Loan Servicer Code of Conduct Proposed by State Officials and DOJ

According to the Wall Street Journal, the 50-state alliance of attorney generals who are working with federal agencies to investigate and reform mortgage servicing have sent their first list of demands to the nation's leading banks. 

The WSJ article, written by Nick Timiraos and Ruth Simon, claims the group sent a 27-page proposal to the banks last Thursday outlining a proposed code of conduct for its servicing operations. The WSJ appears not to have had access to the actual document and was relying on "sources familiar with it."  Shortly before the article appeared the Association of Mortgage Investors' released a comment on the Attorneys General investigation, urging Congress in particular to "respect the process." 

According to the WSJ, the letter was drafted by state attorney generals, the U.S. Department of Justice and three other federal agencies and comes on the heels of separate enforcement actions submitted by bank regulators. The document outlines a number of standards for reforming mortgage servicing.

• Adopting formulas that would force banks to more regularly consider offering loan write-downs to underwater borrowers.
• Enforcing firm modification timelines for servicers to meet, including notifications to borrowers of actions on modification requests.
• Providing a single point of contact for borrowers over the course of the modification process.
• Requiring a freeze on foreclosures during modification considerations and providing methods for penalties and enforcement.
• Outlining steps for banks to verify the accuracy of amounts owned and placing limits on fees the banks can charge distressed borrowers.
• Adopting directives to improve tracking of mortgage notes and chain of title.
• Increasing supervision of foreclosing law firms and other third-party vendors.

The letter indicates that the Mortgage Electronic Registration System (MERS), the industry owned mechanism for tracking mortgage documents that has been at the heart of many complaints about robo-signing and improper foreclosures, will be dealt with later.  

The WSJ says that this letter is separate from any settlement that may be worked out between the group and banks to address various abuses that came to light in the fall and led to foreclosure moratoriums in several states including a nation-wide pause in Bank of American's foreclosures.  Such a settlement, the newspaper says, "could include requirements for banks to write down more than $20 billion in loan balances for borrowers that are underwater or to pay more in fines. The current proposal, outlining a code of conduct, is designed to lay the foundation for more permanent changes in mortgage-servicing practices that would outlast such a settlement."

To further quote the WSJ article, "Banks said they are studying the document 'We are analyzing what was shared with us yesterday,' said a spokeswoman for Wells Fargo. A spokesman for Citigroup said, 'Our discussions with government officials are confidential.' Bank of America declined to comment.

The press release from AMI, which represents private investors, public and private pension funds and endowments, quoted the group's Executive Director Chris Katopis commenting, not on a specific letter, but on news reports concerning "the multi-state Attorney General investigation into mortgage servicer alleged misconduct."   Katopis stated:

"For months, the 50 state Attorneys General have worked on developing a settlement plan that helps Americans and our communities.  This is a bipartisan group of elected officials which includes Republicans and Democrats, conservatives, centrists, and all political stripes.  While the details of the plan's substance are forthcoming, we all must respect the integrity of the process.  We urge Congressional lawmakers to respect the rule of law, the autonomy of the states, and allow this process to continue without intervention, at least until all of the facts are made known to the public.

"As Congress reviews the proposed plan and other recommendations, the issue of defective loan put backs must remain high on the agenda, as it impacts a range of our institutions back home, such as state entities. "It is the greatest hope of mortgage investors that any settlement carefully consider the impact on the soundness of state pension, retirement systems, life insurance, and medical savings plans."

AMI may be responding in equal measure to the investigation and to efforts currently underway in Congress to eliminate the Making Home Affordable Program (HAMP), and otherwise eliminate or severely restrict the government's role in housing finance.