On July 11, the Board of Governors of the Federal Reserve System (Board) issued guidance to emphasize the importance of appropriate risk management practices and controls in connection with a decision not to complete foreclosure proceedings after they have been initiated (a situation referred to in the guidance as an abandoned foreclosure). This guidance applies to state member banks, bank holding companies and savings and loan holding companies (collectively, banking organizations) with residential mortgage servicing operations.

According to the Board, "[i]nformation obtained on mortgage industry practices has revealed that lenders and servicers sometimes discontinue a foreclosure process without notification to borrowers or local authorities, which can raise a number of issues. Banking organizations with residential mortgage servicing operations should ensure that the following key concepts are addressed in their policies and practices governing abandoned foreclosures:

  • Notification to Borrowers. Supervised banking organizations should notify the borrower(s) when a decision is made not to pursue a foreclosure action, and should inform the applicable borrower(s) of their (1) rights to occupy their property until a sale or other title transfer action occurs, (2) financial obligations regarding the outstanding loan balance and the payment of applicable taxes and insurance premiums, and (3) property maintenance responsibilities.  
  • Communications. Supervised banking organizations should use all means possible to provide the notification described above to affected borrowers, particularly those who prematurely vacated their homes based on the servicers’ initial communications regarding foreclosure actions. In particular, when attempting to provide the notification, supervised organizations should employ the same extensive methods they use to contact borrowers in connection with payment collection activities.  
  • Notification to Local Authorities. Supervised banking organizations should ensure that their procedures include reasonable efforts to notify appropriate state or local government authorities of the organization’s decision to not pursue a foreclosure, including complying with applicable state or local government notification requirements. These local entities may include tax authorities, courts, or code enforcement departments.  
  • Obtaining and Monitoring Collateral Values. Supervised banking organizations should have a process for obtaining the best practicable information on the collateral value of a residential property that may be subject to foreclosure, updating this information on a regular basis and using current information in their assessment as to whether to initiate, continue, or abandon a foreclosure proceeding."

The Board indicated in the guidance that both safety and soundness and consumer compliance examiners will be monitoring abandoned foreclosure procedures.

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