Under the agreement, which still must be ratified by other agencies involved with the issue, servicers would be required to offer a loan modification when the value of a borrower's home is greater than its value in a foreclosure. Loss mitigation activities would have to be initiated within 90 days after a borrower was delinquent, and such procedures would have to be disclosed to borrowers prior to a mortgage closing.
The servicing rules come as part of risk retention standards, which were required by the Dodd-Frank Act enacted last year. As part of the deal, borrowers would have to make at least a 20% downpayment to meet criteria that exempts lenders from retaining a portion of the loan when selling it into the secondary market.
The law required several agencies, including the Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, Federal Reserve Board, Securities and Exchange Commission and Federal Housing Finance Agency to write rules outlining risk retention standards, but provide a “qualifying residential mortgage” exemption for loans that meet strict underwriting criteria. If lenders made loans that met such standards, they would not have to retain a portion of the loan if they sold it into the secondary market.
But the banking agencies have fought for months over whether servicing standards should be included as part of the QRM exemption, with FDIC Chairman Sheila Bair arguing it was the best way to fix ongoing problems in the servicing arena. The OCC, however, favored separate servicing standards, saying the risk retention rule was not the appropriate place to handle the topic.
The Fed has been working for weeks to broker an agreement between the FDIC and OCC. Under the deal, both sides get what they want. Servicing standards will become part of the QRM, but the agencies will also continue work on separate servicing standards.
The FDIC board, which includes the OCC, is scheduled to discuss the issue at its March 15 meeting. While the banking agencies agree, sources said, the deal will still have to be cleared by the SEC, FHFA and the Department of Housing and Urban Development.