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Law360 (April 1, 2020, 5:27 PM EDT )
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| Adam Swanson |
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| Jessie Bonaros |
With businesses forced to close throughout New York and reports that an estimated half million New Yorkers may soon be unemployed, the residential mortgage default rate will skyrocket. The number of people facing financial hardship as a result of the unprecedented COVID-19 pandemic will be vast.
The goal of the 90-day forbearance is to give New Yorkers time to recover and regroup before a one-month default snowballs into a statewide foreclosure crisis for New York that might also depress property values.
However, shifting too much of the burden to the banking industry could negatively impact small and local institutions, forcing them to sell their residential loan portfolios to generate liquidity and avoid risk.
Cuomo's executive order is an attempt to balance these concerns and interests. The order modified — effective from March 21 until April 20 — Section 39(2) of the state banking law to provide that a refusal by any regulated entity to grant forbearances to these impacted parties for a period of 90 days is deemed an unsafe and unsound business practice.
Banks Must Establish Means for Making Forbearance Requests
On March 24, the DFS superintendent issued an emergency regulation — Title 3 of New York Codes, Rules and Regulations Part 119 — requiring banks to establish a mechanism for consumer borrowers to apply for a 90-day mortgage payment forbearance by April 7 and respond to any applications within 10 days.
The Part 119 regulation applies to regulated institutions, defined as "any New York regulated banking organization as defined under New York Banking Law and any New York regulated mortgage servicer entity subject to the authority of the Department." Under state banking law, banking organizations includes "all banks, trust companies, private bankers, savings banks, safe deposit companies, savings and loan associations, credit unions and investment companies."
The Part 119 regulation implements the 90-day forbearance requirements called for under Executive Order 202.9, subject to safety and soundness requirements of the regulated institution, and makes the requirements effective until April 20, unless extended further.
More specifically, regulated institutions must:
- Email, publish on their website, mass mail or similarly communicate broadly to customers by April 7 how to apply for COVID-19 relief and provide contact information.
- Develop clear and easy-to-understand criteria, reasonably tailored to the requirements of the regulated institution, for individuals to qualify for COVID-19 relief.
- Communicate promptly to an applicant if an application omits any information reasonably necessary to process the application about what information is missing and how the applicant can provide the information.
- Process and respond to requests for COVID-19 relief no later than 10 business days after receiving all information reasonably required to process the application.
- Develop and implement procedures for the expedited processing of applications for COVID-19 relief for any individual who (1) reasonably establishes an exigent circumstance, and (2) requests the expedited processing of the individual's application.
- Communicate all determinations on applications for COVID-19 relief to the applicant in writing where reasonably feasible and warranted. If the application is granted, the communication must state what, if anything, the applicant needs to do to secure the relief. If the application is denied, the communication must state the basis for denial and provide a statement that the applicant may file a complaint with the DFS if the applicant believes the application was wrongly denied.
- Maintain copies of all files relating to the implementation of the Part 119 regulation for a period of seven years from the date of creation, and make such files available for inspection at the time of DFS's next examination of the regulated institution.
Implications of Denying Borrower Forbearance
To determine if a regulated institution has engaged in an unsafe or unsound practice by denying an application for COVID-19 forbearance relief, the DFS will consider the following: (1) the adequacy of the means established to process such forbearance applications; (2) the thoroughness of the review afforded to the application; (3) payment history, creditworthiness, and the financial resources of the borrower; (4) the application of any state and federal laws or regulations that would prohibit the grant of a forbearance; and (5) the safety and soundness requirements of the regulated institution.
It is not clear whether the borrower has a private right of action to enforce a violation of the Part 119 regulation. Generally, under New York law, to be:
entitled to sue for a statutory violation, the plaintiff must demonstrate: (1) that he or she is a member of the class for whose benefit the statute was enacted, (2) that the recognition of a private right of action would promote the legislative purpose, and (3) that the creation of such a right would be consistent with the legislative scheme.
Factor 1 seems to be clearly met in any claim by a consumer borrower. Factor 2 would have to be examined given that the forbearance requirement emanates from the executive order and is not a legislative enactment. Factor 3, however, operates against private enforcement and may provide some comfort to regulated entities.
Section 39(2) of the banking law provides for enforcement by the DFS superintendent. Section 39(2) provides that the superintendent may "issue an order directing the discontinuance of such unauthorized or unsafe and unsound practices, and fixing a time and place at which [a regulated entity] may voluntarily appear before him or her to present any explanation in defense."
Section 44 of the banking law sets forth certain fines and penalties for violations of Chapter 2, which includes Section 39(2), which the superintendent may recover "in a proceeding after notice and a hearing."
Thus, a court may find that enforcement of Section 39(2) of the banking law is the exclusive jurisdiction of the DFS superintendent. Since the executive order amends Section 39(2) — and the Part 119 regulation was issued under the DFS powers in the banking law and under Cuomo's executive order — a court may find that enforcement of the 90-day forbearance requirement is in the exclusive jurisdiction of the superintendent also.
Regulatory Exemptions
The Part 119 regulation does not apply to — and does not affect any mortgage loans made, insured, or securitized by any agency or instrumentality of the U.S., any government-sponsored enterprise, or a Federal Home Loan Bank — or affect the rights and obligations of any lender, issuer, servicer or trustee of such obligations, including servicers for the Government National Mortgage Association.
The Part 119 regulation also does not apply to any commercial mortgage or any other loan not described in the regulation.
Conclusion
Regulated institutions subject to the Part 119 regulation now face the practical challenge of implementing and carrying out its requirements. These institutions — likely subject to the same shutdown orders as other businesses — are already operating under strained conditions.
Part 119 gives these institutions less than 10 business days to: (1) create an application and application process; (2) identify and solicit the objective information necessary to review each applicant; (3) establish qualifying criteria; (4) develop an expedited processing procedure; (5) make the application readily available to customers; and (6) communicate all this information to consumer borrowers.
After establishing the program and procedures, the regulated institutions will then face the challenge of processing and responding to countless applications for 90-day forbearance relief within 10 business days — all with a reduced or remote staffing model.
The lost revenue from 90 days of nonpayment will also be substantial — especially to smaller community banks. While most regulated institutions will be able to financially carry this burden for 90 days, the DFS advised that it may renew the Part 119 regulation resulting in the extension of the 90-day forbearance period if "faced with a longer emergency." In that case, the financial impact on the mortgage industry in New York could be severe, even crippling.
Adam M. Swanson is a partner and Jessie D. Bonaros is an associate at McCarter & English LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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