Fraud and Prevention

New Diligence

Perspectives by Denis Brosnan
August 31, 2009

Over the past several months, trends in loss mitigation have been heavily influenced by state and federal requirements, most notably the Making Home Affordable Plan promulgated by the federal government. Additionally, several Western states have enacted new laws mandating due diligence by lenders to evaluate borrowers for loss mitigation alternatives to foreclosure.

One example is California's Senate Bill SB 1137, which requires a loss mitigation evaluation prior to commencement of non-judicial foreclosure proceedings. Additionally, California's Senate Bill SBx2 7/ABx2 7 mandates an extension of the three-month waiting period between the notice of default and the notice of sale for an additional 90 days, unless a servicer obtains an exemption from the applicable state commissioner based on the use of a robust loss mitigation program.

Finally, a growing number of states and jurisdictions have proposed or mandated mediation or conciliation programs prior to or concurrently with judicial or non-judicial foreclosures, including Nevada, Oregon, Pennsylvania, Colorado and Florida.

While these measures have undoubtedly helped some borrowers and tenants avoid the consequences of foreclosure, they have substantially raised the risks and costs of lenders, servicers and foreclosure law firms and trustees.

Traditional servicers are stretched organizationally to meet loss mitigation demand and to fulfill policy objectives, because their operational default management units were not built for the current level of activity. Now these companies must also adjust their procedures and increase compliance staffing.

As a result, servicers find themselves in the unenviable position of trying to be responsive to calls from government agencies and investors to be more proactive in loss mitigation while at the same time taking steps to ensure continued compliance with consumer protection laws and the contractual requirements of pooling and servicing agreements.

In the meantime, with so much emphasis now being placed on loss mitigation programs, it is important for borrowers to be aware of companies offering loan modification services. Many of these programs require defaulting borrowers to pay money up front in order to avoid foreclosure or to obtain a loan modification.

Unfortunately, the services provided by these organizations divert precious funds that the borrowers would otherwise need to make modified loan payments, while not ensuring a loan modification will be consummated. Frankly, the service offered by these organizations - the negotiation of a loan modification - is an activity probably best accomplished by the borrowers themselves.

Nevertheless, this activity is so prevalent that the Comptroller of the Currency recently issued a consumer advisory, http://www.occ.treas.gov/ftp/ADVISORY/2008-1.html, which outlined several "red flags" and examples of scams related to foreclosure rescue and mortgage modification. Additionally, many states have introduced legislation regulating the activity of foreclosure consultants or loan modification companies.

These statutes require licensing, bonding or registration, as well as complete written disclosure of the terms of the contract or services to be provided. Some states like California have taken this a step further by prohibiting the collection of any upfront fees from borrowers prior to performance of services described in the contract.

Denis Brosnan is the CEO of Prommis Solutions, an Atlanta-based provider of mortgage foreclosure and bankruptcy processing services for mortgage servicers. Mr. Brosnan began his professional career as a practicing attorney, representing mortgage servicers in lender liability, foreclosure and bankruptcy eviction actions in North and South Carolina. For more information, call (800) 275-7171, or visit http://www.prommis.com.