SR 13-9 / CA 13-6: Minimum Standards for Prioritization and Handling Borrower Files with Imminent Scheduled Foreclosure Sale

SR 13-9 / CA 13-6: Minimum Standards for Prioritization and Handling Borrower Files with Imminent Scheduled Foreclosure Sale

BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
WASHINGTON, D.C. 20551

DIVISION OF BANKING
SUPERVISION AND REGULATION

DIVISION OF CONSUMER
AND COMMUNITY AFFAIRS

SR 13-9 / CA 13-6
April 23, 2013

TO THE OFFICER IN CHARGE OF SUPERVISION AT EACH FEDERAL RESERVE BANK AND TO THE CHIEF EXECUTIVE OFFICER OF FINANCIAL INSTITUTIONS SUPERVISED BY THE FEDERAL RESERVE THAT ARE ENGAGED IN MORTGAGE SERVICING ACTIVITIES

SUBJECT:

Minimum Standards for Prioritization and Handling Borrower Files with Imminent Scheduled Foreclosure Sale

Applicability to Community Banking Organizations: This guidance applies to any financial institution, supervised by the Federal Reserve, regardless of asset size, that engages in mortgage servicing activities.

Purpose

The Federal Reserve is issuing this letter to set forth guidance on sound business practices for residential mortgage servicing that Federal Reserve supervised financial institutions1 are expected to address in their collections, loss mitigation, and foreclosure processing functions. The guidance confirms the minimum standards that all regulated institutions are expected to adopt in prioritizing and handling borrowers’ files with imminent risk of foreclosure.

Background

The residential mortgage crisis revealed weaknesses in the servicing of residential mortgage loans.2 These weaknesses were pervasive throughout the mortgage servicing industry and were centered in the administration of delinquent loans, loss mitigation practices, and foreclosure processing. As a result, in February 2012, the Federal Reserve and Office of the Comptroller of the Currency (OCC) issued guidance to banking organizations subject to enforcement actions for deficient practices in mortgage loan servicing and foreclosure processing ("Consent Orders") establishing certain minimum standards for the handling and prioritization of files with an imminent foreclosure sale ("February 2012 Guidance"). The February 2012 Guidance was intended to ensure that borrowers would not lose their homes without first receiving either a review of their foreclosure in accordance with the standards, at a minimum, or a full independent review under the Consent Orders. At those servicers subject to the February 2012 Guidance, examiners are continuing to monitor these institutions for compliance with this guidance.

As of March 2013, the servicers already subject to the February 2012 Guidance account for more than 57 percent of the residential mortgage industry's total servicing volume. Consequently, the Federal Reserve and OCC have concluded that it is appropriate to broaden applicability of the guidance to encompass the remaining institutions subject to their respective jurisdictions that service residential mortgages, which collectively account for a significant portion of the residential mortgage industry's remaining servicing volume. The standards set forth in the attached guidance reflect the February 2012 Guidance, with updates and modifications to account for its broadened applicability, and are consistent with previously issued statements by the Federal Reserve concerning financial institutions' loss mitigation efforts.3

Supervisory Expectations

The Federal Reserve expects financial institutions that service residential mortgages to act responsibly in their administration of delinquent mortgages and borrowers at imminent risk of foreclosure. Financial institutions must comply with safe and sound banking practices, federal, state, and local laws, third party investor requirements, and the Making Home Affordable Modification Program requirements, as well as other existing contractual and programmatic commitments, as applicable. Prudent business practices in servicing residential mortgage loans include ensuring that, prior to proceeding to a foreclosure sale:

• The loan is in default under applicable law and investor requirements;
• Any borrower complaints, appeals, or escalations have been considered and addressed;
• The borrower is not subject to specific legal protections such as those afforded under the Servicemembers Civil Relief Act4 and bankruptcy law;
• The financial institution has the appropriate legal authority to foreclose;
• All appropriate notices have been provided to the borrower;
• Appropriate outreach and other loss mitigation efforts have been made;
• The loan is not currently in an active loss mitigation program;
• The borrower is not currently qualified or being considered for a loss mitigation action; and
• The financial institution is in compliance with all applicable federal, state, local, and other legal requirements.

The attached guidance confirms the minimum standards for the handling and prioritization of borrowers' files that are subject to an imminent (within 60 days) scheduled foreclosure sale. These minimum review criteria are intended to ensure a level of consistency across servicers, and should be used to determine whether a scheduled foreclosure sale should be postponed, suspended, or cancelled because of critical foreclosure defects in the borrower's file. The purpose of the guidance is to ensure that borrowers will not lose their homes without their files first receiving a pre-foreclosure sale review that, at a minimum, meets the standards listed in the attached guidance. The Federal Reserve expects that each institution subject to this guidance will promptly confirm that its existing processes comply with this guidance. If an institution has not already implemented these standards, it must implement them immediately.

These standards are not intended to incorporate the final rules amending Regulation X and Regulation Z issued by the Consumer Financial Protection Bureau (CFPB) on January 17, 2013, and effective on January 10, 2014, which govern mortgage servicers' loss mitigation and foreclosure processing functions.5 The Federal Reserve expects that all servicers will undertake appropriate action in a timely manner to ensure their practices will be compliant with the new rules by the effective date.

Federal Reserve Banks should distribute this letter to state member banks, bank and savings and loan holding companies (including their non-bank subsidiaries), and U.S. branches and agencies of foreign banking organizations that are engaged in mortgage servicing activities in their districts and to appropriate supervisory staff. Questions regarding this letter may be directed to:

• Jack Jennings, Senior Associate Director, at 202-452-3053, in Division of Banking Supervision and Regulation.
• Suzanne Killian, Senior Associate Director, at 202-452-2090, in the Division of Consumer and Community Affairs.

In addition, questions may be sent via the Board's public website.6

signed by
Michael S. Gibson
Director
Division of Banking
Supervision and Regulation

signed by
Sandra F. Braunstein
Director
Division of Consumer and Community Affairs

Attachments:

Minimum Standards for Prioritization and Handling Borrower Files with Imminent Foreclosure Sale

Cross References:

• CA letter 11-6, "Revised Examination Procedures for the Servicemembers Civil Relief Act"
• SR letter 07-16 / CA letter 07-4, "Statement on Loss Mitigation Strategies for Servicers of Residential Mortgages"

Notes:

1. Federal Reserve supervised financial institutions refers to state member banks, bank and savings and loan holding companies (including their non-bank subsidiaries), and U.S. branches and agencies of foreign banking organizations. Return to text
2. See the April 2011 report on "Interagency Review of Foreclosure Policies and Practices" http://www.federalreserve.gov/boarddocs/rptcongress/interagency_review_foreclosures_20110413.pdf Return to text
3. Refer to SR letter 07-16 / CA letter 07-4, "Statement on Loss Mitigation Strategies for Servicers of Residential Mortgages." Return to text
4. For more information regarding the Servicemembers Civil Relief Act, see CA letter 11-6, "Revised Examination Procedures for the Servicemembers Civil Relief Act." Return to text
5. See 78 Federal Register 10696 (February 14, 2013) and 78 Federal Register 10902 (February 14, 2013). Return to text
6. See http://www.federalreserve.gov/apps/contactus/feedback.aspx. Return to text

PDF

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Attachment
Minimum Standards for Prioritization and Handling Borrower Files with Imminent Foreclosure Sale (April 23, 2013) Operating standards for scheduled foreclosure sales The minimum standards set forth in this guidance reflect sound business practices that should be part of a mortgage servicer's ongoing collections, loss mitigation and foreclosure processing functions. Accordingly, the Federal Reserve requires that all state member banks, bank and savings and loan holding companies (including their non-bank subsidiaries), and U.S. branches and agencies of foreign banking organizations that service residential mortgage loans incorporate this guidance into their ongoing business processes. Failure to comply with this guidance may result in unsafe and unsound banking practices, non-compliance with foreclosure related consent orders, as applicable, and/or require rescission of completed foreclosures. Purpose This guidance confirms the minimum standards for the handling and prioritization of borrower files that are subject to an imminent (within 60 days) scheduled foreclosure sale. The purpose of this guidance is to ensure that borrowers will not lose their homes without their files receiving, at a minimum, a pre-foreclosure sale review conducted under the standards listed in this guidance, which also help to ensure loan modifications were considered as appropriate. Servicers of residential mortgages should use these review and validation standards to determine whether a scheduled foreclosure sale should be postponed, suspended or cancelled due to critical foreclosure defects in a borrower's file. These minimum review criteria are intended to ensure a level of consistency across servicers, not to supplant review and validation procedures that go beyond these minimums. Servicers that currently apply more than these minimum standards as part of their own pre-foreclosure sale review and validation procedures are expected to continue to do so. These standards are not intended to incorporate the final rules amending Regulation X and Regulation Z issued by the Consumer Financial Protection Bureau (CFPB) on January 17, 2013, and effective on January 10, 2014, which govern mortgage servicers' loss mitigation and foreclosure processing functions. The Federal Reserve expects that all servicers will undertake appropriate action in a timely manner to ensure their practices will be compliant with the new rules by the effective date.

Overview Servicers of residential mortgages should monitor all borrower files in the foreclosure process on at least a weekly basis to determine if a foreclosure sale is scheduled within the next 60 days. The servicer should implement procedures to perform and document a timely pre- foreclosure sale review according to the criteria set out in this guidance and appropriately postpone, suspend or cancel the scheduled foreclosure sale when warranted. The servicer will promptly determine whether the borrower is currently in an active loss mitigation program or is being actively considered for or has requested consideration under the Home Affordable Modification Program (HAMP) or other modification or loss mitigation program as further defined in standard number 9 below, and whether further foreclosure proceedings and/or the scheduled foreclosure sale should be postponed, suspended or cancelled as required by program standards as applicable. The following standards are a non-exhaustive list of criteria for which an exception would warrant postponement, suspension or cancellation of a foreclosure sale until the Minimum Pre￾Foreclosure Sale Review Standards are satisfied. As noted above, individual servicers may apply additional standards/criteria to postpone, suspend or cancel a scheduled foreclosure sale. Any negative response to the Minimum Pre-Foreclosure Review Standards detailed below will be considered a critical defect (except for standard number 7 where a positive response is a defect) and should cause the servicer to postpone, suspend or cancel a scheduled foreclosure sale. Independent control functions (such as audit, compliance, and risk management) should confirm and document servicer adherence to their own servicing standards/criteria and the minimum standards in this guidance through a program of monitoring, sampling, and testing of scheduled and completed foreclosure sales.

Minimum
Pre-Foreclosure Sale
Review Standards
Date of the scheduled foreclosure sale: [ blank space for the date] Once the date of foreclosure is established, the servicer needs to confirm the following information before foreclosing:

1. Is the loan's default status accurate?

2. Does the servicer have and can demonstrate the appropriate
   legal authority to foreclose (documented assignments, note endorsements, and other necessary legal documentation, as applicable)?

3. Have required foreclosure notices or other required
   communications to the borrower or others, as applicable, been provided in a timely manner?

4. Has the servicer taken all steps necessary to confirm whether
   the borrower, co-borrower, and all obligors on the mortgage, trust deed, or other security in the nature of a mortgage are entitled to protections under the Servicemembers Civil Relief Act (SCRA), including running queries through the Department of Defense database? If the borrower, co￾borrower, or other obligor is subject to SCRA protections, has the servicer complied with all applicable legal requirements to foreclose?

5. Determine whether the borrower is in an active bankruptcy.
   If so, does the servicer have documented legal authority to foreclose?

6. Determine whether the loan is currently under loss mitigation
   or other retention review or such review has been requested by the borrower as part of the foreclosure process. If so, did the servicer notify the borrower that all conditions necessary to effect the loss mitigation or retention action have not been met, what is needed to meet those conditions, and the date necessary to cure the deficiencies to avoid further foreclosure action? If a borrower submitted a complete loan modification application after the foreclosure referral, did the servicer comply with any applicable dual track restrictions?

7. Is the borrower currently in an active trial loss mitigation plan?

8. Determine whether the servicer accepted any payment from the
   borrower in the preceding 60 days (that is, were borrower payments, including interest, principal, fees, or escrow payments, applied to the borrower's account or retained in a suspense account). If so, did the servicer clearly communicate to the borrower that he or she is neither in nor being considered for a loss mitigation program, and that the servicer's acceptance of the payment in no way affected the status of the foreclosure that is proceeding?

9. As applicable, was the borrower solicited for and offered a loss
   mitigation option, such as, those required by HAMP, government-sponsored enterprises (GSEs), Federal Housing Administration (FHA), U.S. Department of Veterans Affairs (VA), state-level government programs under U.S. Department of Treasury, other third party investor, or the servicer's loss mitigation and modification programs? To the extent applicable, has the servicer complied with its loss mitigation obligations detailed in the National Mortgage Settlement? Have any borrower complaints, appeals, or escalations been considered and addressed?

10. Was the fully executed loan modification application submitted
    by the borrower, as defined by the applicable modification program, and reviewed by the servicer as required, including any timeline or notice requirements?

11. Was the modification decision correct and validated as required
    by the applicable modification program (to include, as applicable, compliance with program requirements and accuracy of calculations and application of the net present value (NPV) test) along with appropriate resolution and communication of any borrower complaint, appeal, or escalation?

12. Was the borrower or the borrower's representative (such as,
    housing counselor or attorney) notified of the loan modification decision and rationale as required by the applicable loss mitigation program or these standards?

13. If required by the GSE or other investor, has the servicer
    certified to the attorney conducting the foreclosure that all delinquency management requirements have been met, including that there is neither an approved payment plan arrangement nor a foreclosure alternative offer pending or accepted?