The 50 state attorneys general and a group of federal regulators
have proposed settlement terms to the country's five largest
mortgage servicers to resolve ongoing foreclosure abuse
investigations. The recently released term sheet (the
"Proposal") would affect millions of mortgages nationwide
by imposing, among other things, mandatory loss mitigation
requirements. The 27-page document calls for modification
eligibility based on valuation formulas, an end to "dual
track" processing, and guaranteed independent review. The
Proposal sets forth requirements for foreclosure affidavits and
certain internal policies to ensure compliance with any settlement.
The Proposal carves out a significant oversight role for the
Consumer Financial Protection Bureau ("CFPB" or
"Bureau"). The CFPB will receive significant information
regarding the servicers' loan modification policies and
activities, foreclosure affidavit training and procedures, and
input into each servicers' procedures to comply with the
Proposal. In addition, the CFPB will have the power to enforce
compliance with the terms of the Proposal.
This Alert focuses on those portions of the proposal over
which the CFPB will retain significant oversight. Companies should
refer to the Proposal itself to fully understand its potential
impact.
Loan Modification and Independent Review
Current loss mitigation programs remain largely voluntary and
guided by either independent agreements or federal initiatives like
the Home Affordability Modification Program ("HAMP").
Yet, under the Proposal, servicers would assume an affirmative duty
to offer some form of loss mitigation depending on the loan's
"net present value" ("NPV"). Under the
Proposal, if modification leads to a greater NPV than foreclosure,
servicers must offer it. Although the Proposal permits servicers to
define NPV, any such definition must be made available to the CFPB
upon request. These new rules extend even beyond the initial
modification decision. For example, a borrower may enroll in a
trial period plan under HAMP or other proprietary modification
programs. Under the Proposal, those modifications automatically
become permanent once the borrower makes the first three payments.
In short, loan modification would be the mandatory first
option.
Servicers must consider loan modifications even where the NPV, as
discussed above, or HAMP do not mandate modification. The Proposal
requires servicers to consider principal reductions in all
"appropriate circumstances to provide for sustainable
modifications." Servicers may offer "performance-based
reductions" in lieu of forbearance of principal. Under that
arrangement, if the borrower complies with the loan modification
terms over a three-year period, one third of the forborne amount is
forgiven each successive year. And if principal is forborne, the
servicer may not charge servicing fees on that amount. Yet, how
these terms would be collectively interpreted remains to be seen.
The Proposal also dictates that servicers encourage loss mitigation
by adopting employee incentive plans favoring modification.
Perhaps the most significant element of the proposal is independent
review for applicants denied modification. This internal review
process may be through an ombudsman or an independent panel. In
either case, the reviewer has the ability to obtain files and
overrule the servicer's initial decision. Borrowers could
present evidence that the NPV or eligibility calculation was
erroneous. Servicers would then have to promptly make available
account histories upon the borrower's request.
The CFPB stands to play a major oversight role in the loan
modification and independent review process. Under the Proposal,
the CFPB has the right to obtain the NPV formula used by the
servicer. In addition, the entire review process would be subject
to monitoring by the attorneys general and the CFPB. The monitoring
process is undefined.
Dual Track Prohibition and Procedural Requirements
The Proposal largely eliminates "dual tracking." This
term refers to simultaneous but independent processing of both
foreclosure and modification proceedings for the same borrower.
Under the Proposal, the ability to initiate foreclosure, file a
motion for relief in a bankruptcy proceeding, object to
confirmation of the borrower's Chapter 13 plan, or move to
dismiss the borrower's bankruptcy case would all be halted
while a good faith modification evaluation is in process. And once
foreclosure does become an option, a referral could not be made
until the applicant receives written notice that loss mitigation
had been denied. The processes would have to be coordinated.
Procedural limits also accompany the dual tracking prohibition and
loan modification requirement. Servicers have a duty to provide
adequate staffing and systems for tracking borrower documents. The
Proposal further calls for a "single point of contact,"
including "an email address and direct toll-free telephone
number with a voicemail box for a single contact, a designated
employee with primary responsibility to handle all loss mitigation
communications." Every action taken on a foreclosure, loan
modification, bankruptcy, or other servicing file, including all
communications with the borrower, must be electronically
documented.
During the loan modification process, any missing application
document must be brought to the borrower's attention within 10
days of the application. The servicer must cease all collection
efforts while the borrower is making timely payments under a trial
loan modification or applying for modification. Furthermore, in
judicial foreclosure states, or where filing is otherwise required
by law, all servicers must submit an affidavit detailing their loss
mitigation efforts and the results of those efforts. Loss
mitigation will be evaluated upon review.
Foreclosure Documentation
In response to the allegations of "robo-signing," the
Proposal places strict requirements on the documentation required
for foreclosures. Affidavits must include a detailed description of
the affiant's (typically a servicer employee) basis of personal
knowledge. Employers must implement "standards for
qualifications, training, and supervision." And those specific
standards, along with training materials, videotaped copies of
standard training sessions, and related operational manuals, shall
be made available to both the attorneys general and the CFPB.
Moreover, the Proposal requires servicers to conduct independent
audits regarding the accuracy of their financial systems containing
mortgage information and to audit the accuracy of the information
contained in foreclosure affidavits. The servicers must provide the
results of these audits to the attorneys general and CFPB on a
confidential basis.
Compliance, Monitoring, and Enforcement
The CFPB will play a critical role in the servicers'
compliance efforts, monitoring of those efforts, and enforcement of
the agreement. The Proposal provides that the servicers must adopt
"enhanced" corporate governance procedures to monitor
compliance with the agreement. Servicers are required to provide
the attorneys general and CFPB with "regular state-specific
data reports on compliance with [the agreement], particularly on
loan modification efforts, including remedial actions taken."
These reports must include certain information concerning court
orders in foreclosure actions.
In addition, the attorneys general and CFPB have the power to
select an independent third party to monitor the servicers'
compliance with the agreement and would receive regular reports
from the monitor. The attorneys general and CFPB will also have
input on the servicers' procedures to resolve borrower
complaints regarding noncompliance with the agreement. In other
words, the Bureau looks to gain both a clear view of how
modifications are being effected and a guaranteed say in how
disputes are addressed.
Finally, the Proposal states that "a material violation of
this Agreement constitutes an unfair and deceptive trade practice
and a breach of the duty of good faith and fair dealing." This
clause enables the CFPB to enforce this agreement through its
powers under Dodd-Frank to prohibit unfair and deceptive trade
practices.
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.