The 50 state attorneys general and a group of federal regulators have proposed settlement terms to the country's five largest mortgage servicers to resolve ongoing foreclosure abuse investigations. The recently released term sheet (the "Proposal") would affect millions of mortgages nationwide by imposing, among other things, mandatory loss mitigation requirements. The 27-page document calls for modification eligibility based on valuation formulas, an end to "dual track" processing, and guaranteed independent review. The Proposal sets forth requirements for foreclosure affidavits and certain internal policies to ensure compliance with any settlement. The Proposal carves out a significant oversight role for the Consumer Financial Protection Bureau ("CFPB" or "Bureau"). The CFPB will receive significant information regarding the servicers' loan modification policies and activities, foreclosure affidavit training and procedures, and input into each servicers' procedures to comply with the Proposal. In addition, the CFPB will have the power to enforce compliance with the terms of the Proposal.
This Alert focuses on those portions of the proposal over which the CFPB will retain significant oversight. Companies should refer to the Proposal itself to fully understand its potential impact.
Loan Modification and Independent Review
Current loss mitigation programs remain largely voluntary and guided by either independent agreements or federal initiatives like the Home Affordability Modification Program ("HAMP"). Yet, under the Proposal, servicers would assume an affirmative duty to offer some form of loss mitigation depending on the loan's "net present value" ("NPV"). Under the Proposal, if modification leads to a greater NPV than foreclosure, servicers must offer it. Although the Proposal permits servicers to define NPV, any such definition must be made available to the CFPB upon request. These new rules extend even beyond the initial modification decision. For example, a borrower may enroll in a trial period plan under HAMP or other proprietary modification programs. Under the Proposal, those modifications automatically become permanent once the borrower makes the first three payments. In short, loan modification would be the mandatory first option.
Servicers must consider loan modifications even where the NPV, as discussed above, or HAMP do not mandate modification. The Proposal requires servicers to consider principal reductions in all "appropriate circumstances to provide for sustainable modifications." Servicers may offer "performance-based reductions" in lieu of forbearance of principal. Under that arrangement, if the borrower complies with the loan modification terms over a three-year period, one third of the forborne amount is forgiven each successive year. And if principal is forborne, the servicer may not charge servicing fees on that amount. Yet, how these terms would be collectively interpreted remains to be seen. The Proposal also dictates that servicers encourage loss mitigation by adopting employee incentive plans favoring modification.
Perhaps the most significant element of the proposal is independent review for applicants denied modification. This internal review process may be through an ombudsman or an independent panel. In either case, the reviewer has the ability to obtain files and overrule the servicer's initial decision. Borrowers could present evidence that the NPV or eligibility calculation was erroneous. Servicers would then have to promptly make available account histories upon the borrower's request.
The CFPB stands to play a major oversight role in the loan modification and independent review process. Under the Proposal, the CFPB has the right to obtain the NPV formula used by the servicer. In addition, the entire review process would be subject to monitoring by the attorneys general and the CFPB. The monitoring process is undefined.
Dual Track Prohibition and Procedural Requirements
The Proposal largely eliminates "dual tracking." This term refers to simultaneous but independent processing of both foreclosure and modification proceedings for the same borrower. Under the Proposal, the ability to initiate foreclosure, file a motion for relief in a bankruptcy proceeding, object to confirmation of the borrower's Chapter 13 plan, or move to dismiss the borrower's bankruptcy case would all be halted while a good faith modification evaluation is in process. And once foreclosure does become an option, a referral could not be made until the applicant receives written notice that loss mitigation had been denied. The processes would have to be coordinated.
Procedural limits also accompany the dual tracking prohibition and loan modification requirement. Servicers have a duty to provide adequate staffing and systems for tracking borrower documents. The Proposal further calls for a "single point of contact," including "an email address and direct toll-free telephone number with a voicemail box for a single contact, a designated employee with primary responsibility to handle all loss mitigation communications." Every action taken on a foreclosure, loan modification, bankruptcy, or other servicing file, including all communications with the borrower, must be electronically documented.
During the loan modification process, any missing application document must be brought to the borrower's attention within 10 days of the application. The servicer must cease all collection efforts while the borrower is making timely payments under a trial loan modification or applying for modification. Furthermore, in judicial foreclosure states, or where filing is otherwise required by law, all servicers must submit an affidavit detailing their loss mitigation efforts and the results of those efforts. Loss mitigation will be evaluated upon review.
In response to the allegations of "robo-signing," the Proposal places strict requirements on the documentation required for foreclosures. Affidavits must include a detailed description of the affiant's (typically a servicer employee) basis of personal knowledge. Employers must implement "standards for qualifications, training, and supervision." And those specific standards, 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 CFPB. Moreover, the Proposal requires servicers to conduct independent audits regarding the accuracy of their financial systems containing mortgage information and to audit the accuracy of the information contained in foreclosure affidavits. The servicers must provide the results of these audits to the attorneys general and CFPB on a confidential basis.
Compliance, Monitoring, and Enforcement
The CFPB will play a critical role in the servicers' compliance efforts, monitoring of those efforts, and enforcement of the agreement. The Proposal provides that the servicers must adopt "enhanced" corporate governance procedures to monitor compliance with the agreement. Servicers are required to provide the attorneys general and CFPB with "regular state-specific data reports on compliance with [the agreement], particularly on loan modification efforts, including remedial actions taken." These reports must include certain information concerning court orders in foreclosure actions.
In addition, the attorneys general and CFPB have the power to select an independent third party to monitor the servicers' compliance with the agreement and would receive regular reports from the monitor. The attorneys general and CFPB will also have input on the servicers' procedures to resolve borrower complaints regarding noncompliance with the agreement. In other words, the Bureau looks to gain both a clear view of how modifications are being effected and a guaranteed say in how disputes are addressed.
Finally, the Proposal states that "a material violation of this Agreement constitutes an unfair and deceptive trade practice and a breach of the duty of good faith and fair dealing." This clause enables the CFPB to enforce this agreement through its powers under Dodd-Frank to prohibit unfair and deceptive trade practices.