Moratoriums on foreclosures due to COVID-19 ended this summer, prompting concerns of a shock similar to the 2008 housing crisis. While there are numerous differences between today and the previous recession, financial service providers can stay a step ahead by arming themselves with a few lessons learned.
The COVID-19 pandemic has presented the financial services industry with unique challenges on a scale not seen since the years immediately preceding — and following — the most recent foreclosure crisis, which began more than a decade ago in 2008.
In the months leading up to that foreclosure crisis, the financial services industry was faced with implementing new processes related to loss mitigation efforts that were complicated by ever-changing guidance. Aided by a bad economy and never-before-seen rates of foreclosure, those circumstances resulted in unprecedented enforcement actions by regulatory entities, the largest of which was the National Mortgage Settlement (NMS),[1] a $25 billion consent order involving the federal government, attorneys general from 49 states[2] and the District of Columbia, and the five largest mortgage servicers at the time: Bank of America, Citi, JPMorgan Chase, Ally (formerly known as GMAC), and Wells Fargo.
Over the last 18 months, the COVID-19 pandemic has brought about different, but still unprecedented, circumstances for the financial services industry. The financial services industry has again been called on to be nimble in implementing new processes involving loss mitigation, foreclosure actions and borrower outreach, with guidance and requirements changing constantly, all while employees work from home. Now, as COVID-19-related foreclosure moratoriums expire,[3] the financial services industry, and its regulators, are bracing to see if a repeat of that 2008 foreclosure crisis is on the horizon. As the expected rates of foreclosure actions increase,[4] the industry can examine and learn from the regulatory actions taken during the 2008 foreclosure crisis, particularly by state attorneys general, to prepare for and avoid those same regulatory enforcement actions.
NEW POST: If Prices Fall, Mortgage Foreclosures Will Rise https://t.co/f28uLDNhrT pic.twitter.com/4MmpyXGUpR
— New York Fed (@NewYorkFed) September 8, 2021
Will 2008 Prove a Model for 2021? Here’s How State Attorneys General Will Likely Operate.
State attorneys general are tasked with enforcing the laws of their state, but they do not have unlimited resources. As a result, state attorneys general must choose how best to use those resources, and many are undoubtedly focused on the financial services industry and protection of consumers, particularly regarding liens on what is likely the consumer’s largest asset – the home. That focus is particularly true in the years since the 2008 foreclosure crisis and will only increase as foreclosures resume in the coming months. By reviewing the 2008 foreclosure crisis, and the reaction thereto, we can develop a better understanding of how state attorneys general decide where to allocate resources to prepare for any potential actions in the coming months.
Borrower Complaints
First, state attorneys general have a myriad of opportunities to gather data to identify areas of focus. Their first tool to gather data is by reviewing borrower complaints, and the responses to those complaints, submitted through their own offices. Generally speaking, attorneys general are elected officials and, as a result, will want to ensure they are addressing their constituents’ concerns. Complaints directly from borrowers provide attorneys general with firsthand information about the areas concerning their constituents the most. Following the 2008 foreclosure crisis, ensuring a robust borrower complaint process was clearly a priority. The NMS specifically required that servicers “designate one or more management level employees to be the primary contact for the Attorneys General” and other regulators “for communication regarding complaints and inquiries from individual borrowers.”[5]
In addition to complaints borrowers submit directly to their offices, state attorneys general have access to the complaint database maintained by the Consumer Financial Protection Bureau (CFPB). The CFPB provides access to the data for each complaint, which allows the state attorneys general to perform their own analytics, reviews and summaries that identify the top products and issues of concern for each state.[6] State attorneys general can, and likely will, utilize data from the complaints and the responses to those complaints to identify issues to target for any investigations or reviews of compliance with COVID-19-related requirements.
Media Reports
Second, state attorneys general can review media reports, including reports on consent orders or other enforcement actions initiated by federal agencies or other states. In 2008, media reports routinely reported on issues with “dual tracking” loss mitigation applications, the placement of lender-placed insurance, and allegations of “robo-signing” of affidavits and other legal documents. These topics, which were likely also reflected in borrower complaints, became allegations in the complaint[7] filed in conjunction with the NMS and were addressed by specific servicing standards created by the NMS.[8] Today, in addition to negative media coverage, state attorneys general can review reports and other compilations of data published by the CFPB and other sources. For example, in August 2021, the CFPB published its report entitled “Mortgage Servicing COVID-19 Pandemic Response Metrics: Observations from Data Reported by Sixteen Servicers,” which describes data on six different topics[9] and highlights potential areas of concern.[10] The media is full of data compilations on delinquency rates, forbearance rates, deferral rates, and other pertinent information that is available for review. Simply put, state attorneys general have access to more data and information than they ever have before, and they can obtain that information through quick and easy online research.
Subpoenas and Investigative Demands
Third, state attorneys general can typically obtain data and information directly from the source – the company itself – by issuing a civil investigative demand or subpoena. A state attorney general may issue these demands because of areas of concern identified during a review of borrower complaints or other sources of information. At times, state attorneys general will issue the same demands to multiple companies to identify industry-wide patterns and practices, or the demand may be more targeted. The initial NMS was quickly followed by additional consent orders with individual servicers; those consent orders largely were based on the same types of allegations and contained the same types of terms. This is not uncommon – when a state attorney general identifies an issue with one company, that same attorney general will certainly determine if that same issue exists with other companies.
Inter-State Collaboration
Fourth, attorneys general will collaborate and share information, to the extent allowed by state and federal law. One such example is the standing Consumer Protection Committee of the National Association of Attorneys General (NAAG).[11] The Consumer Protection Committee specifically is tasked with “facilitating cooperation among the various attorneys general Consumer Protection Divisions through open dialogue and communication.”[12] While its mission is broader than consumer protection issues involving the financial services industry,[13] as foreclosures (and, as a result, borrower complaints) increase, we expect this committee and the NAAG as a whole to share information and strategies on how to respond. In addition to information sharing, this collaboration can increase the leverage each state attorney general has against an individual company. The NMS provides an explicit example of this collaboration. We have no reason to believe that collaboration will stop.
When State Attorneys Bring Enforcement
Once they obtain their data and information, state attorneys general will scrutinize it to identify any violations of their respective state laws. At the time of the NMS, the state attorneys general generally referred to violations of state laws prohibiting unfair and deceptive acts and practices (UDAP laws).[14] Generally, these UDAP laws, at their core, prohibit any action that is unfair or deceptive and provide very broad definitions of what actions can meet these standards. As a result, while the allegations identified in the complaint to the NMS may not have violated a specific state statute, the state attorneys general were able to identify those actions as unfair or deceptive, and thus, a violation of state law. Today, many states have enacted specific state statutes to require or prohibit certain actions, many of which were originally addressed in the NMS. These new state laws provide state attorneys general with even more enforcement opportunities. But, to this day, the UDAP laws remain a powerful tool for state attorneys general. Any violations of federal law, such as the CARES Act, or failure to comply with agency guidelines, create a risk of a violation of a UDAP law. Oftentimes, state attorneys general can rely on these UDAP laws to provide the authority to investigate and enforce any areas where they believe a company’s response to the pandemic was contrary to a state executive order, rule, regulation, guideline from Fannie Mae, Freddie Mac, FHA, VA, USDA, or federal executive order or law. As a result, the breadth of these UDAP laws makes it critical for industry participants to be proactive in identifying and remedying any issues as early as possible.
To be proactive, financial services companies must obtain, review and react to the same information as state attorneys general. As discussed above, problems identified with one company can easily become problems industry-wide. Borrower complaints, media reports, including consent orders issued against other companies, data compilations, and the website for each state attorney general are among the best sources to identify risks within your own company. Companies that review this information should be well positioned to anticipate and prepare for any civil investigative demands or subpoenas; provide robust responses to borrowers’ complaints; and, if needed, remedy potential issues with their own practices as early as possible.
Finally, companies must ensure that their COVID-19-related policies and procedures are clear, in writing, and updated continuously as new rules and requirements are issued. We understand that the industry was forced to move as quickly as possible to adjust to each new rule, regulation and guidance and implement new policies and procedures. If the company was not able to reduce those new procedures to writing at the time, do so now. A civil investigative demand or subpoena from a state attorney general will generally request a written response and any supporting documentation. Be particularly cognizant of how the processes and procedures have changed as the pandemic continues and ensure those policies and procedures have been updated to reflect the same. This pandemic, and its related rules, regulations, and guidance, has evolved over the last 18 months, and it will be beneficial to be able to show how your company’s processes and procedures evolved with it.
In conclusion, the financial services industry weathered a foreclosure crisis in 2008 that resulted in long-lasting changes to the industry and the largest consent orders in history. The industry can now learn from those experiences as it enters a period where it can expect a large increase in foreclosure actions and increased regulatory scrutiny as a result of the COVID-19 pandemic. By understanding how state attorneys general reacted to the prior foreclosure crisis and being proactive now, the industry can exit this tumultuous time and potentially avoid the enforcement actions of the past.
[1] See United States v. Bank of America, N.A., et al. (Case No. 1:12-CV-00361-RMC).
[2] Every state except for Oklahoma joined the National Mortgage Settlement. Id.
[3] FHFA has ended the foreclosure moratorium for Freddie Mac and Fannie Mae loans though a moratorium on REO evictions that was extended through September 30, 2021. FHFA Extends COVID-19 Foreclosure and REO Eviction Moratoriums | Federal Housing Finance Agency (the last extension of the foreclosure moratorium); FHFA Extends COVID-19 REO Eviction Moratorium Through September 30, 2021 | Federal Housing Finance Agency (extending the REO evictions moratorium only through September 30, 2021).
[4] The CFPB’s foreclosure-related amendments to Regulation X, which became effective on August 31, 2021, and will remain in place through December 31, 2021, generally require mortgage servicers to continue to hold foreclosure activity for certain borrowers until those borrowers have either been reviewed for loss mitigation or have not responded to outreach requirements over a 90-day period. See generally, 12 C.F.R. §§ 1024.39; 1024.41. As a result, we expect the largest increase in foreclosure actions to be in the first half of 2022.
[5] See Exhibit A; Case No. 1:12-CV-00361.
[6] Consumer Complaint Database | Consumer Financial Protection Bureau (consumerfinance.gov).
[7] Complaint, Case No. 1:12-CV-00361.
[8] Exhibit A; Case No. 1:12-CV-00361.
[9] Servicing Portfolios; Call Metrics; COVID-19 Hardship Forbearance Enrollments; COVID-19 Hardship Forbearance Exits; Delinquency; and Borrower Profiles
[10] Mortgage Servicing COVID-19 Pandemic Response Metrics: Observations from Data Reported by Sixteen Servicers | Consumer Financial Protection Bureau (consumerfinance.gov).
[11] Consumer Protection Committee | National Association of Attorneys General (naag.org).
[12] Id.
[13] Id.
[14] Consent Order; Case No. 1:12-CV-00361.
Robert Maddox is a partner in the Birmingham, Ala., and Washington, D.C., offices of Bradley Arant Boult Cummings LLP and a leader of both the firm’s State Attorneys General and Regulators Practice Group and the Banking and Financial Services Practice Group. In the past decade, he has handled more national/multi-state state attorneys general investigations and related consent judgments than any attorney in the United States. He represents clients before the CFPB, DOJ, OCC, FRB, HUD, SEC and multiple state regulatory agencies, including banking, finance and insurance agencies. He can be reached at 
Anna Craft is a partner in the Birmingham office of Bradley Arant Boult Cummings LLP. She advises financial services companies on a variety of complex compliance and regulatory matters. Her practice has focused on the negotiation and implementation of consent judgments with various regulators and the proactive implementation of changes to business practices that are required as a result of new statutes and regulations. She can be reached at 
