Consumer Financial Services Alert - July 12, 2011

The OCC issued supervisory guidance to national banks, communicating standards for the oversight and management of mortgage foreclosure activities. Importantly, the Guidance requires that all national banks complete self-assessments of their foreclosure practices to ensure that the practices conform to the OCC’s standards by September 30th. As part of the assessments, foreclosure file reviews must be conducted to evaluate compliance with state and federal law and, if violations are found that result in financial harm to the borrower, remediation must be provided where appropriate.

The Guidance stems from a review by all the federal banking agencies of the foreclosure practices of 14 of the largest depository institution mortgage servicers that began last year and is ongoing.

The Guidance prescribes standards in the following six areas:

Foreclosure Process Governance

Management should ensure that foreclosure governance processes are sufficient to manage and control operational, compliance, legal, and reputation risk associated with foreclosure activities. Board action should be taken to ensure that management has addressed these areas. According to the OCC, depending on the level of activity, this will generally require policies and procedures that provide effective guidance, control, and monitoring of all foreclosure-related activities, including appropriate vendor management and audit and quality-control standards. Management also should ensure sufficient staffing, organizational structure and training is in place to carry out foreclosure activities in a proper and legal manner.

Dual Track Processing

According to the OCC, borrowers are often confused when a servicer is working with them to modify their mortgage but continues with legal proceedings related to foreclosure. To reduce this confusion, management should suspend foreclosure proceedings for successfully performing trial period modifications where they have the legal ability to do so under servicing contracts.

Affidavit and Notarization Practices

Management must ensure that attestations in foreclosure-related affidavits are truthful, accurate, and adequately supported by file documentation, that affiants have sufficiently reviewed the documentation and have adequate knowledge to make the attestations, and that notary practices conform to state legal requirements.

Documentation Practices

Management must ensure that all documents supporting foreclosure actions are maintained and have been properly endorsed or assigned. Further, management should ensure the maintenance of a clear audit trail reconciling foreclosure filings to servicer source systems of record. The accuracy of those records should be verified, including statements of total indebtedness and fees charged.

Legal Compliance

Management must ensure adherence to all laws and regulations related to mortgage foreclosures. In particular, the OCC reminds management that certain borrowers are provided additional foreclosure protections through the Servicemembers Civil Relief Act and bankruptcy provisions.

Third-Party Vendor Management

Management should properly structure, carefully conduct and prudently manage relationships with third-party vendors, including outside law firms assisting in the foreclosure process. Management should ensure that third-party vendors have the skills necessary to perform the assigned functions.

Click here for the Guidance.

Please call Michael Whalen (202-346-4315) or Lynne Barr (617-570-1610) with any questions concerning the Guidance. Michael and Lynne represent one of the 14 depository institutions in the ongoing federal banking agency foreclosure review and many banks in servicing matters generally.

The FRB and FTC issued final rules to implement the credit score disclosure requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Under the rules, if a creditor uses a consumer report to grant credit to a consumer on terms that are materially less favorable than the most favorable terms available to a substantial proportion of consumers from the creditor or in taking adverse credit action, the creditor must disclose to the consumer the credit score and related information in notices under the Fair Credit Reporting Act.  The rules amend Regulation V, the FTC’s rules and certain model notices in the Equal Credit Opportunity Act’s Regulation B.  Click here for the Regulation V and FTC rules amendments and here for the Regulation B amendments.  The amendments are effective 30 days after the date of publication in the Federal Register.

HUD issued a final rule setting forth the minimum standards for the state licensing and registration of residential mortgage loan originators, requirements for operating the Nationwide Mortgage Licensing System and Registry, and its oversight responsibilities pursuant to the Secure and Fair Enforcement Mortgage Licensing Act of 2008, to ensure proper monitoring and enforcement of states’ compliance with statutory requirements.

The rule clarifies the following undefined or ambiguous terms in the SAFE Act:

In the business.  Only those individuals who are engaged in the “business of a loan originator” must to be licensed as loan originators under the SAFE Act. The rule provides that for an individual to engage in the “business of a loan originator,” he or she must act as a loan originator in a commercial context, that is for the purpose of obtaining profit for any other individual or entity. The individual must also act with a degree of habitualness or repetition or the source of the financing must provide such financing or perform other phases of mortgage originations with a degree of habitualness or repetition.

Compensation.  The term “for compensation or gain,” used in the definition of “loan originator” is to be construed broadly, and is not limited to payments predicated on the closing of a loan.

In addition, the rule:

• Gives examples of “taking a loan application,” “offering or negotiating terms of a loan,” and “for compensation or gain,” as these terms are used in the definition of “loan originator.” An individual cannot avoid the “taking an application” element by directing others to physically receive applications and then pass the application to the individual.  “Offering or negotiating terms” covers presenting for consideration by a prospective borrower particular loan terms, whether verbally or in writing. Acting ‘‘for compensation or gain’’ is satisfied if an individual receives or expects to receive in connection with the individual’s activities anything of value, including, but not limited to, payment of a salary, bonus, or commission.
• Provides that loan processors and underwriters are not subject to loan originator licensing if the processor or underwriter performs his or her duties at the direction of and subject to the supervision and instruction of a state licensed loan originator or registered loan originator.
• Does not require individuals engaged in loan modifications or loss mitigation to be licensed as loan originators, instead deferring resolution of this issue to the Consumer Financial Protection Bureau.

Click here for the rule which is effective August 29, 2011.