1. Financial Bulletin
Regulations and developments affecting the financial services industry March 9, 2011
Proposed mortgage reform:
What servicers need to know
Last Thursday, the state attorneys general • Loss mitigation requirements — test. If the test is positive, the servicer
and federal regulators submitted a Mortgage servicers would be required must send the results to the trustee
27-page term sheet to the country’s five to thoroughly evaluate borrowers for or other authorized parties to obtain
largest 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 to
servicing procedures. The term sheet have to offer and facilitate loan consider principal reduction as
covers 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 evaluate
modifications and more. Negotiations a higher net present value (NPV) than delinquent loans with loan-to-value
between the institutions and regulators foreclosure. If a borrower requests ratios of more than 100 percent and
will 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 standard
term sheet and their implications for agreement prohibits one, the servicer modification.
mortgage 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. 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 Jordan
Servicers would be prohibited from initiating a foreclosure National Banking and Securities
Industry Leader
or filing a motion for relief from a bankruptcy plan while T 212.624.5310
E nichole.jordan@us.gt.com
a modification evaluation is in process or an application for
Molly Curl
a loss modification program is pending. Bank Regulatory National Advisory Partner
T 214.561.2450
E molly.curl@us.gt.com
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2 Financial Bulletin – March 9, 2011