February  9,  2011     Attorney  General  Tom  Miller   Hoover  State  Office  Building     1305  E.  Walnut   Des  Moines,  IA  50319     Dear  AG  Miller,       We  thank  you  again  for  meeting  with  us  last  month  in  Iowa  and  reiterate  our  support   for  your  investigation  and  our  high  hopes  for  an  impactful  settlement  that  will  make  a   real  difference  in  the  lives  of  millions  of  American  families  and  our  communities.         As  you  heard  from  us  in  December  and  have  certainly  seen  through  the  course  of  your   investigation,  the  U.S.  mortgage  servicing  system  is  fundamentally  broken,  especially   when  it  comes  to  helping  prevent  the  massive  wave  of  foreclosures  sweeping  the   nation.    The  need  for  true  change  couldn’t  be  more  apparent  or  crucial.     As  requested  we  have  put  together  a  set  of  more  detailed  and  concrete  blueprint  for   how  the  servicing  industry  should  be  overhauled  through  the  impeding  settlement.         We  look  forward  to  working  closely  with  you  and  your  staff  as  the  investigation   proceeds  this  winter  and  spring.     Sincerely,                   Reverend  Dr.  Eugene  Barnes   Mary  Kay  Henry     National  People’s  Action   SEIU               Beverly  De  Leonardis       Rev.  Lucy  Kolin   Alliance  for  a  Just  Society     PICO  National  Network                 Amy  Schur   Rev.  Dr.  Mikael  N.  Broadway   Alliance  of  Californians  for  Community  Empowerment   IAF  Southeast      


Alabama  Attorney  General  Luther  Strange   Alaska  Attorney  General  John  J.  Burns   Arizona  Attorney  General  Tom  Horne     Arkansas  Attorney  General  Dustin  McDaniel     California  Attorney  General  Kamala  Harris     Colorado  Attorney  General  John  Suthers     Connecticut  Attorney  General  George  Jepsen     Delaware  Attorney  General  Beau  Biden     District  of  Columbia  Attorney  General  Irvin  Nathan  (Acting)     Florida  Attorney  General  Pam  Bondi   Georgia  Attorney  General  Sam  Olens     Hawaii  Attorney  General  Mark  Bennett     Idaho  Attorney  General  Lawrence  Wasden     Illinois  Attorney  General  Lisa  Madigan   Indiana  Attorney  General  Greg  Zoeller     Iowa  Attorney  General  Tom  Miller     Kansas  Attorney  General  Derek  Schmidt     Kentucky  Attorney  General  Jack  Conway     Louisiana  Attorney  General  James  “Buddy”  Caldwell     Maine  Attorney  General  William  Schneider     Maryland  Attorney  General  Douglas  F.  Gansler     Massachusetts  Attorney  General  Martha  Coakley     Michigan  Attorney  General  Bill  Schuette     Minnesota  Attorney  General  Lori  Swanson     Mississippi  Attorney  General  Jim  Hood     Missouri  Attorney  General  Chris  Koster     Montana  Attorney  General  Steve  Bullock     Nebraska  Attorney  General  Jon  Bruning     Nevada  Attorney  General  Catherine  Cortez  Mastro     New  Hampshire  Attorney  General  Michael  Delaney     New  Jersey  Attorney  General  Paula  T.  Dow   New  Mexico  Attorney  General  Gary  King     New  York  Attorney  General  Eric  Schneiderman     North  Carolina  Attorney  General  Roy  Cooper     North  Dakota  Attorney  General  Wayne  Stenehjem     Ohio  Attorney  General  Pat  DeWine     Oklahoma  Attorney  General  Scott  Pruitt     Oregon  Attorney  General  John  Kroger     Pennsylvania  Attorney  General  William  H.  Ryan,  Jr.  (Acting)     Rhode  Island  Attorney  General  Peter  Kilmartin     South  Carolina  Attorney  General  Alan  Wilson    

South  Dakota  Attorney  General  Marty  Jackley     Tennessee  Attorney  General  Robert  E.  Cooper  Jr.     Texas  Attorney  General  Greg  Abbott     Utah  Attorney  General  Mark  Shurtleff     Vermont  Attorney  General  William  Sorrell     Virginia  Attorney  General  Ken  Cuccinelli     Washington  Attorney  General  Rob  McKenna     West  Virginia  Attorney  General  Darrel  V.  McGraw     Wisconsin  Attorney  General  J.B.  Van  Hollen     Wyoming  Attorney  General  Bruce  A.  Salzburg  


  TO:     Attorney  General  Tom  Miller   FROM:   PICO,  NPA,  SEIU,  AJS,  ACCE,  SE  IAF   RE:     Problems  in  U.S.  Mortgage  Servicing  &  Needed  Solutions   DATE:     February  9,  2011  (REVISED)   CC:       Other  49  State  Attorneys  General       Problem:    Servicers  are  not  making  affordable  loan  modifications  that  benefit   both  homeowners  and  the  housing  market,  even  when  modification  would   provide  a  greater  return  to  investors  than  a  foreclosure.     Solution:     • Mandatory  Loan  Modification   When  a  loan  becomes  delinquent  or  when  a  borrower  provides  their  servicer  with   notice  that  default  is  imminent,  the  servicer  must  review  the  mortgage  loan  to  see  if   an  affordable  loan  modification  can  be  made.    If  a  loan  modification  is  in  the  best   interest  of  the  homeowner  and  investor,  then  the  servicer  is  compelled  to  offer  a   modification.       • Mandatory  Principal  Reduction   If  the  balance  on  a  loan  exceeds  the  current  market  value  of  the  house  the  first  step   must  be  to  reduce  the  principal  to  100%.    Recapture  of  forgiven  amount  may  not   exceed  50%  of  the  increase  in  market  value  as  determined  by  a  third  party   appraisal.       • Junior  Liens  Extinguished  or  Reduced   For  any  junior  lien  that  is  entirely  underwater,  even  if  it  is  not  in  default,  the   servicer  must  extinguish  that  lien  according  to  the  payoff  schedule.    For  other   junior  liens,  all  liens  must  be  reduced  proportionately  to  meet  the  CLTV  cap.     Transparent,  Fair,  Appealable  Net  Present  Value  (NPV)  Calculation   Each  servicer  must  provide  public  access  to  the  NPV  Test  that  it  uses  in  making  a   loan  modification  determination.  Inputs  of  general  applicability  (default  rate  for  a   community,  locally  specific  appraisal,  foreclosure  costs,  etc.)  must  also  be  made   public.      NPV  calculation  must  be  appealable  by  the  homeowner  for  errors  and   misinformation.       The  servicer  must  disclose  the  property  value  of  the  home  that  it  has  used  for   purposes  of  determining  the  terms  of  the  modification  and  the  methodology  used   to  determine  the  property  value.    If  the  homeowner  disputes  the  property  value   and  can  give  basis  for  the  dispute  and  show  that  disputed  difference  is  material,  the   servicer  must  conduct  an  independent  appraisal  of  the  property  at  servicer’s   expense    


  •   •

Fair  Application  of  Fees     All  foreclosure  and  default  related  fees  and  costs  must  be  waived  in  determining   the  new  principal  balance  for  the  loan  modification.       Reasonable  Debt-­to  Income  and  Residual  Income  Calculations     Affordability  should  be  based  on  a  debt-­‐to-­‐income  ratio  range  and  a  residual   income  test.    The  front-­‐end  debt-­‐to-­‐income  ratio  for  modifications  should  be   between  25-­‐31%.    The  back  end  ratio,  which  should  include  all  other  secured  and   unsecured  debts  and  medical  expenses,  should  not  exceed  46-­‐60%  based  on   circumstances.      A  residual  income  schedule  that  accounts  for  geographical   differences  in  cost  of  living  shall  be  set  to  ensure  that  borrowers  have  sufficient   residual  to  pay  other  necessary  living  expenses  regardless  of  front  or  back-­‐end   ratio  calculations.       All  Modifications  Permanent   All  modifications  must  be  at  a  fixed  interest  rate  for  the  life  of  the  loan.   No  Release  of  Liability   No  modification  can  include  a  waiver  of  any  legal  claims  of  the  homeowner.     Affirmative  Outreach   Affirmative  outreach  provisions  should  be  put  in  place  requiring  servicers  to  alert   borrowers  of  the  terms  of  the  settlement,  search  for  and  reach  out  to  eligible   borrowers  with  proposed  loan  modifications,  including  door  to  door  contact  in   heavily  impacted  census  tracts.    

  •   •

    Problem:    Servicers  proceed  with  the  foreclosure  process  at  the  same  time  as   they  are  conducting  a  loss  mitigation  process.    This  leads  to  borrower  confusion   and  further  complicates  the  process  and  the  communication  between  borrower   and  servicer.    It  also  leads  to  unjust  foreclosures  before  due  diligence  is   completed  in  the  loan  modification  process.       Solution:     • Mandatory  and  Standard  Loan  Modification  Review   Foreclosures  should  not  be  initiated  until  the  servicer  does  a  complete  review  of  a   borrower’s  file.    If  the  borrower  is  already  in  foreclosure  when  he  or  she  requests  a   review,  the  foreclosure  process  (and  not  just  the  final  sale)  must  be  suspended  until   the  review  is  completed.         a. This  review  must  include  the  complete  payment  history;  the  contact   log;  and  any  other  relevant  information  to  determine  whether  the   borrower  is  actually  in  arrears.    


b. This  review  must  include  a  determination  that  all  loss  mitigation   requirements  (as  set  out  by  HAMP,  investors,  FHA,  GSE’s,  etc.)  have   been  met,  and  the  servicer  must  disclose  to  the  customer  all  inputs   and  calculations  done  to  establish  qualification  for  a  loan  modification   (see  NPV  transparency  above).     c. Servicers  must  develop  a  protocol  for  evaluating  Pooling  and  Servicing   Agreements  for  investor  restrictions  and  must  seek  a  waiver  if   necessary.   Written  Confirmation  of  Review  to  Borrower   If  a  borrower  is  not  offered  a  loan  modification,  the  servicer  must  provide  a  sworn   affidavit  to  the  borrower,  disclosing  the  reasons  for  denial,  including—   a. any  calculations  done  to  determine  loan  modification  eligibility;  and   b. if  the  denial  is  due  to  investor-­‐imposed  restrictions,  the  specific  language  in  the   PSA  prohibiting  the  modification,  instructions  on  how  the  borrower  can  view   the  full  PSA,  and  a  written  log  of  the  servicer’s  efforts  to  obtain  a  waiver  of  this   restriction.           Borrower  Appeals  Process     The  denial  letter  must  provide  the  borrower  with  an  opportunity  to  appeal  this   determination  to  a  neutral  party.    Foreclosure  can  only  be  resumed  after  written   denial  has  been  provided  and  time  for  an  appeal  has  passed.  If  an  appeal  is  pending,   no  foreclosure  can  be  resumed.   No  Legal  Foreclosure  Without  Proof  of  Due  Diligence   Servicers  should  be  required  to  file  a  certification  of  loan  modification  procedures   as  a  precondition  to  a  foreclosure  sale.    In  the  case  of  a  non-­‐judicial  foreclosure,  the   government  official  responsible  for  recording  deeds  and  other  transfers  of  property   in  the  jurisdiction  in  which  the  property  is  located  shall  not  permit  the  recordation   of  a  deed  transferring  title  after  a  foreclosure  without  certifying  that  the  party   conducting  the  sale  has  demonstrated  that  the  requirements  of  this  section  have   been  met.    A  sale  of  property  in  violation  of  this  subsection  is  void.       Consistent  Communication  with  Consistent  Staff   Upon  contacting  the  servicer,  the  borrower  must  be  assigned  a  case  manager  that   will  remain  with  that  borrower  throughout  their  loss  mitigation  experience.    This   case  manager  will  have  decision-­‐making  authority  and  access  to  the  highest  levels   of  management  in  the  company.    It  is  permissible  for  additional  line  staff  to  assist   the  case  manager,  as  long  as  the  case  manager  is  always  accessible  to  the  borrower.     If  a  servicer  is  temporarily  incapable  of  providing  this  adequate  staffing  level,  the   servicer  must  refer  to  a  licensed  special  servicer  until  adequate  staffing  levels  are   reached.      


  Problem:    Servicers  take  unfair  advantage  of  borrowers  in  default  by  charging   multiple  fees,  sometimes  for  services  that  are  unnecessary,  and  sometimes  for  

costs  that  are  disproportionate  to  the  service  being  performed  (in  some  cases  by   affiliated  companies).     Solution:     • All  Fees  Must  Be  Reasonable  and  Transparent   All  servicer  fees  must  be  bona  fide  and  reasonable  and  fully  disclosed  to  the   borrower.    Lender  attorneys  fees  charged  to  borrowers  may  not  exceed  bona  fide   and  reasonable  fees  for  work.    Fees  may  only  be  collected  for  services  actually   rendered  or  for  work  actually  performed.             • Forced-­place  Insurance  Severely  Limited   The  use  of  force-­‐placed  insurance  must  be  limited  to  reasonable  application,   affordable  payments  and  only  after  other  options,  including  borrower’s  option  to   purchase  on  open  market,  have  been  exhausted.       Problem:    For  any  requirements  (including  those  already  in  place),  adequate   enforcement  provisions  and  staff  must  be  put  in  place  so  servicers  are  not  able  to   ignore  the  requirements  with  impunity.     Solution:     • Each  settlement  should  contain  the  creation  of  an  ombuds-­‐office  under  the  AG  that   will  investigate  violations  of  the  agreement.    Fines  should  be  imposed  for  violations   of  the  agreement  if  servicer  refuses  to  cure.    Also,  the  AGs  should  have  the  right  to   issue  a  “cease  and  desist”  letter  to  halt  foreclosure  activity  during  the  investigation.     • A  portion  of  any  monetary  funds  from  the  settlement  should  be  directed  to  legal  aid   and  housing  counseling  groups  to  assist  with  modifications  and  enforcement  of   agreement  including  foreclosure  prevention  litigation.       • In  addition  to  assigning  each  borrower  a  single  case  manager,  a  single  team  should   be  created  in-­‐house  at  each  servicer  as  part  of  the  settlement  to  oversee  loan   modification  activity  under  the  settlement.       Problem:    Because  of  entrenched  problems  and  long-­standing  fraudulent   practices,  many  families  who  should  have  received  a  loan  modification  have   already  been  harmed,  including  the  loss  of  their  homes.       There  are  two  basic  categories  of  homeowners  who  have  been  harmed  by  servicers’   malfeasance:    (1)  those  who  have  lost  their  homes;  and  (2)  those  who  are  still  in  their   homes,  but  have  been  denied  a  loan  modification,  pushed  into  default,  or  merely  had   improper  fees  tacked  onto  their  account.        

Solution:     • Remedies  for  Those  Still  in  Process   For  homeowners  who  have  not  yet  lost  their  home  in  a  foreclosure  sale,  servicers   should  institute  a  supervised,  full  review  of  every  file  marked  in  default.    This   review  must  include  a  review  of  the  payment  history,  including  the  timing  and   application  of  payments  and  the  validity  of  fees  charged.         a. Homeowners  found  not  to  be  in  default  should  be  removed  from  foreclosure,   corrections  of  credit  reporting  status  must  be  provided  to  the  credit  bureaus,   and  accounts  should  be  fully  corrected.         b. All  pending  foreclosures  should  be  halted  while  this  review  takes  place,  and   dual  track  processing  must  be  stopped  on  all  loans  so  that  the  modification   review  can  be  completed.       c. Fees  should  be  rolled  back  and  limited  to  reasonable  and  necessary  ones.       d. Recalculation  of  principal  balances  should  be  done  to  account  for  improperly   assessed  fees  or  overcharged  interest.     • Remedies  for  Those  Whose  Foreclosures  Have  Been  Completed   The  servicers  should  also  be  required  to  undertake  a  review  of  all  completed   foreclosures  to  identify  any  cases  where  the  foreclosure  was  executed  on  the  wrong   home,  where  the  homeowner  was  not  in  default,  and  where  the  foreclosure  was   completed  without  completing  the  loan  modification  review  process,  providing  a   written  denial  to  the  homeowner,  or  failing  to  offer  a  qualifying  homeowner  an   appropriate  modification.         a.    If  the  home  has  not  yet  been  sold  to  bona  fide  third  party,  the  servicer  should   offer  to  restore  the  mortgage,  with  a  reduction  of  the  principal  balance  to   account  for  all  assessed  foreclosure  fees,  as  well  as  any  improper  fees.    If  the   homeowner  cannot  afford  the  current  mortgage  payments,  they  should  be   assessed  properly  for  a  loan  modification  under  the  procedures  established   above.    Servicers  must  further  provide  corrected  credit  reporting  to  the  credit   bureaus  to  mitigate  the  negative  credit  reporting.    A  restitution  fund  should  be   established,  funded  by  the  servicers,  to  provide  damages  to  this  class  of  injured   party.     b.    If  the  home  has  already  been  sold  to  a  third  party  or  if  the  homeowner  no   longer  wishes  to  retain  the  home,  the  servicer  should  be  required  to  refund  to   the  homeowner  all  foreclosure  fees  assessed  against  the  homeowner’s  account,   plus  the  amount  by  which  the  valuation  the  servicer  relied  on  exceeds  the   foreclosure  sale  price.      Servicers  must  also  take  steps  to  repair  the   homeowner’s  credit  in  these  situations.    A  restitution  fund  should  be   established,  funded  by  the  servicers,  to  provide  damages  to  this  class  of  injured   party.     c.    If  the  homeowner  who  was  subject  to  a  wrongful  foreclosure  cannot  be  located,   the  servicer  should  be  required  to  deposit  the  money  that  would  otherwise  be   paid  to  the  homeowner  into  the  fund  for  legal  services  and  housing  counselors.  

    Problem:    Under  the  current  system,  borrowers  who  are  denied  for  loan   modifications  do  not  have  access  to  any  kind  of  appeals  or  escalation  process  to   have  the  decision  reviewed  for  accuracy.     Solution:             • Every  borrower  must  have  the  right  to  appeal  to  an  independent  third  party—a   court,  mediator  or  public  agency—that  can  review  the  servicer’s  loss  mitigation   effort.    Foreclosure  must  be  stayed  during  the  appeal.       Problem:    Mortgage  fraud  has  caused  a  ripple  effect  of  negative  consequences  for   families,  communities  and  government,  including  reduced  property  values,   negative  equity  for  millions  of  American  homeowners,  widespread  job  loss,  and   massive  state  revenue  shortfalls.       Solution:     • Allow  homeowners  to  refinance  at  current  interest  rates  and  market  values.       Problem:    Throughout  the  entire  mortgage  process,  from  origination  to  servicing   and  modification,  banks  and  bank  executives  have  consistently  broken  the  law.       Bank  executives  knowingly  made  and  purchased  deceptive  and  predatory   mortgage  loans;  fraudulently  packaged  those  risky  loans  as  AAA  high  quality   investments;  ignored  the  securitization  rules  they  themselves  wrote;  and   systematically  falsified  loan  documents  in  a  rush  to  foreclose  on  families.    But  so   far,  not  a  single  bank  or  bank  executive  has  had  to  face  justice  or  pay  for  their   crimes.      

Solution:     • As  the  top  law  enforcement  officials  in  our  states,  Attorneys  General  must  seek   criminal  penalties  as  they  discover  bankers  and  servicers  who  broke  the  law.     Banks  and  bank  executives  are  not  above  the  law  and  should  not  escape  the   consequences  for  their  illegal  actions.  

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