Mar 082011

Last October, the Attorneys General of all 50 states launched an investigation of the practices of the largest residential mortgage servicers.  Apparently, progress has been made.  Yesterday, the American Banker leaked an alleged draft settlement proposal from the attorneys general.  According the AB, this initial proposal was presented last week to the five largest residential mortgage servicers (Bank of America, Citgroup, JPMorgan Chase, Wells Fargo & GMAC). 

The scope of this initial proposal is fairly broad.  Some of the proposed provisions are similar to those currently being reviewed by the Indiana Supreme Court, while others go much, much further.  I expect the servicers will push back hard against nearly all of the proposed terms, and it will be months before anything is finalized. 

Some highlights in the proposed terms, and how they would play out in Indiana, include:

  • Loss mitigation efforts.  This proposal incorporates HAMP, but goes beyond it in several ways.  Under this proposal, servicers would have an “affirmative duty to thoroughly evaluate borrowers for all loss mitigation options prior to foreclosure referral.”  Borrowers who have made three timely trial period payments under HAMP would have to be granted a permanent modification, effective the first month after the third payment is paid.  The current “dual-track” process (e.g., pursuing the judicial foreclosure at the same time the borrower is being reviewed for a modification) would be verboten – as long as the borrower is being considered for a modification, then the servicer can not file a foreclosure complaint, and before filing a complaint, the servicer will have to certify to the court that the servicer attempted loss mitigation with the borrower.  If the complaint is filed before the borrower requests assistance, then the servicer will have to stop the foreclosure process until a decision is made on the modification request.  These proposals parallel the recommendations from the Indiana AG to the Indiana Supreme Court.  In addition, if documents or information are missing from a modification request, the sevicer will have to notify the borrower in writing within 10 business days of exactly what is needed, and describe any deficiencies.  I would think this last point would be a no-brainer for the servicers.  Borrowers find the modification process confusing and overwhelming.  If the servicers help the borrowers understand exactly what the servicers want/need –> the borrower is more likely to provide the needed information –> servicer’s staff spends less time with each file –>increased profits.   Win-win. 
  • Defined Deadlines.  A servicer would be required to make a decision on a borrower’s initial modification request within 30 days.  The borrower’s financial documents will be valid for 120 days.  If denied for HAMP, the borrower must be considered for any alternative programs within 15 days.  If denied, the borrower must be notified in writing within 10 days, and all denials must be independently reviewed, and a foreclosure complaint can not be filed until the review is complete. 
  • Adequate Staffing.  ‘Nuf said. 
  • Single Point of Contact.  The servicer would be required to provide the borrower with a single employee, who would be responsible for handling all communications with the borrower.  Great idea, and already part of the OCC’s proposal. However, the only recourse if a POC dumps all calls into voice mail and/or never returns calls (which has happened to some of my clients who actually have a single POC) is to request to speak with a manager or supervisor. 
  • Loan Portals.  The servicers would have to develop the technology to give borrowers free direct access to loss mitigation information, including a way for the borrowers and housing counselor to submit documents electronically.  At least one servcier has already been working on such a system. 
  • Principal Reduction.  The proposal calls for reducing the principal balance in certain circumstances, including if the borrower is in bankruptcy.  Right now, HAMP also allows a servicer to reduce principal, but does not require it, and bankruptcy courts have no power to require lenders to reduce principal on a partially-secured residential mortgage loan.  This proposal is open to further discussion. 
  • Consider other factors affecting ability to pay.  The servicer would be required to consider the borrower’s other debt load to determine whether a loan modification would be sustainable.  In addition, the servicers’ loan modification programs would be required to cover second mortgages as well as first, and the modification terms for a first mortgage would also have to apply to the second.  Interesting, but most second mortgages are not serviced by the same company – and if they are, they can easily be sold or transferred to get around this provision. 
  • Denial of Loss Mitigation.  If a loan modification is denied, the servicer would have to disclose to the borrower the reasons for the denial, including the property value and discount rates used.  If the investor denied the modification, then the servcier must provide the investor’s name, the investor’s reason for denial, and a copy of the part of the agreement that provided the basis for the denial. 
  • Tighter short sale deadlines.  A decision must be made within 30 days. Right now, that is the law in Indiana – not always followed, but the law nonetheless. 
  • Limits on Fees.  All default and foreclosure-related fees must be bona-fide, reasonable, and disclosed in detail to the borrower.  Servicers would be required to post a fee schedule on their websites.  No fees may be charged while a modification application is being reviewed, or during a trial modification.  So-called “property preservation” fees (a/k/a “drive-by fees”) could only be charged if the servicer has a “reasonable belief” that the property is vacant, and property valuation fees may be charged only once a year.  Right now, servicers charge nearly all borrowers in default a monthly fee (usually $10-$20) just to have someone (allegedly) drive past the house, even if there is plenty of other evidence that the borrowers are still living there (e.g., borrowers are required to certify as part of the loan modification process that they are still living in the house, and frequently must provide a utility bill to back them up).  These drive-by fees are pure profit for the servicers, and I think they’ll fight hard to keep the cash flow coming.  There are also restrictions on fees paid to the servicers’ affiliate companies and fee-splitting. 
  • Force-placed insurance.  Force-placed insurance is the most expensive insurance money can buy, and it only protects the mortgage company’s interest, not the homeowner’s.  Before force-placing insurance, a servicer would be required to try to maintain the homeowner’s existing (and less-expensive) policy, even if the servicer is required to advance the funds to do so.  If the servicer does force-place insurance, then the insurance company can not be affiliated with the servicer, and fee-splitting and kickbacks would be prohibited.  Again, this would be great, but this practice contributes a too much to the servicers’ bottom lines for the servicers to cave easily. 
  • Account summary.  At least 45 days before filing for foreclosure, the servicer would be required to provide the borrower with an “itemized, plain language account summary” covering all activity over the past 36 months.  Failure to list a fee on this summary means that the fee is waived.  I like this one, especially the “stick” part to encourage servicers to inform borrowers about all the fees.  Right now, the best way to get an account summary is to make a qualified written request under RESPA, but this requires the borrower to be proactive, many times the account summary is difficult to decipher, and the servicers may “forget” to include all the fees.  In Indiana, although lenders are supposed to provide a payment history to the borrower at a foreclosure settlement conference, not all borrowers request a settlement conference, not all lenders remember to do this, and the time period covered is usually much less than 36 months. 
  • Proof of ownership.  The foreclosure complaint would have to include the basis for asserting that the plaintiff has the right to foreclose, and all assignments and transfers would have be attached to the complaint.  This is already standard procedure in Indiana, and would be further clarified under the plan proposed to the Indiana Supreme Court.  However, the AG proposal goes beyond this requirement, and would also require the complaint to identify the current location(s) of the original note, mortgage, and any interim assignments.
  • Affidavits.  Basically, servicers will have to follow state laws regarding preparation and execution of affidavits.  There are a couple small additions (e.g,, training requirements, no stamped signatures, and notary logs), but otherwise, these proposals reflect what the laws actually require. 
  • Posting Payments.  Payments will have to be posted within two business days after receipt.  If a payment is more than $50 short of the full scheduled payment amount, then it can be posted to a suspense account, but the borrower must be notified about the suspense account and any activity in that account.  Once there is enough funds in the suspense account to make a full payment, then the servicer must apply the payment to principal and interest.  Funds in a suspense account could not be used to pay fees until the regular loan payments (including principal, interest, and escrow) are current.  This last one’s the kicker.  The practice of applying suspense account money to the servicer’s fees instead of payments keeps the borrower delinquent longer, and prevents the investor from getting the funds it is entitled to.  Granted, some of the fees are paid to third parties (attorneys fees, titlework, etc.), but many of the fees are internal (late fees, some BPOs, and even some drive-by fees) and are pure profit for the servicers.  Servicers are NOT going to like this proposal. 
  • Audits.  Servciers will have to conduct regular audits of affidavits and account summaries to verify that they comply with existing law and the terms of the settlement agreement, and take appropriate remedial steps if problems are discovered.  In my opinion, the servicers’ internal auditors should already be doing this.  The AGs also want the servicers to have their independent auditors audit the servicers’ account information systems, and make copies of the report available to the AGs.  OK, nobody likes being audited, plus audits are expensive.  Then again, these systems should already be a part of the annual audit cycle.  There’s too much risk from an auditor’s perspective to ignore the system that is at the very heart of the business.   
  • Good Faith and Fair Dealing.  This means that the individual borrowers (and their attorneys) should be able to use a servicers’ failure to abide by the settlement terms as an affirmative defense in a foreclosure.  Big stuff here.  Right now, not all states allow homeowners to use a servicer’s failure to follow HAMP as a defense or counterclaim to a foreclosure (although Indiana probably would), but having this standard stated explicitly in the agreement would make it easier for borrowers to enforce the settlement provisions in their individual foreclosure actions.
  • Penalties.  Finally, the fun stuff.  It looks like the AG’s want a fund to be used to educate and pay homeowner-victims (although it will most likely be insufficient to fully compensate any single borrower).  It is not clear if this allows private remedies for non-compliance. 

What this proposal doesn’t cover:  MERS.  That bohemoth will have to wait for another day (or month). 

All in all, it’s a good start.  Of course, this is the starting position for futher negotiations, so don’t expect the final settlement to be quite as beneficial to individual homeowners.  Plus, repealing HAMP would add another twist to the process (the Magic 8-Ball answer to that: “Outlook not so good.”).

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