FDIC May Change the Way Servicers are Compensated

In setting standards for bank securitizations, the Federal Deposit Insurance Corp. is seeking comment on changing the way residential servicers are compensated and suggesting that depositories should not be obligated to make more than three advances to cover delinquent monthly payments by homeowners. In terms of compensation, FDIC is asking if servicers should be paid incentives to modify loans as well as actual expenses. The FDIC's proposal also notes that loss mitigation has been a "significant cause of friction" between servicers and RMBS investors. "For RMBS, should contractual provisions in the servicing agreement provide for the authority to modify loans to address reasonably foreseeable defaults and to take such action as necessary or required to maximize the value and minimize losses on securitized financial assets?" FDIC asks in its advance notice of proposed rulemaking. The receiver of failed banks contends the misalignment of interests in the securitization process has caused significant losses to the Deposit Insurance Fund. The agency wants to fix what it calls these "defects." The proposal is being issued for a 45-day comment period.