Loan Compliance Considerations with COVID-19

by Drew Young, Senior Manager

COVID-19 has caused dramatic change for consumers and businesses since landing on US shores in January of this year.  Perhaps one of the hardest hit industries is financial services.

For financial institutions of all shapes and sizes, business has changed dramatically. Perhaps for the better, institutions have embraced and leaned on technology in the face of not being able to meet the needs of their customers in a traditional face-to–face manner. The crisis fallout has caused disruptions and challenges for businesses involved in the mortgage origination process, including creditors, mortgage loan originators, attorneys, and real estate appraisers. Regulators at the top in Washington also realized some of the challenges that have come along with serving credit demands in the changed financial landscape. As such, they made some temporary adjustments to more stringent regulations in a concerted effort to allow institutions to still be able to provide their customers (both business and consumer) with much needed access to credit.  “The steps we are taking today will help consumers facing financial emergencies obtain access to mortgage credit faster,” stated CFPB Director Kathleen L. Kraninger.  “The pandemic is resulting in consumers facing various challenges, and our temporary and targeted solutions are intended to ensure that consumers receive the credit they need in a timely manner.”[1]

In realizing the critical role financial institutions play in providing access to credit, one of the first things that changed for quarterly Home Mortgage Disclosure Act (“HMDA”) reporters, was that on March 26,2020, the CFPB noted they don’t intend to cite an institution for not reporting their data quarterly.  The CFPB noted that at a later date, they would provide information as to when institutions subject to CFPB examination would have to resume compliance with the quarterly reporting expectation.[2]  Institutions should continue to be diligent in recording and collecting the data to be prepared for their annual submissions of the required HMDA data, but as of the publication of this article, the quarterly filing expectation is on pause.

The CFPB issued guidance that covered various scenarios in which a consumer’s request to access credit could be expedited.  This guidance should be seen as a boon for consumers and institutions alike because it indicates that financial institutions can focus their efforts and valuable resources on meeting a potential client’s financial needs.  In light of the COVID-19 Pandemic, the CFPB first addressed the application of certain provisions in the Regulation Z Right of Rescission Rules and the TILA-RESPA Integrated Disclosure Rule. The CFPB decided that “if a consumer determines his or her need to obtain funds due to the COVID-19 pandemic (1) necessitates consummating the credit transaction before the end of the TRID Rule waiting periods or (2) must be met before the end of the Regulation Z Rescission Rules waiting period, then the consumer has a bona fide personal financial emergency that would permit the consumer to utilize the modification and waiver provisions, subject to the applicable procedures set forth in the TRID Rule and Regulation Z Rescission Rules.”[3]  Knowing that some of the fallout from the pandemic has yet to be felt, institutions should continue to be mindful of these rules in providing customer assistance, but they should also be sure to thoroughly document when financial hardships felt by a consumer lead to relying on one of the exemptions above.  Internally, an institution’s procedures and risk assessments should be updated to reflect these changes, and credit memos or loan approval forms should always document the reasoning for deviations from the standard waiting periods.   Documentation should include the fact that the need is due to a bona fide financial emergency, that it is due to the COVID-19 pandemic, and that it necessitates the waiving of the traditional waiting periods.

In addition, stringent Flood Disaster Protection Act (“FDPA”) rules have been adjusted in an effort by the joint agencies to encourage financial institutions to assist borrowers in need of timely deferrals or modifications due to hardships caused by the pandemic. Banks that extend repayment terms, restructure existing loans, or ease terms for new loans in a manner consistent with sound banking practices, can contribute to the health of the local community and serve the long-term interests of the lending institution. Some of these loan payment changes or modifications normally trigger MIRE (make increase renew extend) event rules.  Though these rules have not been waived, the FDIC has noted that while institutions work diligently to assist COVID-19 affected borrowers, that in place of the traditional MIRE requirements an institution may: delay providing the traditional notice to borrower of special flood hazard area until after the COVID-19 emergency if a property is located in a Special Flood Hazard Area (SFHA) and informing consumers about the availability for special disaster relief assistance in the event of a flood. Prior to providing written notice, the lender may, at their discretion, choose to use another method to inform the borrower of this information (i.e. by phone or email); rely temporarily on a loan’s previous flood determination on file rather than obtain a new one during the COVID-19 pandemic and delay establishing an escrow account for any applicable loan until after the end of the COVID 19-pandemic.  FDIC examiners have even noted that, “under the FDIC’s discretionary examination authority, will not criticize lenders’ good faith flood insurance compliance efforts to accommodate borrowers in a safe and sound manner during the COVID-19 emergency.” [4]

Even though regulators have loosened some of the stringent requirements, financial institutions should have a system in place to ensure deferred HMDA, TILA, and Flood requirements are addressed as soon as reasonably practicable.  The concerted effort from the regulators is for the benefit of the consumer, to ease their access to much needed deferrals, modifications, or new credit.  As a safe and sound banking practice, institutions should remember to thoroughly document anytime a financial burden felt by the consumer leads to relying on one of the noted easements.  In addition, institutions should remember that these easements are temporary.

[1] https://www.consumerfinance.gov/about-us/newsroom/cfpb-paves-way-consumers-facing-financial-emergencies-access-mortgage-credit-quickly/

[2] https://www.consumerfinance.gov/policy-compliance/guidance/supervisory-guidance/statement-quarterly-reporting-home-mortgage-disclosure-act/

[3] https://files.consumerfinance.gov/f/documents/cfpb_tila-respa-integrated-disclosure_rescission-pandemic-interpretive-rule.pdf

[4] https://www.fdic.gov/coronavirus/faq-fi.pdf

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The information provided in this communication is of a general nature and should not be considered professional advice.  You should not act upon the information provided without obtaining specific professional advice. The information is subject to change as a result of evolving legislative developments and government guidance.