rc11tucker.workshop3

8/3/2019 RC11Tucker.Workshop3

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Servicing Regulation ByEnforcement Action:

Understanding the New Rules and

How to Comply

Jonice Gray Tucker, Esq.Partner

BuckleySandler LLP


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Jonice Gray Tucker, Partner, BuckleySandler LLP

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Servicing Regulation By Enforcement Action: What are the New Rules and How Do Servicers Comply?

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Foreclosure documentation crisis has triggered

nationwide, multi-jurisdictional scrutiny of entire

default servicing process.

Federal Banking Regulators

Horizontal Review & Consent Orders

OCCs June 30, 2011 Guidance

Multi-State Attorney General Group/DOJ/CFPB

Detailed term sheet being negotiated.

Enforcement action now driving national servicing

standards and compliance expectations.

Overview


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3Servicing Regulation By Enforcement Action: What are the New Rules and How Do Servicers Comply?

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Federal Banking Regulators:Horizontal Review Overview

Horizontal review conducted in 4Q of 2010 by OCC,

Federal Reserve, and OTS.

FDIC participated by invitation.

Aimed at evaluating the adequacy of controls and

governance over foreclosure processes and the

authority to foreclose.

Simultaneous review of 14 federally regulated

mortgage servicers and two service providers.

Included a review of ~2,800 loan files.


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Federal Banking Regulators:Horizontal Review Findings

All foreclosed borrowers seriously delinquent

notwithstanding process errors. Generally adequate documentation of loan

ownership.

Notwithstanding, weaknesses found in critical areas:

Insufficient foreclosure governance policies and

procedures, Inadequate staffing to handle increased volume,

Critical weakness in the signing and notarizationof affidavits,

Undercharging and overcharging of fees and a

lack of accurate records reflecting fees actuallycharged,

Inadequate third-party vendor management,including oversight of foreclosure counsel, and

Quality control and audit deficiencies.


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Federal Banking Regulators:Consent Orders

The Orders require major reforms in mortgage

servicing operations. Acting Comptroller Walsh

Orders require servicers to undertake

comprehensive risk assessment and make

prospective changes:

Single-point of contact/Dual-tracking,

MIS improvements,

Expanded compliance responsibilities, and

Greater third-party oversight.

Look-back loan file review also required. Aimed at remunerating borrowers who were

financially harmed.


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Federal Banking Regulators:OCC Guidance

Consent Orders set baseline for national servicing

standards.

Major themes carried forward in follow-on guidance

to all OCC-regulated servicers issued June 2011.

Aimed at ensuring that all mortgage servicers

under OCC supervision adhere to appropriate

foreclosures management standards.

Requires banks under OCC supervision to conduct

self-assessments in at least six areas and make

changes going forward.

Banks also required to conduct foreclosure file

reviews.


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Multi-State Attorney General Group

Investigation by Multi-State Attorney General Group is

ongoing and focused on five largest servicers.

Working with the DOJ, Dept. of Treasury, and CFPB.

Term sheet has been subject of months of negotiations.

Clear attempt to set more detailed national servicingstandards through enforcement action.

Original proposal very aggressive, but more modest

reforms in counterproposals.

Addresses wide range of matters, including:

Foreclosure information and documentation,

Governance of loss mitigation functions, Permissible fees,

Payment posting, and

Lender-placed insurance.


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Settlement thought to be imminent during summer,

but stalled again.

Historically, multi-state group has been fractured

with multiple AGs expressing discontent in

written submissions and oral statements.

Latest sticking point is extent of liability release

to be provided to the financial institutions.

Exacerbated by FHFA lawsuits against 17

institutions.

Discontent by influential AGs (MA, NY, and NV)

and by servicers.


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Settlement nonetheless likely given power

of regulators and enforcement officials to

take high-impact remedial actions.

Resolution will set detailed de facto

servicing standards via enforcement action.

Mandated changes likely to substantially

increase time and cost associated with

default servicing.


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Default Servicing Standards:Significant Themes

Media, regulators, and consumer advocates remain

focused on issues related to default servicing

keeping politicians focused on these issues.

Compliance with major themes embodied in

Consent Orders advisable even if not under

Consent Order, subject to OCC Guidance, or

otherwise the subject of enforcement action.

Many institutions also conducting file reviews with

expectation that regulators will mandate reviews in

future.


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Default Servicing Standards:Significant Themes

Six Major Compliance Themes in Consent Orders

Foreclosure process governance

Dual track processing

Affidavit and notarization practices

Documentation practices

Legal compliance

Third-party vendor management


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Standard #1:Foreclosure Process Governance

Concept: Foreclosure policies must be well

documented and contain adequate controls to

manage operational compliance, legal, and

reputation risk associated with foreclosure activities.

Employee compliance with written policies must be

monitored.

How to Comply: Review and revise/rewrite written

policies and procedures for all key functions and

install mechanisms to ensure the appropriate

oversight of compliance at all levels.


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Standard #2:Dual Track Processing

Concept: Foreclosures cannot proceed for

borrowers who have been approved for and have

not defaulted on loss mitigation plans.

How to Comply: Discontinuation of practice.

Requires significant coordination among internal

groups and third-party service providers.

Quality control and data integrity checks

paramount.


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Standard #3:Affidavit and Notarization Process

Concept: Affidavit attestations must be based on

personal knowledge of the affiant and supported by

documentation. Notaries and signatories must

comply with state notary requirements.

How to Comply: Review and revise/rewrite written

procedures on standards for personal knowledge,

use of business records and adherence to

notarization formalities.


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Standard #4:Documentation Practices

Concept: Documents supporting foreclosure

proceedings must be maintained, properlyendorsed/assigned, and their accuracy must be

verified.

How to Comply: Implement processes sufficient to

ensure: Ability to locate and access all pertinent

documents (document retention and

transmission checklists recommended for

outside counsel), and

Timely and appropriate documentation of legal

standing to foreclose.


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Standard #5:Legal Compliance

Concept: Banks must comply with all laws and

regulations relating to foreclosure, with special focus

on SCRA and bankruptcy protections.

How to Comply:

Acquire detailed compilation of state foreclosure

laws and regulations.

Actively monitor regulatory changes.

Timely implement changes and audit processes

to ensure compliance.

Ensure that internal departments are

communicating effectively with one another and

outside counsel.


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Standard #6:Third Party Vendor Management

Concept: Management must ensure that third-party

vendors are qualified to undertake the roles forwhich they are hired and must oversee and monitor

vendors closely, including outside foreclosure

counsel.

How to Comply: Review current relationships with all third party

vendors.

Implement a careful due diligence process whenselecting and renewing vendors.

Provide ongoing oversight, including periodicreviews.

Ensure that vendors comply with bankprocedures legal standards and emergingindustry best practices.


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Iowa Sample


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Georgia Sample


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File Assessment:Foreclosure File Review

Purpose(s) of file review

Identify financial injuries to borrowers and

remunerate/remediate.

OCC/FRB recently provided guidance onremediation to those subject to Consent Orders.

Identify technical errors in process and fixgoing forward.

Use checklists that allow for a yes/no/could not be

determined construct.

Determine problem foreclosure firms and severties or fix problems.

Document retention checklists.


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Emerging Issue:Fair Servicing

Regulators engaging in heightened scrutiny of servicing

issues, with unprecedented attention and access to loan-level servicing data.

Because foreclosure crisis seen as hitting minority

communities harder, increasing public pressure to ensure

that borrowers who are members of minority groups have

a fair opportunity to prevent foreclosure.

Fair Lending Unit within DOJ Civil Rights Division

analyzing potential discrimination in loan modifications

Demographics at census tract level likely to be an

analytical driver.

Banking regulators also prioritizing fair servicing,

particularly in the default context.

E i I


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Emerging Issue:Fair Servicing

Consumer advocacy groups shifting focus to race disparities in

workouts and treatment of REO properties.

NCRC study suggested that among HAMP eligible borrowers36.4% of white borrowers received loan modificationapprovals in contrast to 32.3% of Hispanic and 24.3% ofAfrican American borrowers.

NFHA investigation alleges disparities in maintenance andmarketing of REO properties based on predominate race in

census tracts. Studies have significant limitations.

More recent Federal Reserve Bank of San Francisco studyshows that minority borrowers were slightly more likely toreceive a loan modification, and less likely to re-default afterthe modification.

NFHA investigation used questionable methodology.

Pro-consumer studies, nonetheless, likely to serve as a

springboard for regulator attention and private litigation alleging

servicers engaged in discrimination with respect to servicing

practices.

C t t I f ti


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Contact Information

Questions?

Jonice Gray Tucker

202-349-8005

[email protected]

BuckleySandler LLP

1250 24th Street NW, Suite 700

Washington, DC 20037

www.buckleysandler.com
mailto:[email protected]://www.buckleysandler.com/http://www.buckleysandler.com/mailto:[email protected]