This memorandum summarizes the Senate Bill 896 entitled the “Helping Families Save Their Homes Act of 2009” (the “Act”) which passed the United States Senate on May 6, 2009, and the United States House of Representatives on May 19, 2009.1 The Act was signed into law as Public Law 111-22 by President Obama on May 20, 2009. The Act contains many sweeping changes that will significantly affect the mortgage lending industry. The Act is particularly noteworthy because, among other things, it amends the federal Truth-in-Lending Act (“TILA”) to create a safe harbor from liability for servicers, and other parties, in connection with entering loan modifications and other loss mitigation plans. Importantly, the Act also amends TILA to create a controversial new disclosure requirement that must be provided to borrowers by purchasers and assignees of residential mortgage loans in the secondary mortgage market.
Additionally, the Act changes the existing HOPE for Homeowners Program (the “HOPE Program”), and the procedures for obtaining and maintaining approval to participate in the Federal Housing Administration (the “FHA”) insured lending programs. The Act further institutes new foreclosure prevention initiatives for the FHA single-family loan program. Finally, the Act enacts new protections for bona fide tenants in instances where their residence has been foreclosed on by the owner’s secured creditor. These key sections of the Act are summarized in detail below. Note that the Act contains additional provisions that are not discussed herein. Again, the Act became effective on May 20, 2009.
I. Safe Harbor under Section 129A of TILA
The Act amends existing Section 129A of TILA, which was originally enacted by the Housing and Economic Recovery Act of 2008, to provide residential mortgage loan servicers with a safe harbor from liability in connection with entering “qualified loss mitigation plans” with borrowers. The Act also extends this safe harbor to any other person including a trustee, issuer, and loan originator, in their own capacity when they cooperate with the servicer in the implementation of a qualified loss mitigation plan.
A. Key Definition
Under the Act, a “qualified loss mitigation plan” means:
- A residential loan modification, workout, or other loss mitigation plan, including to the extent that the Secretary of the Treasury determines appropriate, a loan sale, real property disposition, trial modification, pre-foreclosure sale, and deed in lieu of foreclosure, that is described or authorized in guidelines issued by the Secretary of the Treasury or his designee under the Emergency Economic Stabilization Act of 2008;2 and
- A refinancing of a mortgage under the HOPE Program.
B. Details of Safe Harbor
The Act amends existing Section 129A of TILA to provide residential mortgage loan servicers with a safe harbor from liability in connection with loan modifications without regard to existing pooling and servicing agreements (“PSAs”).3 The existing Section 129A of TILA created a fiduciary duty for servicers to investors, but carefully carved-out instances in which different duties were created in PSAs. The Act now amends Section 129A of TILA and provides that notwithstanding any other provision of law, whenever a servicer of residential mortgages agrees to enter into a qualified loss mitigation plan with respect to 1 or more residential mortgages originated before the date of enactment of the Act, including mortgages held in securitization or other investment vehicles:4
- To the extent the servicer owes a duty to investors or other parties to maximize the net present value of the mortgages, the duty will be construed to apply to all investors and parties, and not to any individual party or group of parties; and
- The servicer will be deemed to have satisfied the duty to investors and other parties to maximize net present value if, before December 31, 2012, the servicer implements a qualified loss mitigation plan that meets the following criteria: (i) default on the payment of the mortgage has occurred, is imminent, or is reasonably foreseeable, as those terms are defined by guidelines issued by the Secretary of the Treasury or his designee under the Emergency Economic Stabilization Act of 2008; (ii) the mortgagor occupies the property securing the mortgage as his or her principal residence; and (iii) the servicer reasonably determined, consistent with the guidelines issued by the Secretary of the Treasury or his designee, that the application of the qualified loss mitigation plan to a mortgage or class of mortgages will likely provide an anticipated recovery on the outstanding principal mortgage debt that will exceed the anticipated recovery through foreclosure.
Please note that the language adopted in the final regulation while expansive, is not as sweeping as the provision adopted by the House, which explicitly declared that qualified modifications could be adopted notwithstanding any contractual provision to the contrary such as quantitative or qualitative limitations set forth in a pooling and servicing agreement.
A servicer that is deemed to be acting in the best interests of all investors or other parties under the Act will not be liable to any party who is owed a duty, and will not be subject to any injunction, stay, or other equitable relief to the party based solely upon the implementation by the servicer of a qualified loss mitigation plan. Further, under the Act, any person including a trustee, issuer, and loan originator, will not be liable for monetary damages or be subject to an injunction, stay, or other equitable relief, based solely upon the cooperation of the person with the servicer in order for the servicer to implement a qualified loss mitigation plan. Note that this safe harbor will not be construed as shielding liability of any servicer or other person (i.e., the trustee, issues, loan originator, etc.) for actual fraud in the origination or servicing of a loan or in the implementation of a qualified loss mitigation plan, or for the violation of a federal or state law, including any anti-predatory lending laws. The House amended the Senate version of the Act to add this exception to the safe harbor for fraudulent or other illegal activity on the part of servicers, and other parties.
While these new changes make it more difficult for investors in securitizations to litigate, object to, limit, or otherwise take issue with modifications in their pools, some classes of investors may be able to assert a claim in instances when an express contractual provision in the applicable pooling and servicing agreement (or loan sale agreement, as the case may be) expressly prohibits the suggested modification.
Finally, the Act requires that each servicer who engages in providing qualified loss mitigation plans regularly report its modification activities to the Secretary of the Treasury. Regulations will be promulgated under the Act that specify the timing, form, and content of the modification reporting.
II. New Secondary Market Disclosure under TILA
The Act also amends Section 131 of TILA by adding an important and controversial new disclosure requirement. In addition to the numerous other disclosures required by TILA, no later than 30 days after the date on which a mortgage loan5 is sold or otherwise transferred to a third party, the “creditor”6 that is the new owner or assignee of the mortgage must notify the borrower in writing of the following:
- 1.The identity, address, telephone number of the new creditor;
- The date of transfer;
- How to reach an agent or party having authority to act on behalf of the new creditor;
- The location of the place where transfer of ownership of the debt is recorded; and
- Any other relevant information regarding the new creditor.
Significantly, the Act also amends the civil liability provisions of TILA to provide borrowers with a private right of action against the assignee for noncompliance with this new disclosure requirement. A consumer would be able to recover actual damages, as well as statutory damages of no more than:
- 1.$4,000 in individual actions; or
- The lesser of $500,000 or 1% of a creditor’s net worth in a class action.
Note that this new disclosure is in addition to the mortgage servicing transfer disclosures, frequently referred to as the “Hello” and “Goodbye” letters, that are already required under the federal Real Estate Settlement Procedures Act (“RESPA”) when the servicing rights on a residential mortgage loan are transferred This amendment is clearly evident of the desire on Capitol Hill for more transparency in the secondary mortgage market. For servicing-released loan transfers, the new servicer would be the likely candidate to give the disclosure and would most likely provide it along with the RESPA-mandated “Hello Letter.” For servicing-retained transactions, either the existing servicer would give the notice on behalf of the new holder, or the new holder itself would have to send the disclosure.
Further, please note that this new disclosure specifically identifies the holder of the loan, something that is not required by the existing “Hello-Goodbye” RESPA disclosures, and requires information regarding how the debt is recorded. For most interim purchasers of mortgage loans who will either resell them or securitize them, aside from perhaps registering the loans with the MERS system, these loan assignments are simply not recoded but are held in-blank pending further disposition. The fact that the interim purchaser now has to be identified to the borrower greatly enhances the litigation risk for the purchaser.
III. Changes to HOPE for Homeowners Program
The Act also makes the previously pledged and long awaited changes to the HOPE Program in an effort to make the initiative have a greater impact in stemming foreclosures nationwide. Specifically, the Act attempts to accomplish three major things: (i) it permits the reduction of the HOPE Program’s fees, (b) provides greater incentives for mortgage servicers to utilize the HOPE Program; and (c) reduces administrative burdens by making the requirements more consistent with standard Federal Housing Administration (“FHA”) practices. The Act also shifts the primary responsibility for running the HOPE Program to the Secretary of the United States Housing & Urban Development (the “Secretary” and “HUD”, respectively), and puts the previously established Board of the HOPE Program in a smaller advisory role. Note that in order to fund these changes to the HOPE Program additional money is allocated from the Emergency Economic Stabilization Act’s TARP Program to the Secretary.
A. Upfront & Annual Premium Changes
The Act amends the HOPE Program to provide that for each refinanced eligible mortgage the Secretary must collect a single premium payment at the time of insurance in an amount up to 3 percent. The previously requirements mandated that the Secretary collect the full 3 percent. This amendment allows the Secretary to lower the upfront mortgage insurance premium fee on loans refinanced under the HOPE Program. The Act also amends the HOPE Program to provide that for each refinanced eligible mortgage the Secretary must collect an annual premium in an amount equal to not more than 1.5 percent. The previously requirements mandated that the Secretary collect the full 1.5 percent. This amendment allows the Secretary to lower the annual insurance premium fee on loans refinanced under the HOPE Program.
In setting these new premiums, the Act charges the Secretary to consider and give due weight to the purpose of the HOPE Program (namely stemming foreclosures), and the financial health of the HOPE Program.
B. Appreciation Sharing
Additionally, the Act amends the appreciation sharing component under the HOPE Program by allowing the Secretary to collect up to 50 percent of appreciation on any property that was sold or otherwise disposed of, up to the appraised value of the home at the time when the mortgage being refinanced was originally made. The existing rules stated that the Secretary was entitled to the full 50 percent of the appreciation. Also, importantly, the Act amends the section to allow the Secretary to share any amounts of appreciation received with the holder of the existing senior mortgage, the holder of any existing subordinate mortgage, or both. This appreciation sharing was not permitted under the existing HOPE Program.
The Act further adds authority for the Secretary to establish payment to the servicer of the existing senior mortgage or existing subordinate mortgage for every loan insured under the HOPE Program, and to the originator of each new loan insured under the HOPE Program. These amendments were made with a view towards incentivizing more parties to participate in the HOPE Program, which has been underutilized thus far.
C. Conformity Changes to the HOPE Program
The Act amends the HOPE Program to mandate that the Secretary conform all documents, forms, and procedures for insuring mortgages under the HOPE Program to the standards in place for mortgages insured under the regular FHA single-family insurance program, to the extent possible. This change is meant to alleviate the burden on servicers and lenders under the HOPE Program, and make the HOPE Program more streamlined and uniform.
The Act also modifies the current debt-to-income affordability test to make it calculated at the time of the new loan application under the HOPE Program, and not as of March 1, 2008 (as it was previously required).
D. Wholesale/Bulk Refinances
Finally, the Act permits the Secretary to establish a structure and procedures for an auction in order to refinance eligible mortgages on a wholesale or bulk basis (if feasible).
IV. FHA Mortgagee Approval & Oversight
The Act also amends the National Housing Act to institute stricter requirements on FHA-approved mortgagees, among the other changes described below.
A. New Requirements for Mortgagees
The Act institutes new restrictions on who may become an FHA-approved mortgagee. In order to be eligible for approval by the Secretary, an applicant mortgagee must not be, and must not have any officer, partner, director, principal, manager, supervisor, loan processor, loan underwriter, or loan originator of the applicant mortgagee who is:
- Currently suspended, debarred, under a limited denial of participation (“LDP”), or otherwise restricted the HUD Mortgagee Review Board, or the HUD Civil Rights Division, or under similar provisions of any other Federal agency;
- Under indictment for, or has been convicted of, an offense that reflects adversely upon the applicant’s integrity, competence or fitness to meet the responsibilities of an approved mortgagee;
- Subject to unresolved findings contained in a HUD, or other governmental audit, investigation, or review;
- Engaged in business practices that do not conform to generally accepted practices of prudent mortgagees or that demonstrate irresponsibility;
- Convicted of, or who has pled guilty or nolo contendre to, a felony related to participation in the real estate or mortgage loan industry: (i) during the 7-year period preceding the date of the application for licensing and registration; or (ii) at any time preceding the date of application, if the felony involved an act of fraud, dishonesty, or a breach of trust, or money laundering;
- In violation of provisions of the S.A.F.E. Mortgage Licensing Act of 2008,7 or any applicable provision of state law; or
- In violation of any other requirement as established by the Secretary.
An approved mortgagee must immediately submit to the Secretary, in writing, notification of the occurrence of any of the following activities:
- The debarment, suspension or LDP, or application of other sanctions, other exclusions, fines, or penalties applied to the mortgagee or to any officer, partner, director, principal, manager, supervisor, loan processor, loan underwriter, or loan originator of the mortgagee pursuant to applicable provisions of state or federal law; and/or
- The revocation of a state-issued mortgage loan originator license issued pursuant to the S.A.F.E. Mortgage Licensing Act of 2008, or any other similar declaration of ineligibility pursuant to state law.
The Secretary must conduct a rulemaking to carry out these new requirements. The Act directs the Secretary to implement these new rules no later than 60 days after the date of the enactment of the rules by notice, mortgagee letter, or interim final regulations, which will take effect upon their issuance.
B. New Advertising Requirements
The Act also implements new requirements for advertising by mortgagees. The Act requires that the Secretary, by regulation, require each approved mortgagee (i) to use the business name of the mortgagee that is registered with the Secretary in connection with all advertisements relating to the business of the mortgagee in the HUD mortgage insurance programs; and (ii) to maintain copies of all the advertisements and promotional materials, in the form and for the period as the Secretary requires by regulation.
These new advertising rules are likely in reaction to the large amount of lenders marketing their products and services under the auspices of the FHA and HUD, and by using FHA and HUD logos.
C. Expansion of Oversight by HUD
The Act provides that no later than 3 months after the date the Act is enacted, the Secretary must:
- Expand the existing process for reviewing new applicants for approval for participation in the mortgage insurance programs of the Secretary for mortgages on 1- to 4-family residences for the purpose of identifying applicants who represent a high risk to the Mutual Mortgage Insurance Fund; and
- Implement procedures that, for mortgagees approved during the 12-month period ending upon the date of enactment: (i) expand the number of mortgages originated by the mortgagees that are reviewed for compliance with applicable laws, regulations, and policies; and (ii) include a process for random reviews of the mortgagees and a process for reviews that is based on volume of mortgages originated by the mortgagees.
Clearly, Congress wants HUD to be more active in its supervision of HUD-approved mortgagees, especially because insured mortgages are being originated at greater volumes in the current market.
V. Foreclosure Prevention Measures in the FHA Single-Family Program
The Act also expands the ability of the FHA to promote and engage in foreclosure prevention in the single family loan program.
A. Loss Mitigation Compensation
The Act broadens the Secretary’s authority to compensate mortgagees for loss mitigation efforts. The Act allows the Secretary to pay insurance benefits to the mortgagee to recompense the mortgage for all or part of any costs of the mortgagee taking loss mitigation actions on loans that are facing imminent default. Previously, the Secretary could only pay insurance benefits for loss mitigation actions on loans that were already in default.
B. Partial Claims
The Act also amends the section regarding payments of partial claims by HUD to mortgagees that are then applied to the underlying mortgage. The existing law used to limit these partial claim payments to only mortgages that were already in default, but the Act expands coverage to mortgages that face imminent default. Under the Act, the Secretary may establish a program for payment of a partial claim to a mortgagee that agrees to apply the claim amount to payment of a mortgage on a 1- to 4-family residence that is in default or faces imminent default, as defined by the Secretary via regulation.
The Act also alters the terms of the partial claim payments by HUD that are applied to the underlying mortgage. Under the Act, any payment of a partial claim to a mortgagee must be made in the sole discretion of the Secretary and on terms and conditions acceptable to the Secretary, except that:
- The amount of the payment must be in an amount determined by the Secretary, not to exceed an amount equivalent to 30 percent of the unpaid principal balance of the mortgage and any costs that are approved by the Secretary;
- The amount of the partial claim payment must first be applied to any arrearage on the mortgage, and may also be applied to achieve principal reduction;
- The borrower must agree to repay the amount of the insurance claim to the Secretary upon terms and conditions acceptable to the Secretary;
- The Secretary may permit compensation to the mortgagee for lost income on monthly payments, due to a reduction in the interest rate charged on the mortgage;
- Expenses related to the partial claim or modification may not be charged to the borrower;
- Loans may be modified to extend the term of the mortgage to a maximum of 40 years from the date of the modification; and
- The Secretary may permit incentive payments to the mortgagee, on the borrower’s behalf, based on successful performance of a modified mortgage, which must be used to reduce the amount of principal indebtedness.
The Secretary may pay the mortgagee, from the appropriate insurance fund, in connection with any activities that the mortgagee is required to undertake concerning repayment by the borrower of the amount owed to the Secretary.
C. Assignment of Mortgages to HUD
The Act also broadens the existing authority for assignment of an insured mortgage to HUD, and encourages loan modifications. The Secretary may now promote loan modifications for eligible delinquent mortgages or mortgages facing imminent default through the payment of insurance benefits and assignment of the mortgage to the Secretary and the subsequent modification of the terms of the mortgage. The Secretary may pay insurance benefits for a mortgage without reduction for any amounts modified, but only upon the assignment, transfer, and delivery to the Secretary of all rights, interest, claims, evidence, and records with respect to the mortgage by the mortgagee. Under the Act, the Secretary may accept assignment of a mortgage only if:
- The mortgage is in default or facing imminent default;
- The mortgagee has modified the mortgage or qualified the mortgage for modification sufficient to cure the default and provide for mortgage payments the borrower is reasonably able to pay at interest rates not exceeding current market interest rates; and
- The Secretary arranges for servicing of the assigned mortgage by a mortgagee (which may include the assigning mortgagee).
After modification of a mortgage, the Secretary may provide HUD insurance for the mortgage. The Secretary may subsequently: (i) re-assign the mortgage to the mortgagee under terms and conditions as are agreed to by the mortgagee and the Secretary; (ii) act as a Government National Mortgage Association (“Ginnie Mae”) issuer, or contract with an entity for that purpose, in order to pool the mortgage into a Ginnie Mae security; or (iii) re-sell the mortgage in accordance with any program that has been established for purchase by the federal government of insured HUD mortgages, and the Secretary may coordinate standards for interest rate reductions available for loan modification with interest rates established for the purchase.
The Secretary may require the existing servicer of a mortgage assigned to the Secretary to continue servicing the mortgage as an agent of the Secretary during the period that the Secretary acquires and holds the mortgage for the purpose of modifying the terms of the mortgage, provided that the Secretary compensates the existing servicer appropriately, consistent with HUD single-family guidelines. If the mortgage is resold, the Secretary may provide for the existing servicer to continue to service the mortgage or may engage another entity to service the mortgage.
The Secretary may implement these amendments made by the Act through notice or mortgagee letter.
VI. Congress’ Statement on a Foreclosure Moratorium
In the Act, Congress states that mortgage holders, institutions, and mortgage servicers should not initiate a foreclosure proceeding or a foreclosure sale on any homeowner until the foreclosure mitigations provisions, like the Act’s new amendments to the HOPE Program, and President Obama’s Homeowner Affordability and Stability Plan have been implemented and determined to be operational by the Secretary of HUD and the Secretary of the Treasury. However, if a mortgage holder, institution, or mortgage servicer reaches a loan modification agreement with a homeowner under the auspices of the FHA before any plan referred to above takes effect, the moratorium will cease to apply to that institution as of the effective date of the loan modification agreement. Congress clarifies that this moratorium should only apply to a borrower’s first lien that secures their principal dwelling.
In this Congressional statement in the Act, any homeowner who has their foreclosure proceeding or sale barred from being instituted, continued, or consummated in light of this moratorium should not, with respect to any property securing such mortgage, destroy, damage, or impair such property, allow the property to deteriorate, or commit waste on the property. The homeowner should also respond to reasonable inquiries from a creditor or servicer during the period during which such foreclosure proceeding or sale is barred.
This section does not amend any existing federal law, but rather simply announces Congress’ position on foreclosures and explicitly suggests a moratorium until the federal programs are implemented by lenders and/or servicers. It is unclear at this point in time what the effect of this Congressional position will be in the market, and whether it will have any affect on foreclosure timelines nationwide.
VII. Tenant Foreclosure Protections
The Act contains a section that creates the “Protecting Tenants at Foreclosure Act of 2009” (the “Tenant Act”). The Tenant Act provides strong protections for bona fide tenants in instances where their residence is facing foreclosure.
Significantly, the Tenant Act states that in the case of any foreclosure on a federally-related mortgage loan8 or on any dwelling or residential real property after the date of enactment of the Act, any immediate successor in interest in the property pursuant to the foreclosure must assume the interest subject to:
- The provision, by the successor in interest of a notice to vacate to any bona fide tenant at least 90 days before the effective date of the notice; and
- The rights of any bona fide tenant, as of the date of the notice of foreclosure: (i) under any bona fide lease entered into before the notice of foreclosure to occupy the premises until the end of the remaining term of the lease, except that a successor in interest may terminate a lease effective on the date of sale of the unit to a purchaser who will occupy the unit as a primary residence, subject to the receipt by the tenant of the 90 day notice; or (ii) without a lease or with a lease terminable at will under state law, subject to the receipt by the tenant of the 90 day notice, except that nothing will affect the requirements for termination of any federal or state-subsidized tenancy or of any state or local law that provides longer time periods or other additional protections for tenants.
For purposes of the Tenant Act, a lease or tenancy will be considered bona fide only if:
- The mortgagor, or the child, spouse, or parent of the mortgagor, under the contract is not the tenant;
- The lease or tenancy was the result of an arms-length transaction; and
- The lease or tenancy requires the receipt of rent that is not substantially less than fair market rent for the property, or the unit’s rent is reduced or subsidized due to a Federal, State, or local subsidy.
The effect of the Tenant Act is to allow bona fide tenants to remain in their residences, pursuant to their lease following a foreclosure, except when: (i) the successor in interest or purchaser will occupy the property as their primary residence; or (ii) there is no lease; or (iii) the lease is terminable at will under state law. In the cases where: (i) the successor in interest or purchaser will occupy the property as their primary residence; (ii) there is no lease; or (iii) the lease is terminable at will under state law, the tenant must receive the notice to vacate at least 90 days before the lease may be terminated.
The Tenant Act sunsets on December 31, 2012, and all its provisions are ineffective after that date.