Proposed Mortgage Reform


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Proposed Mortgage Reform

  1. 1. Financial BulletinRegulations and developments affecting the financial services industry March 9, 2011Proposed mortgage reform:What servicers need to knowLast Thursday, the state attorneys general • Loss mitigation requirements — test. If the test is positive, the servicerand federal regulators submitted a Mortgage servicers would be required must send the results to the trustee27-page term sheet to the country’s five to thoroughly evaluate borrowers for or other authorized parties to obtainlargest banks that outlines proposed all available loss mitigation options consent for the modification.requirements to overhaul mortgage before foreclosing. Servicers would Servicers are also encouraged toservicing procedures. The term sheet have to offer and facilitate loan consider principal reduction ascovers the entire foreclosure process, modifications instead of foreclosing an option whenever possible.interactions with borrowers, loan when the loan modifications result in Servicers would also have to evaluatemodifications and more. Negotiations a higher net present value (NPV) than delinquent loans with loan-to-valuebetween the institutions and regulators foreclosure. If a borrower requests ratios of more than 100 percent andwill continue over the next few months. a loan modification and the servicer offer a principal reduction if it would Here are some key points from the believes that a pooling and servicing result in a better NPV than a standardterm sheet and their implications for agreement prohibits one, the servicer servicers. would still have to perform the NPV continued>• Foreclosure and bankruptcy information and documentation — In states where foreclosure affidavits are not required, mortgage servicers would be required to provide borrowers with a sworn statement that includes facts supporting the servicer’s right to foreclose on the borrower. This statement would serve as a first notice to the borrower. These rules would also apply to bankruptcy proceedings.
  2. 2. Proposed mortgage reform: What servicers need to know (continued)• Dual track prohibited — Servicers • Development of comprehensive would be prohibited from initiating loan portals — Mortgage servicers a foreclosure or filing a motion will need to develop loan portals for relief from a bankruptcy plan where borrowers can access loss while a modification evaluation is in mitigation information, and submit process or an application for a loss and receive documents. modification program is pending. • Restrictions on servicing fees —• Borrower communication and All default and foreclosure- documentation — Servicers would be related service fees must be “bona required to provide borrowers with fide,” reasonable in amount and a single point of contact to handle disclosed to the borrower. While any loss mitigation communications. a loan modification application is Servicers would also be required in process, the servicer could not to create a single electronic record charge any fees related to the default, for each account that would be foreclosure or bankruptcy. The accessible by the servicer and other servicer would also have to make relevant parties. Servicers must available a schedule of fees. establish procedures to ensure timely documentation of a borrower’s The term sheet comes on the information. Recordkeeping heels of a report released by the systems will be subject to audits by Department of Housing and Urban independent auditors. Development (HUD) last Wednesday, About the newsletter which cited “systemic problems” in Financial Bulletin is published by Grant Thornton LLP. The people in the• Protections for military personnel lenders’ compliance with underwriting independent firms of Grant Thornton — Mortgage services must comply requirements for Federal Housing International Ltd provide personalized attention and the highest quality service to with applicable provisions of the Authority loans. The report found that public and private clients in more than 100 Servicemembers Civil Relief Act half of the 284 loans reviewed should countries. Grant Thornton LLP is the U.S. member firm of Grant Thornton International (SCRA) and any applicable state law have been disqualified because lenders did Ltd, one of the six global audit, tax and that protects military personnel. The not properly verify borrowers’ income or advisory organizations. Grant Thornton International Ltd and its member firms are not servicer must inform servicemember assess borrowers’ financial obligations. • a worldwide partnership, as each member homeowners that they may be firm is a separate and distinct legal entity. protected by the SCRA and refer Content in this publication is not intended them to advocacy organizations. to answer specific questions or suggest suitability of action in a particular case. For additional information on the issues discussed, consult a Grant Thornton client service partner. Contact information Nichole JordanServicers would be prohibited from initiating a foreclosure National Banking and Securities Industry Leaderor filing a motion for relief from a bankruptcy plan while T 212.624.5310 E modification evaluation is in process or an application for Molly Curla loss modification program is pending. Bank Regulatory National Advisory Partner T 214.561.2450 E © 2011 Grant Thornton LLP All rights reserved U.S. member firm of Grant Thornton International Ltd www.GrantThornton.com2 Financial Bulletin – March 9, 2011