Each day new federal and state legislation are issued establishing new accommodations for borrowers due to COVID-19. The Cares Act has created many restrictions on lenders and how they can protect their own interests and enforce their rights. Failing to properly navigate the red tape could result in future liability litigation for lenders.
Before enforcing a mortgage default, a lender should consider whether a borrower’s default is attributable to COVID-19. Lenders should ask themselves whether acting would be consistent with the covenant of good faith and fair dealing given the effects of COVID-19, the industry response, and regulatory action.
The Cares Act has created an array of new claims borrowers could assert in a foreclosure. A key contract defense that will impact contractual performance and liability is a force majeure clause. This provision provides an excuse not to perform due to events outside the contractual parties’ control. COVID-19 may force courts to interpret force majeure clauses and their applicability to a lender’s obligations to perform while a borrower’s ability to perform remains “impossible.”
More and more borrowers are requesting loan modifications and forbearance plans due to Covid-19. Lenders must be very careful that they are considering the borrower’s application and supporting documents carefully. Lenders also must be aware of what they tell their borrowers regarding eligibility for these programs. To the extent the lender makes any representations or omits material information from the borrower, such comments or omissions may form the basis of a negligent or fraudulent misrepresentation claim.
If lenders and their vendors fail to adhere to the accommodations in the Cares Act, they may subject themselves to future liability. Such liability, however, would be contingent on courts finding that borrowers have a private right of action to enforce the CARES Act. Courts may also extend liability under the CARES Act based on a contractual representation/warranty in which both parties agree to adhere to all applicable state and federal law.
Lenders can protect themselves and take steps now to avoid liability. All communications with borrowers should be well documented and employees should be reminded of the importance of properly maintaining such records. Lenders need to regularly revisit their protocols and procedures to determine whether changes need to be made or temporary practices need to be implemented. Lenders should provide training to employees so that they understand the impact of new legislation that may alter regular procedures (i.e. credit reporting, foreclosure referrals). Resources for customers should be readily attainable for customers too as appropriate (e.g., who to contact for relief; documentation, if any, needed to demonstrate financial hardship). Lenders should consider what industry leaders and trade associations are doing and advising so they are not materially deviating from the industry behaviors set by their peers.
If we learned anything from the 2008 mortgage crisis, it’s that new claims always arise following a financial crisis. The best defense is to anticipate them and take steps to eliminate the potential for liability.