You are on page 1of 25

Servicing Overview and Recent Regulatory Developments

Krista Cooley K&L Gates LLP 202-778-9257

September 25, 2011

Copyright 2011 by K&L Gates LLP. All rights reserved.

Servicing Is In the Spotlight

For the past year, all eyes have been focused on residential mortgage servicing Efforts to create and enhance programs for borrowers struggling to make mortgage payments Intense examination of servicers past and current servicing activities Significant efforts to implement servicing requirements at the federal and state level Unprecedented enforcement actions involving residential servicing activities The constant changes and incredible scrutiny from all angles makes it imperative that any entity servicing or considering servicing residential mortgage loans tread carefully

Servicing Overview
Summary of Servicing Functions Loan Transfers and Account Establishment Billing and Payment Processing Escrow Administration Borrower Communication
Customer Service
Handling inquiries

Resolving complaints

Notices and Disclosures


Servicing Overview
Summary of Servicing Functions Delinquent Servicing
Collections and Borrower Outreach Loss Mitigation Retention and Disposition
Repayment plans, forbearance agreements, loan

modifications, short sales, deeds-in-lieu of foreclosure

Foreclosure Management Real Estate Management Property Preservation and Protection Investor Reporting

Servicing Overview
Mortgage servicers are accountable to multiple parties, including: Borrowers Federal Regulators

GSEs State Regulators

Banking Regulators 50 State Attorneys General

Investors Master Servicers


Servicing Overview
Federal Regulation of Servicing Activities TILA Truth in Lending Act FCRA Fair Credit Reporting Act RESPA Real Estate Settlement Procedures Act FDCPA Fair Debt Collection Practices Act ECOA Equal Credit Opportunity Act EFTA Electronic Funds Transfer Act GLBA Gramm-Leach-Bliley Act HOPA Homeowners Protection Act National Flood Insurance Act Fair Housing Act GSE Guidelines HUD/VA/RHS Guidelines for Insured Loans

Disclosure requirements Credit reporting

Escrow administration Borrower communications Debt collection activities

Servicing Overview
State Regulation of Servicing Licensing and approvals Servicing Fees Disclosures/Notices Collection Activity Vacant Property Registration Property Preservation Foreclosure Mediation

Regulatory Developments and Foreclosure Avoidance Initiatives

Highlights of Recent and Ongoing Foreclosure Avoidance Initiatives
Fannie Mae Delinquency Management and Default Prevention The HAMP option and federal agency variations to the program State foreclosure mediation and servicer licensing requirements

Fannie Mae Delinquency Management and Default Prevention

Earlier this month, Fannie Mae reissued Announcement SVC-2011-08R, which amended delinquency management and default prevention guidance issued in June of this year Updated guidance must be implemented by October 1, 2011 Servicer must document all activity required by the Announcement in the mortgage loan servicing file

Fannie Mae Delinquency Management and Default Prevention

Initial and Reissued Announcement Guidance Includes: Specific collection/borrower outreach requirements
Detailed instructions regarding the number and timing of collection calls Revisions to the timeframes and content for written solicitations to borrowers regarding foreclosure avoidance Borrower Solicitation Letters
Must be sent at least once before referral to foreclosure and

once post referral to foreclosure, with some exceptions Timelines for sending based on delinquency and the borrowers response Letter may be customized, but must include all elements of Fannie Mae Forms 731 and 761 and be available to Fannie Mae for review upon request

Fannie Mae Delinquency Management and Default Prevention

Initial and Reissued Announcement Guidance Includes: Updated guidance for loan modifications
Clarifies the hierarchy for determining a borrowers qualification for loan modifications Requires servicers to be judicious when determining whether a modification over a forbearance plan or repayment plan is the most appropriate option based on the borrowers circumstances

Requirements and timelines for foreclosure referral

Provides instructions on the conditions and timelines for foreclosure referral Requires a pre-foreclosure referral review to determine that certain conditions have been met prior to referral

Home Affordable Modification Programs

Treasurys HAMP Program Designed to help borrowers avoid foreclosure by modifying loans to a level that is affordable and sustainable. The loan must meet certain eligibility criteria, including:

Currently occupied primary residence securing the loan First lien loan originated on or before January 1, 2009 Unpaid principal balance no more than $729,750 for one-unit property Total monthly mortgage payment exceeds 31% of gross monthly income Borrower experiencing financial hardship without sufficient liquid assets

Servicer must conduct a Net Present Value (NPV test) determines whether a modification at the affordable payment is more valuable to the mortgage holder than going through foreclosure Borrowers must complete a three-month trial payment period Currently set to expire on December 31, 2012


Federal Agency HAMP Options

1. FHA-HAMP Implemented through Mortgagee Letter 2009-23 and subsequent guidance issued by HUD Specific option within HUDs loss mitigation waterfall for FHA-insured loans with specific eligibility criteria Permanent addition to HUDs loss mitigation guidance Combines a loan modification and a partial claim No NPV test Three- or four-month trial payment period required, depending on delinquency upon qualification

Federal Agency HAMP Options

2. VA-HAMP Servicers must evaluate borrowers under the VAs loss mitigation waterfall before considering a VA-HAMP modification Does not require use of the NPV test Must meet eligibility criteria including:

Loan secured by borrowers primary residence Borrower must qualify and agree to the VA HAMP modification before Treasurys HAMP expiration date No restriction on loans originated before January 1, 2009

3. RD-HAMP RD-HAMP requires lenders to satisfy all independent RHS guidance related to special loan servicing as well as requirements specific to RD-HAMP. Servicers must therefore be familiar with RHS guidance and Treasury guidance specific to the RD-HAMP program.

State Developments Regarding Servicing and Foreclosure

State legislators and regulators have implemented laws and regulations requiring servicers to comply with foreclosure mediation requirements. Connecticut Until July 1, 2014, servicers that commence foreclosure actions must comply with foreclosure mediation provisions
Includes borrower mediation sessions that must occur within defined timeframes

Michigan Recently extended the sunset date for the mortgage loan modification negotiation program
Party may not commence foreclosure proceedings until the mortgagor has received notice of the availability of and had an opportunity to participate in the states mortgage loan modification negotiation program

State Developments Regarding Servicing and Foreclosure

States are also increasingly requiring the licensing or registration of servicers. Montana Legislation effective on October 1, 2011 will require the licensing of mortgage servicers and will regulate their servicing conduct Texas Recent legislation requires the registration of residential mortgage loan servicers
Department of Savings and Mortgage Lending has provided a list of Residential Mortgage Loan Servicing Best Practices
Address borrower outreach and counseling information,

foreclosure practices, and loss mitigation


Enforcement Trends Renewed Enforcement of Existing Servicing Requirements

As a result of the increased scrutiny on residential mortgage servicing in the last year, regulators have focused their attention on enforcing existing servicing requirements. Two examples: HUD servicing requirements for FHA-insured loans SCRA requirements for servicemembers


Focus on Servicing in HUD Enforcement Involving FHA-Insured Loans

All divisions of HUD responsible for enforcement MRB, QAD, OIG and the National Servicing Center in Oklahoma are focused on compliance with FHA servicing requirements October 8, 2010 Press release from the FHA Commissioner reminding FHA-approved servicers of their obligations under HUD regulations and HUDs authority to take administrative action for noncompliance

Focus on Servicing in HUD Enforcement Involving FHA-Insured Loans

Allegations focus on loss mitigation and appropriateness of the decision to offer loss mitigation
Significant monetary risk for violations treble damages for failure to engage in loss mitigation

Other allegations have included:

Quality Control of servicing activities Collection efforts including face-to-face meetings Delinquency reporting to the HUD SFDMS Timeliness of foreclosure

SCRA Compliance
Servicemembers Civil Relief Act, 50 U.S.C. app. 501 et seq. Federal statute that provides certain protections to:
Members of the Army, Navy, Air Force, Marine Corps and Coast Guard on active duty Members of the National Guard who are called to active duty for over 30 consecutive days to respond to a Presidentiallydeclared national emergency Commissioned members of the Public Health Service and the National Oceanographic and Atmospheric Administration (NOAA) Dependents of servicemembers also are eligible for relief under some provisions

SCRA Compliance Primary Protections Related to Mortgage Servicing

1. Interest Rate Cap (50 U.S.C. App. 527) Allows servicemembers to reduce interest rates to six percent (6%) for debts that existed prior to active duty during the period of military service and one year thereafter Interest over 6% is forgiven, not deferred 2. Foreclosure and Eviction Protection (50 U.S.C. App. 533) Servicer cannot initiate a sale or foreclosure action of mortgages secured by real property purchased prior to active duty until nine months after the servicemembers active duty terminates, absent court order or a waiver from the servicemember Any sales or foreclosures that do occur during the term of active duty or nine months thereafter are not valid

Recent SCRA Enforcement

Media reports of servicemember foreclosures earlier this year triggered calls for investigations and enforcement actions related to SCRA compliance DOJ, federal banking agencies, CFPB are all examining compliance with these requirements Servicer settlements earlier this year agreed to refund overcharges and address improperly completed foreclosures

Aggressive Enforcement of New and Developing Regulatory Requirements

New National Servicing Standards Additional settlements between regulators and servicers that will set industry expectations CFPB new regulatory regime with expansive enforcement authority Fair Lending and Bankruptcy litigation Additional state laws governing servicing and enforcement activities by state regulators


1. Emphasis on policies, procedures, and practices 2. Internal Controls

3. Keep up with new developments

4. Training on existing and new requirements

5. Record-keeping and document retention

6. Quality Control

Krista Cooley
K&L Gates LLP 1601 K Street, NW Washington, DC 20006