As we reported in our February 15, 2012, client alert, the US federal government and 49 state attorneys general reached a $25 billion settlement agreement (the "Agreement") with five of the nation's largest mortgage servicers (the "Servicers"). On March 12, 2012, consent judgments were filed in the US District Court for the District of Columbia with each of the five Servicers, which settle the claims specified in the complaint. The consent judgments provide the details of the Servicers' financial obligations under the Agreement, which require the Servicers collectively to dedicate $20 billion toward various forms of financial relief to homeowners and $5 billion in cash to the federal and state governments.
The release of the claims against the Servicers hinges upon the implementation of comprehensive national servicing standards. These standards will be phased in over a period of 180 days and will remain in effect for three and a half years. The standards arguably surpass those set forth in the consent orders that the federal banking agencies imposed on the 14 largest mortgage servicers on April 13, 2011. The servicing standards also exceed provisions of existing federal and state laws that pertain to residential mortgage loan servicing, and they go beyond the foreclosure documentation issues that ignited the dispute.
Servicing Standards
The servicing standards require the Servicers to implement comprehensive reforms pertaining to operational issues. Servicers are required to hire, train and supervise staff to handle the workload. This includes assigning a single point of contact to each homeowner that interact with the Servicer. To guarantee quality assurance Servicers must not pay volume-based or other incentives to employees or to other third-party providers, and they may not adopt employee compensation arrangements that encourage foreclosure over loss mitigation alternatives. Servicers must also maintain viable servicing systems to record and track account information and allow consumers to have access to their loan modification applications through an online portal.
The servicing standards also require Servicers to review and assess the adequacy of internal controls and procedures and to implement procedures to address compliance deficiencies. Servicers must also adopt policies and procedures to oversee and manage third party providers, such as foreclosure firms, law firms, trustees, subservicers and other contractors retained on behalf of the Servicer. To identify systemic problems, consumer complaints must be evaluated. In addition, independent reviews should be conducted of various documents, such as affidavits, sworn statements and default notices, as well as loan modifications. Servicers must also perform independent reviews of their systems to ensure the accuracy and completeness of the system.
To facilitate communication between the borrower and the Servicer, the new requirements mandate that Servicers provide toll free telephone numbers, web based portals, websites, hard copy notices and a single point of contact with whom the borrower can interact. The standards impose numerous requirements pertaining to various disclosures that are to be made to the borrower, such as notices regarding the status of a borrower's loan, when a late fee has been imposed, and when an application for a loan modification has been received and processed.
The Servicers are also required to establish procedures to address complaints, whether the complaint originates with the borrower, their authorized representative or a government official. Servicers must also provide a resolution for disputes and billing dispute procedures.
When administering payments, Servicers are required to accept and apply at least two non-conforming payments from a borrower, if the payment, whether alone or in combination with another payment, comes within $50 of the scheduled payment. Under certain circumstances, a Servicer may post partial payments to a suspense account at the Servicer's discretion.
The servicing standards also set forth several restrictions on fees that are charged to borrowers for servicing-related activities, such as late fees, property inspection, property preservation, valuation, attorneys, default, foreclosure and bankruptcy-related fees. There is no equivalent prohibition on fees charged by affiliates, with the exception of a ban on giving or receiving referral fees for third-party default- or foreclosure-related services.
Similar to provisions in the Dodd-Frank Act, Servicers are required to have reasonable cause to believe a homeowner has not paid for property insurance before obtaining force-placed insurance. If a homeowner elects to pay into an escrow account, Servicers are also required to continue to forward payments to an insurer, even if the homeowner fails to make payments into the escrow account.
Default Servicing
The servicing standards address in particular defective default servicing, which was the impetus for the settlement. Servicers must generally engage in loss mitigation activities and foreclosure prevention for delinquent loans and make other reasonable good faith efforts to assist borrowers. Where appropriate, Servicers must consider loan modification, forbearance, short sales, and deed-in-lieu of foreclosure.
As noted above, Servicers are required to establish a single point of contact with the borrower to maintain contact throughout the entire loss mitigation, loan modification and foreclosure processes. The single point of contact has primary responsibility for all communications with the borrower from the moment the borrower requests loss mitigation assistance, until all options have been exhausted or the borrowers account becomes current.
Not surprisingly, the servicing standards set forth in meticulous detail the requirements, prohibitions, and timelines that the Servicers are bound to while guiding the borrower through the loss mitigation process. For example, Servicers may not require borrowers to waive or release claims and defenses as a condition of approval for a loan modification, but they may require a waiver or release arising out of a loan modification in connection with the resolution of a contested claim, if the borrower would not otherwise qualify for the loan modification program. Servicers are required to develop a strategy for a short sale process if the borrower does not qualify for a loan modification program.
The deadlines for each step in the loan modification process are laid out with precision. The time frames for evaluating borrowers' initial requests for loan modifications and the appeals process are under strict deadlines. Rules governing the foreclosure process also contain strict prohibitions and conditions on when loans may be referred to foreclosure and prohibit dual tracking of a borrower's application.
Due to the significant problems that arose with so-called robo-signing, improper documentation and lost paperwork, the servicing standards devote considerable attention to requiring Servicers to document the foreclosure and bankruptcy process. Servicers must ensure that documentation is complete and that all factual assertions made, by or on behalf of the Servicer, in any judicial foreclosure or bankruptcy proceeding are accurate and complete and are supported by competent and reliable evidence. Servicers' affiants must be natural persons, must review the foreclosure and bankruptcy documents and must execute documents by hand signature, except where an electronic signature is permitted. Signature stamps and other mechanical signatures are no longer permitted. Servicers are also required to keep records identifying notarized documents and the notaries employed by the Servicers.
Short Sales
Servicers must also adhere to strict timelines for short sales under the terms of the Agreement. Among the new requirements placed on Servicers is the obligation to notify a borrower within 30 days if any documents are missing from the short sale application and to notify the borrower if there is a deficiency payment that must be made before the short sale can be approved, including the approximate amount. Servicers are then required to make a decision within 30 days of receiving the completed short sale application from the borrower.
The timelines for short sales under the servicing standards mirror the Treasury Department's national standards for short sales under its Home Affordable Foreclosure Alternatives program. Under the Agreement, however, Servicers are bound by certain enforcement mechanisms. If a Servicer takes longer than 30 days on more than 10 percent of the short sale requests, it may be considered in "potential violation." If Servicers fail to provide a deficiency payment disclosure in more than 5 percent of all approved short sales, it will constitute a violation.
Compliance Monitoring
As we reported in our previous client alert, the Servicers' compliance with the Agreement will be monitored by an independent monitoring committee directed by Joseph A. Smith, Jr. (the "Monitor"). The Monitor has various powers and obligations as a part of the monitoring function. The Monitor will assess compliance with the servicing standards by comparison with a set of metrics on a quarterly basis and will report the Servicers' compliance with such metrics on a quarterly basis to the government parties to the Agreement. If the Monitor detects that a Servicer falls outside the threshold error rate for a particular metric, the Servicer may be deemed to be in violation of the Agreement. In such circumstances the Servicer has the right to cure and the obligation to remediate any material harm to borrowers that are identified in quarterly reviews. In some instances, the Monitor may conduct full look-backs to identify any additional borrowers who may have been harmed.
Although the Monitor will be the principal party that detects violations of the Agreement, only a party to the Agreement or the monitoring committee may bring an enforcement action to remedy such a violation. Such an action must be brought in the US District Court for the District of Columbia and, according to the terms of the Agreement, the only available remedy the court may award consists of non-monetary equitable relief and civil penalties with the amount capped per uncured violation depending on the metric at issue. Such penalties may range up to $1 million per violation or up to $5 million for certain repeat violations.
SNR Denton Observations
First, it should be noted that the servicing standards enumerated in the Agreement do not carry the force of law. The only entities bound by these servicing standards are the five Servicers and their affiliates that are parties to the Agreement. However, because the Servicers represent approximately 55% of the total servicing market, the standards may become the de facto national standard for the entire mortgage servicing industry.
Second, On January 30, 2012, the CFPB issued its first Semi-Annual Report to the President and Congress detailing its activities through the end of 2011. In particular, the CFPB mentioned that it has coordinated with other federal regulators to formulate national mortgage servicing standards. The servicing standards in the Agreement constitute a probable baseline for any such national standards. The CFPB also plans to propose rules for mortgage origination and servicing. In a March 26, 2012 speech, Acting Comptroller of the Currency John Walsh echoed the same theme, noting that the federal banking regulatory agencies are "discussing comprehensive uniform mortgage servicing standards that will apply to all federally-regulated banks and thrifts as well as affiliated mortgage servicers."
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
