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Laws May Have Unintended Consequences

Dallas-Tension is evident in the mortgage servicing industry and federal regulators along with state lawmakers and consumer protection groups are coming after servicers, according to speakers on the legislative roundup session at the SourceMedia Mortgage Servicing Conference here.

"Everybody right now is trying to get into your space. There is tension there. We're seeing quite a bit of that on the East Coast. The rules are all being changed," said David M. Bizar, a partner with McCarter & English in Boston. He said attorneys general in New York and Connecticut are enforcing federal law and claiming suitability violations under the Truth in Lending Act.

"In the past when someone came in to originate a loan, all you had to do was try to figure out if they qualified for it under your credit criteria. Suitability is making this like buying stock in the stockbroker's office where the person actually owes a fiduciary duty to the person coming in wanting to buy the securities. That's never really been done. It's another shining example of if it starts to go through, our lives could change significantly."

Servicers are working more with lawyers in-house and externally in order to get through this and ensure they understand what is going on in the field, he added. "Recognize there is a little bit of an alphabet soup going on in our space and we have all these regulations - the OCC, the OTS, I don't know how many state regulators. And they're all doing their own thing."

If a bank is federally chartered, for a large portion, the state regulators can't touch them, Mr. Bizar said. "With everything going on in the states, I wouldn't be surprised if we see some of the institutions move to federal charters. But it doesn't help a bit unfortunately with the foreclosure requirements. There is simply no pre-emption to foreclosures."

Robert Power, senior vice president, issues specialist for Bank of America, in Plano, Texas, said there is a lot of talk regarding across-the-board foreclosure moratoriums and the new and emerging issue of foreclosure counseling/mediation. Eight or 10 states have either a statewide or significant jurisdictions that require some sort of mediation. Local government ordinances are mirroring this.

The bottom line is they delay foreclosures, he said. "We've all seen a dramatic shift on the focus of state policymakers over the past 18 months to two years," said Mr. Power. "For the last 10 years the focus has really been on loan production issues. During the last 18 months there has been a major shift to focusing on servicing issues. There are 800 servicing bills that I'm currently monitoring. Fifty-five percent of those bills deal with foreclosures alone. Historically 15%-20% deal with those issues."

Many lawmakers don't have a thorough understanding of how the servicing industry works. "It has taken them a long time to get up to speed. State legislators have the tendency to shoot first and ask questions later," he added. "They pass legislation without giving it a thorough examination as they should."

Some of these laws that require counseling or mediation could have a positive impact on the ability of servicers to reach customers whom they haven't been able to reach or bring them to the table to be able to work together.

But these laws can also have unintended consequences, according to Mr. Power. There is the potential borrower who hears that their state has passed an across-the-board moratorium or has some sort of mediation program, and when they receive a workout proposal, they decide to wait a month or more until their mediation session takes place to address the issue.

"In all that time, the clock is still ticking. The borrower drops further and further behind. If a borrower waits 30 to 60 days on their debt until mediation they may actually have fewer options available to them."

By the time of mediation the borrower may lose his/her best option for a loan modification, Mr. Power said. That is why it's important that borrowers understand the programs out there like the one offered by the Obama administration.

As a result of extremely high foreclosure rates, some proposed legislation allows tenants to get out of their leases as soon as they receive notice that their property has gone into foreclosure. Others require the servicer to honor the lease. Some bills extend eviction dates of an additional 30 or 60 days with no right to wave that.

Over 125 cities have local ordinances dealing with vacant properties and the number is growing, he said. Registration is required of these properties. A broad-based industry effort has been put in place to develop a nationwide system used to gather information for cities to identify the servicer, the property preservation company and the local real estate agent connected to REO properties in local communities.

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