On April 13, 2011, the Office of the Comptroller of the Currency ("OCC") announced settlements with 14 mortgage servicers, including eight bank mortgage servicers, along with two third-party mortgage service providers and their subsidiaries (together, the "Servicers"). The settlements require, among other things, the Servicers to enhance compliance policies, review prior foreclosures, and change certain procedures relating to mortgage modifications. Although these settlements are somewhat similar to the universal settlement proposed by the 50 State Attorneys General ("AGs"), the OCC settlements do not require mandatory loan writedowns or mandatory mortgage modification. Because the OCC settlements permit the Servicers to propose compliance plans without writedown or modification mandates, they may negatively affect the ability of the AGs to complete a universal settlement.
The settlements stem from investigations conducted by the OCC, the Federal Reserve, the Office of Thrift Supervision, and the Federal Deposit Insurance Corp. in late 2010 into "unsafe and unsound practices" in processing foreclosures. In the settlements, which mirror one another, the Servicers agree to review all loans foreclosed between January 1, 2009 and December 31, 2010 to assess compliance with state and local laws and remunerate borrowers harmed financially by noncompliant foreclosure procedures. In addition, the Servicers agree to:
- refrain from seizing homes belonging to homeowners who negotiated a temporary or permanent loan modification;
- implement within 120 days a plan providing an avenue to petition for redress for borrowers who believe they have been harmed; and
- put in place "acceptable compliance programs" within 120 days that would ensure all mortgage servicing and foreclosure operations comply with OCC supervisory guidance, state and local laws, and the terms of the settlement.
According to the settlements, these compliance programs should address:
- standards for affidavits and documentation used in foreclosure and bankruptcy proceedings; policies overseeing the monitoring of mortgage servicing and loss mitigation operations; and policies governing appropriate staffing levels, training programs, and reviews of mortgage servicing, foreclosure, loss mitigation, and loan modification personnel;
- third party management of foreclosure or related functions;
- activities with respect to the Mortgage Electronic Registration System ("MERS") and processes to ensure compliance with MERS requirements;
- foreclosure review by an independent consultant;
- operations of management information systems;
- mortgage servicing activities, including those relating to loss mitigation, loan modification, and foreclosures; and
- risk assessment and risk management programs.
The Deputy Comptroller and Examiner-in-Charge in the Large Bank Supervision division of the OCC are tasked with overseeing the Servicers' compliance with the OCC consent orders. Servicers are required to submit quarterly reports to the OCC detailing the form and manner of actions taken to ensure compliance with the terms of the Orders. The settlements also provide for monetary penalties, although the amounts have not been released for violations of settlement terms. In the AGs' proposed settlement, the CFPB, along with the AGs, would play a similar oversight role, as servicers would be required to provide both the AGs and the CFPB with "regular state-specific data reports on compliance."
Although both settlements focus on similar policy and compliance issues, the AGs' proposed settlement sets forth a single set of policies for the Servicers to follow instead of allowing individual compliance plans. Specifically, the AGs' settlement would require mortgage servicers to establish a $20 billion fund to compensate borrowers who have been the subject of servicer misconduct and to fund programs assisting homeowners in avoiding foreclosure. A large part of these funds would be put toward loan modifications that include principal reductions for delinquent "underwater" mortgages—those mortgages with greater than 100 percent LTV. The AGs' settlement would also require that servicers take the following actions:
- evaluate all delinquent mortgages with LTV greater than 100 percent;
- offer borrowers loan modifications rather than initiate foreclosure when loan modifications will result in a greater net present value than foreclosure;
- offer borrowers modification plans that include principal reductions whenever those plans would result in a greater net present value than a standard loan modification; and
- implement "performance-based" principal reductions for qualifying borrowers, under which one-third of the borrower's forborne principal balance would be forgiven each year the borrower complies with loan modification terms over a three-year period.
In addition, mortgage servicers could not charge servicing fees on any forborne principal amount. The settlement would also provide borrowers with the opportunity to request an independent review of any denied loan modification request.
The AGs, led by Iowa AG Tom Miller, still believe a universal settlement is possible. According to Bloomberg news reports, AGs and lenders have reached "agreements in principle" on "several issues" that would be addressed by global settlement. However, due to disagreements over mandatory writedowns and "potential monetary payments by the banks," it may take "at least two months" to reach a final agreement. It is this same writedown issue that purportedly divided the AGs earlier this year. By entering into settlements with the OCC, the Servicers have likely established their own compliance plans as the baseline for continuing negotiations with the AGs. Because the OCC settlements do not require mandatory writedowns and modifications, it is possible the Servicers would balk at the inclusion of such terms in the universal AG settlement. In light of the OCC settlements, any future global settlement between AGs and lenders may be limited in both scope and force compared to the original proposed terms.