later sold to Fannie Mae. After the borrowers defaulted on their loans, Fannie Mae, consistent with Rhode Island law, conducted non-judicial foreclosure sales of the properties. The plaintiffs filed suit, arguing that Fannie Mae and FHFA (which acts as Fannie Mae’s conservator) are government actors and that the nonjudicial foreclosure sales violated their Fifth Amendment procedural due process rights. The district court disagreed, however, and granted the defendants’ motion to dismiss on the grounds that “because FHFA stepped into Fannie Mae’s shoes as its conservator and its ability to foreclose was a ‘contractual right inherited from Fannie Mae by virtue of its conservatorship,’ FHFA was not acting as the government when it foreclosed on the plaintiffs’ mortgages and was not subject to the plaintiffs’ Fifth Amendment claims.” The court further determined that FHFA’s conservatorship over Fannie Mae did not make Fannie Mae a government actor subject to the plaintiffs’ constitutional claims because FHFA “does not exercise sufficient control” over the GSE. The plaintiffs appealed, arguing, among other things, that the FHFA’s nearly 13-year conservatorship of the GSEs makes its control permanent and renders them governmental actors.
On appeal, the appellate court concluded that in its role as conservator, “FHFA is not a government actor because it has ‘stepped into the shoes’ of the private GSEs” and assumed all of their private contractual rights, including the right to perform non-judicial foreclosures. The appellate court also refuted the plaintiffs’ argument that FHFA’s 13-year conservatorship made its control permanent, pointing out that the “housing and mortgage financial markets are highly complex, as are the various indicators of their financial health, so the fact that FHFA has maintained the conservatorship for almost thirteen years does not mean that the government’s control is permanent.” As such, because the GSEs are not government actors they are also not subject to the plaintiffs’ due process claims, the appellate court concluded.
CFPB publishes rulemaking agenda
On June 11, the Office of Information and Regulatory Affairs released the CFPB’s spring 2021 rulemaking agenda. According to a Bureau announcement, the information released represents regulatory matters the Bureau is “currently pursuing under interim leadership pending the appointment and confirmation of a permanent Director.” Any changes made by the new permanent director will be reflected in the fall 2021 rulemaking agenda. Additionally, the Bureau indicates that it plans to continue to focus resources on actions addressing the adverse impacts to consumers due to the ongoing Covid-19 pandemic, and highlighted an interim final rule issued in April that addresses certain debt collector conduct associated with the CDC’s temporary eviction moratorium order (covered by InfoBytes here). The Bureau will also continue to take concrete steps toward furthering the agency’s “commitment to promoting racial and economic equity.”
Key rulemaking initiatives include:
- Small Business Rulemaking. Last September, the Bureau released a Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA) outline of proposals under consideration, convened an SBREFA panel last October, and released the panel’s final report last December (covered by InfoBytes here and here). The Bureau reports that it anticipates releasing a notice of proposed rulemaking (NPRM) for the Section 1071 regulations this September to “facilitate enforcement of fair lending laws as well as enable communities, governmental entities, and creditors to identify business and community development needs and opportunities of women-owned, minority-owned, and small businesses.”
- Consumer Access to Financial Records. The Bureau notes that it is considering rulemaking to implement section 1033 of Dodd-Frank in order to address the availability of electronic consumer financial account data. The Bureau is currently reviewing comments received in response to an Advance Notice of Proposed Rulemaking (ANPR) issued last fall regarding consumer data access (covered by InfoBytes here).
- Property Assessed Clean Energy (PACE) Financing. As previously covered by InfoBytes, the Bureau published an ANPR in March 2019 seeking feedback on the unique features of PACE financing and the general implications of regulating PACE financing under TILA. The Bureau notes that it continues “to engage with stakeholders and collect information for the rulemaking, including by pursuing quantitative data on the effect of PACE on consumers’ financial outcomes.”
- Automated Valuation Models (AVM). Interagency rulemaking is currently being pursued by the Bureau, Federal Reserve Board, OCC, FDIC, NCUA, and FHFA to develop regulations for AVM quality control standards as required by Dodd-Frank amendments to FIRREA. The standards are designed to, among other things, “ensure a high level of confidence in the estimates produced by the valuation models, protect against the manipulation of data, [ ] avoid conflicts of interest, require random sample testing and reviews,” and account for any other appropriate factors. An NPRM is anticipated for December.
- Amendments to Regulation Z to Facilitate LIBOR Transition. As previously covered by InfoBytes, the Bureau issued an NPRM in June 2020 to amend Regulation Z to address the sunset of LIBOR, and to facilitate creditors’ transition away from using LIBOR as an index for variable-rate consumer products. A final rule is expected in January 2022.
- Reviewing Existing Regulations. The Bureau notes in its announcement that while it will conduct an assessment of a rule implementing HMDA (most of which took effect January 2018), it will no longer pursue two HMDA proposed rulemakings previously listed in earlier agendas related to the reporting of HMDA data points and public disclosure of HMDA data. Additionally, the Bureau states that it finished a review of Regulation Z rules implementing the Credit Card Accountability Responsibility and Disclosure Act of 2009 and plans to publish any resulting changes in the fall 2021 agenda.
The Bureau’s announcement also highlights several completed rulemaking items, including (i) a final rule that formally extended the mandatory compliance date of the General Qualified Mortgage final rule to October 1, 2022 (covered by InfoBytes here); (ii) proposed amendments to the mortgage servicing early intervention and loss mitigation-related provisions under RESPA/Regulation X (covered by a Buckley Special Alert) (the Bureau anticipates issuing a final rule before June 30, when the federal foreclosure moratoria are set to expire); and (iii) a proposed rule (covered by InfoBytes here), which would extend the effective date of two final debt collection rules to allow affected parties additional time to comply due to the ongoing Covid-19 pandemic (the Bureau plans to issue a final rule in June on whether, and for how long, it will extend the effective date once it reviews comments).
FHFA studies the evolution of mortgage risk
On May 20, FHFA released a comprehensive dataset on ways mortgage risk has evolved over time. The revised staff working paper, “A Quarter Century of Mortgage Risk,” provides an account of the evolution of default risk for newly originated home mortgages over the past 25 years. As FHFA explained in its press release, reviewing a comprehensive dataset containing “aggregated results using more than 200 million purchase-money and refinance mortgages from 1990 to 2019” has led researchers to “challenge some long-held assumptions about the impetus of the 2008 financial crisis.” Key findings presented in the working paper include: (i) new data shows that increased mortgage risk in the 1990s “was a precursor to the market failing in 2008,” whereas “previous research could not identify the fact that a refinance boom from 2000-2003 masked the mortgage risk accumulation”; (ii) prior to the 2008 financial crisis, “mortgage risk accumulated across the full spectrum of borrowers, not just those with low credit scores as some have previously asserted”; (iii) “[m]ortgage rate spreads between ‘not risky loans’ and ‘very risky loans’” tightened for portfolio and private-label securities mortgages in the mid-2000s—an indication of expanded credit supply directly prior to the Great Recession; and (iv) during the current era, “sustained house price appreciation is leading mortgage risk to increase.”
9th Circuit: Federal Foreclosure Bar preempts Nevada HOA law, maintaining Fannie Deed of Trust
On May 5, the U.S. Court of Appeals for the Ninth Circuit affirmed summary judgment in favor of a mortgage servicer in an action asserting claims arising from a homeowners’ association’s (HOA) nonjudicial foreclosure on real property in Nevada. According to the opinion, Fannie Mae originally purchased the loan on the property (secured by a Deed of Trust), which was eventually assigned to the mortgage servicer. Following the homeowners’ failure to pay their HOA dues, a foreclosure sale was held, and the property was conveyed to a limited liability company. The mortgage servicer filed a quiet title suit against the company, and the district court granted summary judgment in its favor on the basis that the Federal Foreclosure Bar (which prohibits the foreclosure of FHFA property without FHFA’s consent) “prevented the extinguishment of Fannie Mae’s Deed.”
In agreeing with the district court, the 9th Circuit first rejected two threshold challenges raised by the company, holding that the mortgage servicer “properly and timely” raised its claims under the Federal Foreclosure Bar. Specifically, the appellate court determined that the mortgage servicer “presented ample evidence of its servicing relationship with Fannie Mae,” and that this relationship, along with authority delegated to Fannie Mae loan servicers to protect its mortgage loans, “was more than sufficient to establish” that the mortgage servicer was Fannie Mae’s loan servicer and, therefore “had the authority to assert the Federal Foreclosure Bar” in quiet title action. The 9th Circuit also concluded that the mortgage servicer filed the action within the applicable six-year statute of limitations. In holding that the Federal Foreclosure Bar preempted Nevada’s HOA law and prevented the extinguishment of Fannie Mae’s Deed of Trust, the appellate court noted, among other things, that the mortgage servicer demonstrated that Fannie Mae retained an enforceable interest in the loan at the time of the HOA foreclosure sale. The 9th Circuit rejected the company’s argument that the mortgage servicer “failed to produce a ‘signed writing’ evincing such interest as required by the Nevada statute of frauds.” According to the appellate court, given that the company “was not a party to the underlying loan agreement pursuant to which Fannie Mae acquired the loan,” the company could not raise the statute of frauds.
FHFA finalizes GSE resolution plan requirements
On May 3, FHFA published a final rule requiring Fannie Mae and Freddie Mac (GSEs) to develop “credible resolution plans” (also known as “living wills”) to facilitate their rapid and orderly resolution in the event FHFA is appointed receiver per the Housing and Economic Recovery Act of 2008. Similar to the living wills that other large financial institutions are required to develop under resolution planning rules issued by the Federal Reserve Board and the FDIC, the resolution plans will create a roadmap for preserving business continuity should the GSEs fail again. FHFA Director Mark Calabria stressed that the rule “helps create a stronger, more resilient housing finance system by protecting taxpayers and the mortgage market from harm.”
As previously covered by InfoBytes, last December FHFA published a notice of proposed rulemaking seeking to, among other things, implement liquidity and funding requirements for the GSEs. According to FHFA’s fact sheet, public input was incorporated into the final rule’s key components, which include the following requirements:
- The resolution planning process will start with the identification of core business lines.
- Initial resolution plans must be submitted “two years after the effective date of the final rule” with “subsequent resolution plans to be submitted every two years thereafter.”
- Resolution plans must include the following required and prohibited assumptions: (i) an assumption of severely adverse economic conditions; (ii) a prohibition on assuming that the U.S. government will provide or continue to provide “extraordinary support”; and (iii) the reflection of statutory provisions stating “that obligations and securities of the [GSE] issued pursuant to its charter are not guaranteed by the [U.S.] and do not constitute a debt or obligation of the [U.S.].”
- Resolution plans must identify “potential material weaknesses or impediments to rapid and orderly resolution as conceived in its plan,” along with any actions or steps to address the identified weaknesses or impediments.
- Resolution plans must ensure confidentiality of certain information but also make portions available to the public.
- Resolution plans will be reviewed by FHFA to identity whether additional information is needed, as well as any deficiencies or “shortcomings” (defined as supervisory concerns that do not rise to the level of “deficiencies”). Feedback will be provided along with an opportunity for resubmission.
Additionally, FHFA added a 12-month notification requirement to the final rule should the agency decide to alter the resolution plan submission date. FHFA also reserved the authority to further refine submission requirements. The final rule is effective 60 days after publication in the Federal Register.
FHFA announces refis for low-income borrowers
On April 28, the FHFA announced that Fannie Mae and Freddie Mac will implement a new refinance option for low-income borrowers with Enterprise-backed single-family mortgages. The option applies to eligible borrowers that (i) have an owner-occupied Enterprise-backed one-unit single-family mortgage; (ii) have income at or below 80 percent of the area’s median income; (iii) “have not missed a payment in the past six months, and no more than one missed payment in the past 12 months”; and (iv) do not have a mortgage with a loan-to-value ratio greater than 97 percent, a debt-to-income ratio above 65 percent, or a FICO score lower than 620. Under the new refinance option, lenders must provide both a minimum savings of at least $50 in the borrower’s monthly mortgage payment, and at least a 50-basis point decrease in the borrower’s interest rate. In addition, the new refinance choice includes “a maximum $500 credit from the lender for an appraisal if the borrower is not eligible for an appraisal waiver (the Enterprises will provide the lender a credit of $500 upon the loan’s sale to an Enterprise.)” The new option also includes “a waiver of the 50-basis point up-front adverse market refinance fee for borrowers with loan balances at or below $300,000.” As previously covered by Infobytes, the FHFA announced a new adverse market refinance fee of 50 basis points, or 0.5 percent, on certain refinance mortgages to cash-out and no cash-out refinance mortgages “except for Construction Conversion Mortgages that qualify for single-closing Interim Construction Financing and Permanent Financing,” which went into effect last September. According to FHFA Director Mark Calabria, “this new refinance option is designed to help eligible borrowers who have not already refinanced save between $1,200 and $3,000 a year on their mortgage payment.”