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Mortgage Foreclosure Moratorium – Potential Pitfalls and Mitigating Litigation Risks

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) became law. In addition to providing relief to various industries and businesses, the $2 trillion stimulus package placed several temporary moratoriums, prohibitions, and limitations of the rights of lenders and servicers of federally-backed loans. These include moratoriums on foreclosures and evictions, instituted mandatory forbearance obligations, and significantly relaxed loan modification requirements. These mandates may create a variety of litigation risks for distressed and delinquent loans. This Alert provides a brief outline of the obligations created by the CARES Act, identifies some potential litigation concerns, and discusses certain considerations for minimizing risk of exposure.

Key Provisions of the CARES Act

  Initial Moratorium on residential foreclosures
 
  Temporary 60-day moratorium on foreclosures or foreclosure-related evictions
 
  Applies to all “Federally backed loans”
 
  This includes HUD, FHA, VA, Dept of Ag, Fannie Mae/Freddie Mac owned or securitized
 
  Includes initiating “any foreclosure process,” which appears to include all stages of judicial and non-judicial foreclosures or post-foreclosure evictions
 
  Forbearance Mandate
 
  For single-family borrowers, 180 days immediately, plus additional 180 days upon request of borrower
 
  Forbearance available regardless of delinquency status
 
  For multi-family borrowers, 30 days immediately, plus right to two additional 30-day extensions
 
  Forbearance only available if borrower current as of February 1, 2020
 
  Servicers have an affirmative obligation to provide notice of forbearance right to borrowers
 
  Additional Eviction Moratorium
 
  120-day moratorium on evictions for federally-backed properties
 
  Applies to all property insured, guaranteed, supplemented, protected, or assisted in any way by HUD, FHA, VA, Dept of Ag, Fannie Mae/Freddie Mac, or under USDA Rural Development Voucher Demonstration Program, Violence Against Women Act of 1994
 
  Loan Mods
 
  Loan mods may be made for COVID-19 hardship without categorization as “troubled debt restructuring” until the earlier of 60 days after expiration of national emergency order or December 31, 2020
 
  State Regulations and Private Loan Guidelines This Alert only discusses NY and CA guidelines as examples of additional state action related to the COVID-19 pandemic. Lenders and servicers may wish to be diligent in reviewing any state-issued COVID-19 mandates, prohibitions, regulations, and guidelines for any state where they service debts
 
  New York
 
  Governor Cuomo issued Executive Order 202.9, which mandated that any bank subject to DFS to grant 90-day forbearances
 
  The New York Department of Financial Services (NYDFS) issued regulations regarding application of executive order
 
  Does not apply to New York-licensed branches of agencies of foreign banks
 
  Only applies to residential mortgages
 
  Although NYDFS guidance encourages not charging interest or providing negative credit reporting during forbearance period, there are no explicit prohibitions
 
  California
 
  Governor Newsom issued an executive order authorizing local governments to impose limits of residential and commercial foreclosures and evictions resulting from COVID-19 hardship
 
  Governor Newsom also reached an agreement with numerous financial institutions to provide additional relief
 
  90-day mortgage forbearances, with no interest or fees during forbearance period and no negative credit reporting
 
  60-day moratorium on initiating foreclosure sales or evictions

Potential Litigation Pitfalls

The broad scope and application of the CARES Act creates a variety of potential litigation risks. Though each case should be evaluated on an individual basis, these are some issues lenders and servicers should be aware of with pending matters: 

  Ongoing foreclosures
 
  There is no exception in the law for ongoing foreclosures
 
  Scope of application
 
  Not limited to just FHA loans, includes loans owned OR securitized by Fannie Mae or Freddie Mac
 
  Prohibition on charging penalties, interest, fees, etc. during forbearance period
 
  Prohibition on demanding additional evidence of financial hardship for forbearance requests
 
  After expiration of foreclosure moratorium, may wish to review and, if necessary, adjust default calculations used for trustee’s sale notices and judicial foreclosure motions
 
  There may be an uptick in debt validation letters and qualified written requests after moratorium and forbearance periods expire
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About this Author

Michele Stocker, Greenberg Traurig Law Firm, Ft Lauderdale, Finance and Litigation Law Attorney
Shareholder

Michele L. Stocker is Co-Chair of the Consumer Financial Services Litigation Practice and is a commercial litigator with a broad range of experience representing clients in the financial services industry including regional and national banks, loan servicers, consumer finance companies, mortgage bankers, credit card issuers, debt buyers and third-party debt collectors.

Concentrations

  • Telephone Consumer Protection Act

  • Contested mortgage foreclosures

  • ...
954-768-8271
Jacob Bundick, Greenberg Traurig Law Firm, Houston, Las Vegas, Finance Law Litigation Attorney
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Jacob D. Bundick focuses his practice on litigation, operational matters, and regulatory compliance for the residential mortgage industry. His clients include mortgage loan originators, servicers, and investors in individual and class consumer claims, bankruptcy adversary cases, and contested foreclosures. Jacob advises and represents corporate and institutional clients in federal and state court and various arbitration proceedings regarding claims arising under the Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Housing Act, Fair Credit Collection Practices Act, and those based on state fair lending, collection and deceptive trade practices. He also advises and represents corporate and institutional clients in copyright and trademark infringement matters, commercial contract disputes, construction and insurance matters, and real estate transactions.

702-599-8038
Michael Hogue, Greenberg Traurig Law Firm, San Francisco and Las Vegas, Finance and Construction Law Litigation Attorney
Of Counsel

Michael R. Hogue focuses his practice on construction law, particularly medium and large-scale commercial urban development. Michael represents parties at all stages of the commercial development life cycle, from initial design and contract negotiation to pre and post-completion dispute resolution and litigation. He has represented large commercial owners and developers in real estate and construction litigation in both state and federal court, including claims for breach of contract, fraud, delay claims, negligence, defective design, failure to inspect, and construction defects. Michael...

702-792-3773