By Tammy Campbell, Senior Compliance Counsel, Harland Financial Solutions

The $25 billion foreclosure settlement is the largest of its kind since the $206 billion tobacco settlement of 1998. Similar to the tobacco settlement, the foreclosure settlement (Settlement) will have a far-reaching impact beyond the parties who negotiated and agreed to its terms. The Settlement was reached in March between the attorneys general (AGs) for 49 states (Oklahoma did not join and agreed to a separate settlement), the District of Columbia, numerous federal agencies including, the Department of Justice, the Department of the Treasury, the Department of Housing and Urban Development, and the Consumer Financial Protection Bureau (CFPB), and the nation’s five largest loan servicers (Ally/GMAC, Bank of America, Citi, JPMorgan Chase, and Wells Fargo). Monetary sanctions will be apportioned between direct consumer relief and payments to state and federal governments. The injunctive terms focus on servicing standards, and while technically applicable only to the aforementioned five servicers, will be the starting point for new servicing rules expected to be proposed by the CFPB later this year. This white paper will take a closer look at the Settlement’s servicing requirements and where they will likely lead regulators and the mortgage industry.

 

 

Monetary sanctions and relief. The servicers, who represent roughly 60 percent of the home loan servicing market, have agreed to pay approximately $25 billion, broken down as follows:

• Direct consumer relief – $20 billion. This includes $17 billion in credits to servicers for principal reductions through loan modifications on portfolio loans (60 percent) and homeowner assistance (40 percent), such as waiver of deficiency balances, facilitation of short sales, cash-for-keys payments, relocation assistance, payment forbearance for unemployed homeowners, and contributions to anti-blight efforts. The other $3 billion represents credits for refinancings to underwater borrowers who are not delinquent on their payments but have previously been unable to refinance at lower rates due to negative equity.

 

 • Cash payments to borrowers – $1.5 billion. This represents compensation for mortgage abuses to borrowers who lost their homes to foreclosure between 2008 and 2011. Payments will be in the range of $1,500 to $2,000 per borrower. Acceptance of the Settlement money will not preclude borrowers from seeking additional relief through the courts or as part of the restitution process administered by the federal banking regulators.

 

• Payments to state and federal governments – $3.5 billion. This includes $2.75 billion in payments to states for foreclosure prevention efforts, such as help lines, mediation programs and legal aid, and $750 million in payments to the federal government.

The Settlement provides incentives to the servicers in the form of higher earned credits for principal reductions in the first year and penalties if three-quarters of the credits are not earned by the end of year two. There will be a 140 percent cash penalty on unearned credits after three years. In other words, if the servicers fail to provide relief to borrowers in the form of credits, they will pay cash penalties in a greater amount.

 

 

Injunctive terms for servicing reforms. Perhaps even more important than the $25 billion in sanctions and relief is the 42-page Settlement Term Sheet found in Exhibit A to the Settlement which mandates extensive new servicing standards for the parties to the settlement. The goal of these detailed servicing standards from the perspective of the state AGs and federal agencies is to return integrity and accuracy to foreclosure and bankruptcy proceedings. While it’s important to remember that the Settlement terms apply only to the five named servicers, it is clear that these standards will serve as the starting point for the CFPB’s proposed servicing rules due this summer. The fact that the standards were introduced through the well-publicized Settlement may help them obtain broader acceptance and make certain requirements less controversial than if they had come about solely through the administrative rule-making process.

The Settlement Term Sheet is broken down into seven sections:
•    Foreclosure and bankruptcy information and documentation
•    Third-party provider oversight
•    Bankruptcy
•    Loss mitigation
•    Protections for military personnel
•    Restrictions on servicing fees
•    Force-placed insurance.

Issues like robo-signing and dual tracking were behind the original disputes that led up to the Settlement, but the injunctive terms go well beyond those issues, touching on all aspects of traditional mortgage loan servicing. The five servicers will be subject to these settlement terms for three-and-one-half years. The spillover into formal regulation and industry best practices will be much more far-reaching and long-lived.

The seven sections noted above can be categorized into servicing requirements affecting foreclosure and bankruptcy proceedings, loss mitigation, restrictions on servicing fees, and measures to deter community blight.

 

 

Foreclosure and bankruptcy proceedings. Significant elements related to this category of servicing standards are:
• Processes designed to put an end to “robo-signing” and ensure the integrity of affidavits and sworn statements filed in connection with a foreclosure proceeding.

• A pre-foreclosure referral notice to the borrower to be provided 14 days before a delinquent loan is referred to a foreclosure attorney, including an itemized account summary.

• Required documentation of the servicer’s authority to file a foreclosure action, which must be summarized in the above notice.

• Protections to ensure the accuracy of borrowers’ account information, including prompt crediting of payments, monthly billing statements and enhanced billing dispute procedures.

• Periodic audits/reviews of foreclosure documents to confirm compliance with existing law and terms of the Settlement.

• Oversight and management of third-party providers, such as foreclosure firms, law firms, foreclosure trustees, subservicers and other agents, independent contractors and other entities retained to conduct servicing activities on behalf of the servicers. This will generally require amendments to agreements with third-party providers to allow for periodic reviews and other quality assurance measures. Law firms must certify that their attorneys possess the experience and competence necessary to perform foreclosure and bankruptcy services.

 

 

Loss mitigation. Under the terms of the Settlement, borrowers must be thoroughly evaluated for all available loss mitigation options before referral to foreclosure. Furthermore:
• A determination must be made on a completed application for loan modification within 30 days of receipt by the servicer.

• To address dual tracking problems, a loan may not be referred to foreclosure before a determination has been made on an application for loan modification if the application is received within 120 days of delinquency. If an application for loan modification is received within 30 days of referral to foreclosure, the servicer may not move for a foreclosure judgment or seek a foreclosure sale until a determination has been made on the application. The foreclosure proceeding must remain suspended until the modification application is denied, the modification offer is rejected by the borrower or the borrower fails to perform on the loan modification. Additional restrictions apply up to 15 days prior to a scheduled foreclosure sale if an application for loan modification is received.

• A single point of contact (SPOC) must be assigned to each borrower who seeks loss mitigation assistance. The SPOC must be knowledgeable with respect to loss mitigation options and requirements and ensure that the borrower is considered for all available options. The SPOC must be easily accessible by the borrower and keep the borrower updated regarding the status of loss mitigation efforts.

• Borrower outreach efforts must go beyond pre-recorded automated messages, and must include contact information for national or state foreclosure assistance hotlines and housing counseling resources. No collection efforts may proceed while an application for loan modification is under review or when the borrower is making timely payments under a trial modification.

• The servicers must make public all short sale requirements and all information necessary to apply and qualify for proprietary first and second lien modifications.

• If an application for loan modification is denied, the denial must be submitted for an additional independent internal review. Upon denial, notice must be delivered to the borrower including an explanation of the borrower’s right to appeal.

• Borrowers have 30 days to request an appeal of a denial of application for loan modification. A response must be provided to the borrower within 30 days of appeal and must include a description of other available loss mitigation options if the modification is still denied.

• If a loan is sold or servicing is transferred while an application for loan modification is pending, the servicer must inform the successor servicer, and the servicer must be contractually obligated to continue processing the request for modification and honor any trial or permanent modification agreements.

• Additional protections for military personnel apply, and in some cases go beyond what is required under the Servicemembers Civil Relief Act. For example, servicers may not require a service member to be delinquent in order to qualify for a short sale, loan modification or other loss mitigation relief if the service member is suffering from financial hardship.

Restrictions on servicing fees. All default, foreclosure fees and bankruptcy-related fees must be bona fide and reasonable. An up-to-date schedule of fees must be available to borrowers. Specific limitations apply to attorneys’ fees and late fees. Other third-party fees, such as preservation, inspection and valuation fees, are limited according to GSE timeframes and/or pursuant to the terms of the Settlement. The cost of premiums for force-placed insurance must be commercially reasonable.

 

 

Measures to deter community blight. The five servicers have agreed to participate in programs meant to deter community blight and stabilize neighborhoods. Once a decision not to pursue foreclosure has been made, the servicers must notify local authorities as well as borrowers. For foreclosure referrals, the pre-foreclosure notice must inform borrowers that they have the responsibility to maintain the property and pay taxes until title has been transferred. The servicers must implement additional policies to ensure that REO properties do not become blighted.

 

 

CFPB rulemaking. The CFPB announced in April that new mortgage servicing rules would be proposed this summer and finalized by January 2013. The initial summary of issues provided by the CFPB reflects many of the concepts included in the Settlement. The CFPB statement reveals the following similarities:
• Endorsement of early disclosures to borrowers to inform them about loss mitigation options and provide information about the foreclosure process;
• Monthly mortgage statement requirements (also required under the Dodd-Frank Act), prompt crediting of payments, accurate and accessible account information and document management, and billing error resolution procedures;
• The establishment of servicer foreclosure prevention teams similar to the Settlement’s SPOC requirement; and
• Restrictions on servicing fees with a specific emphasis on force-placed insurance.

It is more than likely that the CFPB’s proposal will borrow heavily from the Settlement’s servicing terms. Whether all of the details of the Settlement will survive a formal rulemaking procedure, including the required Small Business Regulatory Enforcement Fairness Act (SBREFA) review, remains to be seen. The early and extensive publicity surrounding the Settlement will likely enhance its influence on the CFPB’s rule, especially given the fact that the nation’s five largest servicers are already complying with its terms. Those provisions that don’t make it into the final rule may persist as industry best practices and become the norm moving forward, even after the Settlement expires. There is no question that the Settlement has provided a reasonably clear picture of the road ahead.

The Settlement documents can be found at: http://www.nationalmortgagesettlement.com/.
The CFPB factsheet is available at: http://files.consumerfinance.gov/f/201204_cfpb_factsheet_putting-service-back-in-mortgage-servicing.pdf.