Defaults Stress Compliance Needs

Lenders need to make sure their procedures are in compliance with state foreclosure laws, especially as higher default rates rise across the country, said Roland Reynolds, a partner with Pfeifer & Reynolds LLP, at the recent SourceMedia Mortgage Servicing Conference here.

"You may not always be in compliance with state law procedures. Go back and do some house cleaning and make sure you are up-to-date," Mr. Reynolds said on the regulatory panel at the conference. "Look at your timelines and notices. Make sure you don't violate procedures in different jurisdictions."

A lot of times foreclosure attorneys will give servicers good advice regarding specific loan documents if there is a problem, he said. "You don't want to be continually violating procedures in some of the quirky jurisdictions that are out there in different places. One way to do that is just to go back to your foreclosure attorneys and tell them what you are doing. Ask them to certify it to see what you're doing is correct," said Mr. Reynolds.

"Push off that burden. It's a little bit difficult to do those 50 state reviews if you're not a particularly big house. Also, do that with reconveyance procedures and your vendors. Make sure you are in compliance with all the state laws. Now, we are coming into an environment where we are probably going to have more litigation, and this is the time to tighten up on all these things. In most cases, they are not potential class-action cases, but it's possible, particularly in areas making headlines."

Servicing shops should have a loan fraud loss recovery unit within them to some capacity, not just be delegated to quality control people who are just a separate repurchase group, he said.

"I think the way to do it is to pull a couple of people from within your organization who are familiar with underwriting. Maybe have them talk to your some of security folks, too. Teach them how to do asset searches and title reviews," said Mr. Reynolds.

"When you have a loan you've incurred the loss on, and you know it's coming up, review it. Look at that loss. Don't just write it off. Think about ways you can recover it. Either through something as simple as making a demand through the broker who you thought was ignoring the repurchase demands, looking at what else was involved in the fraud. If permissible, talk to the borrower. Be more forceful about it. Do it in-house or through your relationship with outside counsel."

A lot of times, these may not be big losses, he said.

A lot of losses are under $50,000, he added. "But if you get 10 of them at $15,000 a pop, it adds up, and I think suddenly you'll be a hero to somebody. It can take some expertise in understanding these frauds. But there are basic flipping schemes you'll see over and over. I really think it's useful and money that many of you might be leaving on the table."

Take a closer look at all of the communication that is sent out to borrowers and make sure you are in compliance with the Fair Debt Collection Practices Act, said Mr. Reynolds. Sometimes new letters and phone calls get past lawyers. "Communicate and understand the complaints from borrowers. The lawsuits we see are often things that could have been headed off by early communication with the borrowers. Review deeds in lieu and short sales. For foreclosures, review tax reporting and 1099s."

Craig Lackey, executive vice president, deputy general counsel, Countrywide, told servicers to focus more on assessing modifications and making sure that policies are neutral.

There can be difficulty in assessing the cost on a particular loan, especially when there is a great deal of focus on trying to help borrowers and a great deal of negative focus on lenders both in which the manner they made the loans to start with and then later servicing them, he said.

"Assessing modifications, I think that's something you have to consider. You also have to consider the fact that every investor may have a different policy and a modification fee that you can charge. Fannie and Freddie both have specific dollar amounts," he said. "What is your actual cost and is it reasonable to charge a modification fee in connection with this particular borrower's modification and their circumstances?"

He also suggested for those in California, if servicers charge a modification fee, and if the borrower subsequently defaults on the agreement and goes into foreclosure at the time of making demand for reinstatement, they should reconsider collecting the modification fee.

Look at your relationship with the investor, he advised servicers. "At what point is the borrower allowed to modify the loan? Is there any incentive not to modify the loan that is past due 30 days? The borrower's attorney could look at the fact that the lender's decision is motivated to collect late charges while the borrower defaults."

Steve Kaplan, a partner with K&L Gates, told conference attendees contested foreclosures are much more significant today than 10 years ago. His office is busier now defending servicing class actions. "It's not because the numbers of originations have decreased, but servicing has increased significantly. I was shocked to find out we had 14 or 15 contested foreclosure actions. That is highly unusual for a larger firm like ours to frankly be dealing with this," said Mr. Kaplan. "This is the most interesting time I can remember."

The industry should expect to see more legislative initiatives on foreclosures, he said. At the federal level, there has been talk of moratoriums and other changes in the foreclosure process. "We've heard from both sides of the fence. Congress, the House and Senate say they don't plan to do that." (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.bondbuyer.com/ http://www.sourcemedia.com/