The Impact of the 2012 National Mortgage Settlement’s Servicing Standards
By Nate Coulter · July 2, 2013 · 2013 Ark. L. Notes
In categories: Administrative Law, Business Law, Debtor/Creditor, Financial Institutions Law, Practice Tips, Snapshot
In February 2012, after a lengthy investigation, the attorneys general of forty-nine states (all but Oklahoma), the District of Columbia and the federal government reached an agreement with five large banks and mortgage servicers to address widespread problems in the national mortgage servicing market. This agreement, known as the “National Mortgage Settlement,” (“NMS”) led to the entry of five separate consent judgments in the United States District Court for the District of Columbia for each of the five defendant banks and servicers, Bank of America Corp, Wells Fargo, Ally Financial, Inc./GMAC, Citigroup, Inc., and J.P. Morgan Chase & Co. Justice Department (DOJ) Press Release, March12, 2012. These five banks held the top sixty percent of the mortgage market nationally. National Association of Attorneys General (NAAG) February 9, 2012 press release.
Under the terms of the Settlement, the five banks/servicers agreed to provide $3 billion dollars in cash payments to mortgage refinance program and $20 billion dollars in debt relief directly to borrowers. Id. The defendants agreed to pay an additional $5 billion dollars directly to the states and the federal government. The debt relief to borrowers would occur over three years. DOJ March 12, 2012 Press Release. The parties also agreed that Joseph A. Smith, Jr., a former North Carolina banking commissioner, would serve as the national monitor. In that role Smith would supervise the execution of the terms of the settlement and issue periodic reports to the court and the public. NAAG February 9, 2012 Press Release.
The investigation that spawned the Settlement arose out of the collapse of the housing bubble in 2006-2007, and the ensuing tsunami of foreclosures. The wave of foreclosures exposed numerous problems: “robo-signed” affidavits that were turning up in foreclosure proceedings; “lost” notes; excessive fees; “dual tracking” where banks would simultaneously pursue a foreclosure while telling the borrower that his loan modification application was still under consideration; and the servicers generally not living up to their obligations as servicers. United States et. al v. Bank of America Corporation, et. al, Case 1:12-cv-00361-RMC, Complaint filed March 14, 2012, pp. 27-28.
With the settlement, the states and federal government sought to alter the mortgage servicing practices, including foreclosure, of the five banks that were party to the settlement. The forty-two page Settlement Term Sheet that was attached as Exhibit A to each consent judgment spelled out 304 rules that the parties agreed would govern the five defendants’ loan servicing practices going forward. These became known as the settlement’s “servicing standards” and were to be binding on the defendants when servicing “loans secured by owner-occupied properties that serve as the primary residence of the borrower”. Exhibit A, Consent Judgments filed April 14, 2012.
Broader industry reform goals were an anticipated byproduct of the servicing standards contained in the agreement with the five largest servicers. DOJ March 12, 2012 Press Release. The states and federal agencies involved in the national mortgage settlement are currently in discussions with the next nine largest servicers. The states do not anticipate that the servicing standards will be a stumbling block to the resolution of these negotiations. James DePriest, Deputy Attorney General of Arkansas, email exchange with author, June 25, 2013. Assuming an agreement is reached, the standards would be applicable to a very large percentage of the market.
Anecdotal Evidence of Loan Servicing Problems in Arkansas
There is some belief that reform is needed when it comes to the way large loan servicers, particularly those headquartered out of state firms, do business in Arkansas. In the recently concluded regular session of the 89th General Assembly, the Arkansas House Judiciary Committee heard testimony from individuals who appeared in support of HB 1847 that would, among other things, repeal the statute providing for non-judicial foreclosure in Arkansas. Several homeowners and attorneys who represent borrowers reported frustrating barriers to communicating with loan servicers. These anecdotal illustrations of some of the loan servicing problems in Arkansas can be seen in the video recording of the March 21, 2013 committee session.
In two instances, the testifying homeowners maintained that they were current on their mortgage payments but the bank nevertheless filed a notice of statutory foreclosure. Id. Anita Howard was one of these homeowners. She told the committee that Citi Mortgage had acknowledged to her that there was an error in her account, given her “case reference numbers,” and repeatedly offered her assurances that her account would soon be corrected. Yet, it never happened. When the servicer initiated a non-judicial foreclosure even as it continued to draft Ms. Howard’s bank account for the monthly payment, she was forced to file bankruptcy to protect her house while she tried to sort this out. Id. Another witness reported that he had fallen behind on his payments, but subsequently could not get the loan servicer to accept his future partial payments unless he paid the entire arrearage all at once, including the substantial fees that had been assessed. Id.
Statements made at that March 21 hearing by some by members of the House Committee suggest that instances of questionable proof of a mortgage debt or overzealous imposition of servicing fees often arise where home loans are being serviced by large, out of state banks. Lawyers representing borrowers in Arkansas seldom encounter clients who are having problems with an inaccurate accounting of payments, robo-signed documents or communication barriers when the lender is a community bank or an Arkansas-based bank that is servicing its own loans. Joel Hargis, Esq. of Crawley, DeLoache & Hargis, PLLC, on February 27, 2013 class lecture at the University of Arkansas School of Law. When local banks sell their loans in the secondary market, as they often do, the servicing is done elsewhere and more problems arise as a general rule than when the local bank handles the servicing in-house. Id.
A variety of factors explain this difference. When the servicing is handled in-house, the bank personnel typically know the borrowers and communicate early in any crisis that may culminate in foreclosure. The borrower, too, knows where to find the person handling the loan and communication is more efficient. More importantly, banks servicing their own loans bear the primary risk if a mortgagor defaults. By contrast, the largest bank servicers who are servicing mortgages for others do not have the direct loss associated with a default on the home loan. Accordingly, the local bank servicing its own loan is much more motivated to find ways to communicate and resolve a problem loan through some course other than foreclosure if possible.
How the Servicing Standards Might Apply to Solve Some of These Problems
The theme heard in the Arkansas legislative hearing and beyond is that the borrower in distress is often dealing with remote mortgage servicing bureaucracies. These large organizations serially shuffle the borrower’s file from one servicing agent to another. The resulting lack of continuity prolongs the process of trying to sort out accounting problems or find alternatives to foreclosure. In turn, some borrowers may conclude that talking to the bank is not worth the time and energy. Some borrowers whose situations might be salvageable fall into bankruptcy or lose their homes. In these circumstances the implementation of the settlement’s servicing standards would seem constructive.
The servicing standards focus on these practical issues. They are quite specific in places. Elsewhere they are clearly subject to interpretation. What constitutes “adequate staffing” for a servicing company? Or a “reasonable” servicing fee that may be charged to a borrower? In spite of their inherent ambiguities in some areas, the servicing standards could enhance the position of the home loan borrower dealing with a servicing company who has agreed to the standards. At the very least, communication in these relationships ought to increase. To achieve any of these ends, however, greater awareness of what the standards provide and stronger enforcement of the standards are needed.
The Essential Components of the Servicing Standards
The Servicing Standards’ primary elements can be divided into the following categories: (1) accuracy of foreclosure filings and account records; (2) increased notice and accessibility to information for the borrower; (3) loss mitigation and prohibited dual tracking; (4) servicing fee restrictions; and (5) Single Point of Contact at the servicer or lender.
The standards provide that in any bankruptcy or foreclosure, either judicial or non-judicial, the bank/servicer has a duty to be accurate and to be sure there is a legitimate claim before turning the case over to a lawyer for foreclosure:
Servicer shall ensure that factual assertions made in pleadings (complaint, counterclaim, cross-claim, answer or similar pleadings), bankruptcy proofs of claim (including any facts provided by Servicer or based on information provided by the Servicer that are included in any attachment and submitted to establish the truth of such facts) (“POC”), Declarations, affidavits, and sworn statements filed by or on behalf of Servicer in judicial foreclosures or bankruptcy proceedings and notices of default, notices of sale and similar notices submitted by or on behalf of Servicer in non-judicial foreclosures are accurate and complete and are supported by competent and reliable evidence. Before a loan is referred to non-judicial foreclosure, Servicer shall ensure that it has reviewed competent and reliable evidence to substantiate the borrower’s default and the right to foreclose, including the borrower’s loan status and loan information.
(Section I. A. 1)
The bank must also strive to maintain accurate account records on the borrower’s loan:
Servicer shall maintain procedures to ensure accuracy and timely updating of borrower’s account information, including posting of payments and imposition of fees. Servicer shall also maintain adequate documentation of borrower account information, which may be in either electronic or paper format.
When there is a discrepancy, the lender must correct the account promptly and correct the information it has submitted to the consumer credit reporting agencies. (Section I. B. 8)
(2) Notice and Accessibility
The Standards require banks/servicers to give borrowers more opportunities to know what their loan status is and better access to information about their payment history, the loan instruments, and possible avenues to a loan modification. Outlining the basis for the bank’s right to foreclose and who is holding the loan are emphasized:
In all states, Servicer shall send borrowers a statement setting forth facts supporting Servicer’s or holder’s right to foreclose and containing the information required in paragraphs I.B.6 (items available upon borrower request), I.B.10 (account statement), I.C.2 and I.C.3 (ownership statement), and IV.B.13 (loss mitigation statement) herein. Servicer shall send this statement to the borrower in one or more communications no later than 14 days prior to referral to foreclosure attorney or foreclosure trustee.
(Sec. I. A. 18)
In addition, the servicer must let borrowers know that they may receive, upon written request the following:
- A copy of the borrower’s payment history since the borrower was last less than 60 days past due;
- A copy of the borrower’s note;
- If Servicer has commenced foreclosure or filed a POC, copies of any assignments of mortgage or deed of trust required to demonstrate the right to foreclose on the borrower’s note under applicable state law; and
- The name of the investor that holds the borrower’s loan.
(Sec. I. B. 6)
The servicers are also charged with ensuring that they have sufficient staff available to deal with complaints lodged by borrowers who think there is a mistake in their account:
Servicer shall adopt enhanced billing dispute procedures, including for disputes regarding fees. These procedures will include
- Establishing readily available methods for customers to lodge complaints and pose questions, such as by providing toll-free numbers and accepting disputes by email;
- Assessing and ensuring adequate and competent staff to answer and respond to consumer disputes promptly;
- Establishing a process for dispute escalation;
- Tracking the resolution of complaints; and
- Providing a toll-free number on monthly billing statements.
(Sec. I. B. 7)
One of the practical means of enhancing borrowers’ access and awareness and a device for ensuring that everyone is looking at the same documents, is the requirement that the servicers create an “online portal” linked to the servicer’s system so borrowers at no cost can check online the status of their loan modifications. (Sec. IV. E. 1). These portals, such as the Hope Loan Port, would:
- Enable borrowers to submit documents electronically;
- Provide an electronic receipt for any documents submitted;
- Provide information and eligibility factors for proprietary loan modification and other loss mitigation programs; and
- Permit Servicer to communicate with borrowers to satisfy any written communications required to be provided by Servicer, if borrowers submit documents electronically.
(Sec. IV. E. 2)
(3) Loss Mitigation and Dual Tracking
The standards require the servicers to inform the borrower facing possible foreclosure of the government sponsored loan modification programs (HAMP, HARP) as well as anything that might be available through any private programs offered by the lender. The bank is required to “notify potentially eligible borrowers of currently available loss mitigation options prior to foreclosure referral.” (Sec. IV. A. 1) Moreover, the servicer is obligated to “facilitate loan modifications for borrowers rather than initiate foreclosure when such loan modifications for which they are eligible are net present value (NPV) positive and meet other investor, guarantor, insurer and program requirements.” (Sec. IV. A. 2)
While the borrower is pursuing a loan modification, the servicer may not refer the case to foreclosure, provided the loan modification application was received or substantially completed no later than 120 days of delinquency. (Sec. IV. B. 1) If the case had already been referred to foreclosure when the servicer received the loan modification application, then the servicer must conduct an expedited review of the application, provided that the application was received between 37 and 15 days of the foreclosure sale. If the borrower is offered a modification, “Servicer shall postpone any foreclosure sale until the earlier of (a) 14 days after the date of the related evaluation notice, and (b) the date the borrower declines the loan modification offer.” (Sec. IV. B. 9)
(4) Fee Restrictions
Borrowers in Arkansas and elsewhere complain about the fees tacked on to the loan once there is a default or a claim of default by the lender or servicer. Fee abuses by servicers and banks in the wake of the housing crash have been well documented. See Katherine Porter, Misbehavior and Mistake in Bankruptcy Mortgage Claims, 87 Texas Law Review 121 (2008-2009). The standards address this in a broad way, proscribing unreasonable fees generally, and dealing specifically with certain types of fees, like force-placed insurance and property inspection fees, that are permitted only within certain bounds. To curb problems with fees, the standards set out the following:
- All default, foreclosure and bankruptcy-related service fees, including third-party fees, collected from the borrower by Servicer shall be bona fide, reasonable in amount, and disclosed in detail to the borrower as provided in paragraphs I.B.10 and VI.B.1
- Servicer may collect a default-related fee only if the fee is for reasonable and appropriate services actually rendered and one of the following conditions is met:
- the fee is expressly or generally authorized by the loan instruments and not prohibited by law or this Agreement;
- the fee is permitted by law and not prohibited by the loan instruments or this Agreement; or
- the fee is not prohibited by law, this Agreement or the loan instruments and is a reasonable fee for a specific service requested by the borrower that is collected only after clear and conspicuous disclosure of the fee is made available to the borrower.
(Sec. VI.A.1, VI. B. 2)
The standards specifically address attorney’s fees and late fees. Attorney’s fees imposed on the borrower must be incurred in connection with foreclosure or bankruptcy proceedings, shall be for work actually performed, and are not to exceed “reasonable and customary” fees for this type of work. (Sec. VI. B. 3) The late fees may not be assessed on the nonpayment of previous assessments of late fees if that is the only delinquency; cannot be deducted from any regular payment and may not be collected for periods during which a loan modification is being considered. (Sec. VI. B. 4) The standards limit the frequency of property preservation, property inspection and property valuation fees. (Sec. VI. C. 1.) The servicer “shall not obtain force-placed insurance unless there is a reasonable basis to believe the borrower has failed to comply with the loan contract’s requirements to maintain property insurance.” (Sec. VII. A. 1) If the servicer acquires force-placed coverage, it must be at a “commercially reasonable price.” (Sec. VII. A. 8)
(5) Single Point of Contact (SPOC)
Dealing with a very large lender or servicer whose offices are remote from the borrower or the mortgaged property precludes the formation of personal contact with the loan servicer. To counter the frustration and inefficiency associated with getting a different agent with every approach to the servicer, the standards require the servicers to provide each borrower with a single individual who will deal with that borrower’s case every time she calls to talk about the loss mitigation or foreclosure process. (Sec. IV. C. 1) The Servicer “shall promptly provide updated contact information to the borrower if the designated SPOC is reassigned, no longer employed by Servicer, or otherwise not able to act as the primary point of contact.” (Sec. IV. C. 2) The SPOC has “primary responsibility” with the borrower for:
- Communicating the options available to the borrower, the actions the borrower must take to be considered for these options and the status of Servicer’s evaluation of the borrower for these options;
- Coordinating receipt of all documents associated with loan modification or loss mitigation activities;
- Being knowledgeable about the borrower’s situation and current status in the delinquency/imminent default resolution process; and
(Sec. IV. C. 3)
The minimal duties required of this SPOC when dealing with the borrower are extensive:
The SPOC shall, at a minimum, provide the following services to borrowers:
- Contact borrower and introduce himself/herself as the borrower’s SPOC;
- Explain programs for which the borrower is eligible;
- Explain the requirements of the programs for which the borrower is eligible;
- Explain program documentation requirements;
- Provide basic information about the status of borrower’s account, including pending loan modification applications, other loss mitigation alternatives, and foreclosure activity;
- Notify borrower of missing documents and provide an address or electronic means for submission of documents by borrower in order to complete the loan modification application;
- Communicate Servicer’s decision regarding loan modification applications and other loss mitigation alternatives to borrower in writing;
- Assist the borrower in pursuing alternative non-foreclosure options upon denial of a loan modification;
- If a loan modification is approved, call borrower to explain the program;
- Provide information regarding credit counseling where necessary;
- Help to clear for borrower any internal processing requirements; and
- Have access to individuals with the ability to stop foreclosure proceedings when necessary to comply with the MHA Program or this Agreement.
(Sec. IV. C. 4)
The standards also require the servicer to “develop and implement policies and procedures” aimed at making sure that the properties taken back by banks do not become “blighted.” (Sec. VIII. A. 1). The standards have protections for military personnel that track federal statutory requirements. (Sec. V)
Impact of the Standards to Date
However well-intended and carefully crafted, there is a good deal of anecdotal evidence to suggest that these standards are not having the significant impact that architects and supporters of the settlement had hoped for when they were announced. Approximately eighteen months after the settlement, it seems that the standards are being ignored at least some of the time by the five banks that agreed to them. In North Carolina, a borrower in Charlotte trying to save her home from foreclosure received three letters from Bank of America, all dated the same day, with three conflicting messages regarding the status of her application for a loan modification. “Some borrowers still grumbling year after banks’ mortgage pact,” Arkansas Democrat-Gazette, March 31, 2013, page 1 D.
On June 4, 2013, Florida Attorney General Pam Bondi wrote Bank of America’s lawyer to outline a number of complaints she had about the bank’s “non-compliance” with the servicing standards. General Bondi expressed concern that “it takes my staff’s direct involvement to get results that I would expect to be achieved under the settlement without any facilitation on our part.” She noted “troubling patterns” and “the lengthy, inefficient and unsatisfactory loan modification/mitigation processes, which the settlement servicing standards were designed to eliminate.” See letter at Florida AG website.
In May of 2013, the New York Attorney General, Eric T. Schneiderman, threatened to sue Bank of America and Wells Fargo over what he claimed were 339 violations of the servicing standards that his office had documented by those two banks since October, 2012. Subsequently, he wrote a letter to the oversight office’s monitoring committee in which he stated that the two banks were “engaging in much of the same misconduct that precipitated the national mortgage settlement.” “NY attorney general says more proof banks violated mortgage pact,” Reuters, May 24, 2013.
The servicing standards afford no individual remedy for the borrower who believes she is being denied the protections and rights to modification bestowed by these standards. Borrowers may report their negative experiences to the attorney general in their state or to the national monitor. The settlement contemplates that the national monitor, Joseph A. Smith, Jr., the former banking commissioner of North Carolina, will pursue issues of non-compliance. DOJ March 12, 2012 Press Release. The settlement specifies that if a servicer violates the consent judgment it will be subject to penalties of up to $1 million dollars per violation, or up to $5 million dollars for certain repeat violations. Id.
Smith released a statement on May 21, 2013 confirming that there were problems with “compliance with the servicing standards.” “Based on my conversations with consumer professionals, elected officials and distressed borrowers, I know there are areas in which the banks still have work to do, and I am using that insight to determine if there are gaps that require future testing. It is important to the integrity of this process that these compliance reports are thorough and accurate, and I will release them when I am confident they are complete.” https://www.mortgageoversight.com/reports/monitors-updated-national-consumer-relief/
Elsewhere, he has also acknowledged that the monitor may need to play a larger role: “We need to improve; I know we do. The tools we have will begin the process. If we need to do more, we’ll do more.” Supra, Arkansas Democrat-Gazette, March 31, 2013.
On June 19, 2013, Smith filed his office’s five compliance reports with the United States District court, one for each bank. His summary of the filings reveals a general sense that the servicers were complying generally with the standards, but that there were problems which he would deal with firmly:
While it is still early in the compliance monitoring process, it is clear to me the Settlement has allowed us to uncover issues with the servicers’ activities that need to be rectified. My job is to hold the servicers accountable to the commitments they made under the Settlement. I intend to continue to do just that.
The anecdotal reports from North Carolina, New York and Florida are consistent with the small number of cases seen in the Legal Clinic at the University of Arkansas School of Law. Based on the author’s direct experiences with clients in the clinic, borrowers continue to have difficulty getting timely and coherent responses to questions about modifications from the banks that are participants in the settlement. There remain issues of continuity as the SPOC is not always aware of what others at the institution are doing with the borrower’s account. As the Florida Attorney General observed in her letter to Bank of America’s counsel, cases tend to get more careful attention from the servicer when someone from the Arkansas Attorney General’s office intervenes on behalf of the borrower.
Propagation of the Spirit of the Standards
As indicated above, the states and federal agencies continue to negotiate with additional servicing companies whose market shares are next beneath the five they settled with in 2012, and anticipating that their agreement with these nine companies will include the servicing standards. DePriest email of June 25, 2013. Meanwhile, in January of 2013, the Consumer Finance Protection Bureau promulgated mortgage servicing rules as a part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. These rules go into effect on January 10, 2014 and contain many provisions that are similar in language and purpose to the servicing standards in the NMS. CFPB’s January 17, 2013 Summary of the final mortgage servicing rules.
In Arkansas, one year prior to the NMS, the legislature amended the State’s non-judicial foreclosure law to incorporate provisions that telegraphed a small portion of the standards dealing with notice and documentation. After the 2011 amendments, Arkansas law required lenders to send certain documents to the borrower as a precursor to launching a statutory foreclosure bid. A.C.A. § 18-50-103(2). The Arkansas Statutory Foreclosure Act now mandates that a lender must supply the borrower with a payment history, including the date of the default, and a copy of the note and mortgage or deed of trust at issue 10 days before the lender may refer the foreclosure case to an attorney. A.C.A. § 18-50-103(2)(A)(ii). (The standards enhance this, requiring fourteen days’ notice. See Sec. I.A.18) The lender must also indicate who holds the note, specify the physical location of the note and provide information about available loan modification programs or forbearance. Id. In addition, the foreclosing party or its attorney must maintain some presence in Arkansas so that at least in theory borrowers would have better access to the lender or its agents. Id.
Under Arkansas law, the provisions of the Statutory Foreclosure Act are strictly construed. Henson v. Fleet Mtg. Co., 319 Ark. 491, 497, 892 S.W. 2d 250, 253 (1995). Thus, the failure to comply with any of these requirements under the state’s statutory foreclosure law would jeopardize the lender’s ability to obtain a non-judicial foreclosure and might prompt the mortgage servicer to pursue a judicial foreclosure instead. At least one commentator has linked the additional requirements imposed by state statute in 2011 to the subsequent dramatic decline in the number of statutory foreclosures in Pulaski County, Arkansas. Lynn Foster, Statutory Foreclosures in Arkansas: The Law and Recent Developments, 66 Arkansas Law Review 111, 139 (2013).
Practical Applications at the Legal Clinic
Starting in September 2013, and with the support of a grant from the Arkansas Attorney General’s office derived from the NMS, the University of Arkansas School of Law will offer limited legal advice to low income persons facing foreclosure issues in Northwest Arkansas. These free walk-in clinics will be staffed by law students and available every other week at the Fayetteville Public Library.
In addition to providing some legal assistance to homeowners, the walk-in clinics will afford students an opportunity to meet with clients and develop interviewing and counseling skills. Supervised students will assist the walk-in clients by answering basic questions about the mortgage and foreclosure law in Arkansas. To do this, students will need to become familiar with the servicing standards and the Arkansas Statutory Foreclosure Law, some of which incorporates a part of the standards.
Ideally the students’ efforts can help raise awareness of and promote compliance with the servicing standards. Students will be able to communicate the incidents of non-compliance to the National Settlement Monitor. According to a recent report from the settlement monitor, from mid-April 2012 through January 2013, only 27 consumers had lodged complaints with the monitor about the servicing of their loans.
The monitor’s report also indicates state by state how many professionals had lodged complaints on behalf of a client or someone they were assisting. There were zero reported cases in Arkansas from mid-May through January 2013 in this category.
Whether this low level of interaction between people in Arkansas and the national monitor is attributable to a higher degree of servicing compliance with the standards in Arkansas than elsewhere, or a lack of awareness and aggressiveness on the part of borrowers in seeking relief or voicing displeasure to the national monitor is unknown. The reality may well be that the lower numbers reported in Arkansas are product of a combination of factors, including ignorance of the servicing standards. Over time, that can be solved.