The Federal Reserve Board recently issued guidance regarding risk management controls and procedures in situations where banks have made a decision not to follow through with foreclosure proceedings after they have been started. The document applies to state member banks, bank holding companies and savings and loan holding companies (collectively, banking organizations) with residential mortgage servicing operations. There are several notable portions in the document that the FRB considers “key concepts”, and that they encourage banks to follow in their policies and procedures.
Notification to Borrowers
Banks should inform borrowers when a decision is made not to pursue a foreclosure action. This notification should include the following:
It is emphasized that ,“all banking organizations should use all means possible to provide the notification described above to affected borrowers, particularly those who prematurely vacated their homes based on the servicers’ initial communications regarding foreclosure actions.”
The guidance further states that bank should make the same effort to notify borrowers of the above as they would in their attempts to collect on the debt owed on the property. In other words, if you are sending out certified letters and are making efforts to contact the borrower via phone, the FRB wants the same emphasis placed on notification.
Notification to Local Authorities
Banks should, in addition, notify state or local government of their decision not to move forward with a foreclosure. A bank would, of course, want to ensure they are contacting local tax departments to maintain payment on quarterly assessments, outstanding water/sewer activity, to protect their interest in the property by avoiding unnecessary liens.
Obtaining and Monitoring Collateral Values
Banks should have a process in place for obtaining information on the property value and update it on a regular basis. A bank should have already re-valued the property as it most certainly would be considered impaired, and it would need this information in order to complete an accurate ASC 310 analysis. The definition of “regular” is deliberately ambiguous, (hopefully) allowing banks to make the determination of what is considered “regular “ for their own standards rather than by imposing a valuation regimen that is not financially in the bank’s best interests.
Finally, the FRB details the supervisory process to elaborate on what they will be looking for specifically in their field examinations. They state:
“…safety-and-soundness examiners will determine if an organization’s policies and procedures include regular monitoring of property values. This review may be done as part of the regular assessments of banking organizations’ appraisal and evaluation programs.
Consumer compliance examiners will determine if the organization took appropriate steps to notify property owners and local authorities of a decision to discontinue a foreclosure proceeding, provided appropriate training to its staff, and conducted appropriate oversight of third party foreclosure service providers to ensure compliance with these guidance requirements. In addition, consumer compliance examiners will determine if the organization’s decision-making process for initiating and discontinuing a foreclosure proceeding reflects responsible, prudent business practices that consider the current collateral property value and effect of foreclosure abandonment on property owners, local authorities, and other interested parties, and minimizes any potential adverse effects.”
In other words, make sure your policies and procedures are amended to reflect their recommendations, and DOCUMENT your efforts in training and oversight, if you are using a third party for foreclosure activity. The last part regarding “responsible, prudent business practices” is a bit harder to realize, but if your work out or loan committee write ups and minute meetings can sufficiently lay out the bank’s decision making process regarding a particular property that could go a long way to justify any decision that has been made.
To read a copy of this document, please click here.
Manager, Lending and Lending Compliance
Thomas LaChac is Manager of P&G Associatesâ€™ Lending and Lending Compliance team, and brings a wide range of experience in regulatory underwriting, quality assurance, regulatory compliance management and the banking and mortgage industries.