Regulator’s Burdensome Foreclosure Abuse Investigation Resolution “Proposal”

To resolve ongoing foreclosure abuse investigations, federal regulators and 50 state attorneys general recently proposed settlement terms to the 5 largest mortgage servicers ("Proposal").

The Proposal requires modification eligibility based on valuation formulas, bars simultaneous foreclosing and modifying of a residential mortgage, requires independent “modification denial” reviews, and sets forth requirements for foreclosure affidavits and internal policies to ensure settlement compliance.

The Proposal also creates significant oversight authority in the Consumer Financial Protection Bureau ("Bureau") including enforcing compliance with the Proposal’s terms, receiving information regarding servicers' loan modification policies and activities, and providing input into each servicers' Proposal compliance procedures.

Expands Modification Options and Independent Review of Modification Denials

Loss mitigation programs presently are voluntary either through independent agreements or federal initiatives like the Home Affordability Modification Program ("HAMP").

The Proposal requires servicers to offer some form of loss mitigation based on loan's "net present value" ("NPV") as defined by servicer and used in creating a “modification determination standard” of whether modification will lead to a greater NPV than foreclosure.

Further, even where not mandated by NPV or HAMP, servicers must consider loan modifications including reducing “principal” in "appropriate circumstances to provide for sustainable modifications”, offering "performance-based reductions" in lieu of principal forbearance, and forgiving 1/3 of forborne amount for borrowers complying with modification terms over a 3 year period.

The proposal also requires independent review of denied modifications through an ombudsman reviewing servicers’ files and basis for modification denial.

The Bureau will oversee loan modifications and independent review process including reviewing servicers’ modification files and NPV formula.

Bar on Dual Tracking

The Proposal eliminates "dual tracking", i.e., simultaneously foreclosing upon, and attempting to modify, a residential mortgage.
The Proposal also halts initiating a foreclosure - - or filing a motion for relief from, objecting to Chapter 13 plan confirmation in, or moving to dismiss a bankruptcy case - - while a good faith modification evaluation proceeds or restarting foreclosure activity before applicant receives a “written loss mitigation denial notice”.

This dual tracking prohibition and loan modification requirement imposes duties on servicers including providing adequate staffing and systems for tracking documents, a "single point of contact" including "email address and direct toll-free telephone number with a voicemail box”, a “designated employee” responsible for handling all loss mitigation communications, and “electronic documentation” of every foreclosure, loan modification, bankruptcy, or other servicing file action including all communications with the borrower.

Servicers must cease all collection efforts while borrowers apply for modification or make timely trial modification payments and all “judicial foreclosure state” servicers must submit an affidavit detailing their loss mitigation efforts and the results.

Enhanced Foreclosure Documentation Required

In response to "robo-signing" allegations, the Proposal increases foreclosure documentation requirements.

Affidavits must include a detailed description of affiant's basis of personal knowledge and employers must implement "standards for qualifications, training, and supervision" which, 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 Bureau.

The Proposal requires servicers to conduct independent audits regarding the accuracy of their financial systems’ “mortgage information”, audit the accuracy of the information contained in foreclosure affidavits, and provide audits results to the attorneys general and Bureau.

Bureau’s Compliance, Monitoring, and Enforcement Authority

The Bureau will monitor servicers' compliance efforts and enforcement of the agreement.

The Proposal provides that servicers must adopt "enhanced" corporate governance procedures to monitor agreement compliance and provide the attorneys general and Bureau with "regular state-specific data reports” on agreement compliance with loan modification efforts and “remedial actions" including foreclosure actions court orders.

Additionally, the attorneys general and Bureau may select, and receive regular reports from, independent third parties monitoring servicers' agreement compliance and have input on servicers' procedures for resolving borrower “noncompliance with agreement” complaints.

Further, because the Proposal states that material agreement violation constitutes an “unfair and deceptive trade practice” and “duty of good faith and fair dealing” breach, the Bureau could enforce agreements through Dodd-Frank’s “prohibiting unfair and deceptive trade practices” authority.