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New York Banking Department/Goldman Agreement Could Preview Enforcement of Mortgage Servicer Conduct Rules
By Geoffrey C. Rogers

On September 1, 2011, New York Superintendent of Financial Services Benjamin M. Lawsky announced that New York’s Department of Financial Services and Banking Department entered into an agreement with Goldman Sachs Bank, Ocwen Financial Corp., and Litton Loan Servicing LP to adhere to landmark new mortgage servicing practices. The agreement was required by the superintendent as a condition to allowing Ocwen’s acquisition of Goldman Sachs’s mortgage servicing subsidiary, Litton. The agreement was coupled with a commitment from Goldman Sachs to assist affected homeowners by writing down approximately $53 million in unpaid principal. Goldman’s commitment will forgive 25% of the principal balance on all home loans in New York that are delinquent 60 days or more and are serviced by Litton and owned by Goldman Sachs as of August 1. The agreement addresses alleged foreclosure abuses and previews how the Banking Department may enforce its relatively new mortgage servicer conduct rules found in Part 419 of the superintendent’s regulations.

Robo-Signing

The agreement addresses specific methods for remediation of foreclosures where there is evidence of “robo-signing,” a practice that has been in the news for over a year. Robo-signing is a term identifying a number of practices in connection with the execution of affidavits in foreclosure actions. Such practices include submitting affidavits and sworn statements executed by individuals without actual personal knowledge of the matters set forth therein, inserting inaccurate information in an affidavit or sworn statement, and failing to have notarized documents signed by the affiant in the presence of a notary.

Ownership of Note and Mortgage

The agreement also addresses the issue of ownership of the note and mortgage by the foreclosing entity. The agreement requires, in each summons and complaint commencing a foreclosure action, an affirmative allegation that at the time the proceeding is commenced, the foreclosing entity is the owner and holder of the subject mortgage and note, possesses a security interest or other interest entitling it to foreclose on the mortgage and note, or has been delegated the authority to institute a foreclosure action by the owner and holder or a party possessing the legal right to foreclose. The agreement also requires the servicer to plead that the originals of the mortgage and note are in the possession and control of the foreclosing entity or a custodian. If the original note or any interim assignment or allonge is lost or otherwise unavailable, the servicer must comply with applicable law in an attempt to establish ownership of the note and the right to enforcement. The requirement that the servicer must not intentionally destroy or dispose of original notes that are still in force is noteworthy.

Oversight of Third-Party Vendors

Of even greater importance to all mortgage servicers, including mortgage lenders servicing their own portfolios, are the sections of the agreement addressing servicer conduct. These sections provide insight into how the Banking Department might implement and interpret the recent mortgage servicer conduct regulations found in Part 419. A number of the items in the agreement are either requirements taken directly from Part 419 or expansions on those requirements.

Part 419 requires servicers to comply with all applicable federal and state laws and regulations, to maintain adequate staffing to address all servicing issues, and to train and supervise the staff properly. The agreement places substantial responsibility on servicers to adopt written policies and procedures to oversee and manage foreclosure firms, law firms, foreclosure trustees, and other agents, independent contractors, entities, and third parties (including subsidiaries and affiliates) that provide foreclosure or bankruptcy processing services. These responsibilities include:

  • performing due diligence of third-party providers’ qualifications, expertise, capacity, complaints, information systems, quality assurance plans, financial viability, and compliance with licensing requirements and rules and regulations (including prohibitions on fee splitting);
  • amending agreements or engagement letters to require them to comply with their contractual obligations to the servicer, the servicer’s policies and procedures, the loan instruments, the servicing practices in the agreement, and New York laws and rules;
  • conducting regular reviews of a sample of the foreclosure and bankruptcy documents prepared by each third-party provider to ensure compliance;
  • tracking any instance where an adversary requests the imposition of sanctions against a third-party provider, or where a court imposes such sanctions, and taking appropriate action, including termination of the servicer’s relationship with any third-party provider that has been sanctioned by a court;
  • adopting standards for documentation of third-party providers’ fees and charges;
  • adopting policies and procedures for reviewing customer complaints about third-party providers;
  • ensuring that all third-party providers are given reliable contact information for servicer employees who possess relevant information; and
  • conducting a risk assessment of third-party providers to ensure that such providers adequately protect confidential borrower information.

These requirements simply place the onus on the servicer to see that third-party providers comply with standards Part 419 places on servicers in the first instance.

Staffing and Training

Part 419 requires servicers to have adequate, trained staff to respond to consumer complaints and inquiries and to handle loss mitigation activities. The agreement expands in detail the criteria the Banking Department expects a servicer to consider when staffing and establishes the minimum requirements for a training program. Among other items, training must be provided in federal laws and regulations and in the preparation and execution of legal documents, including affidavits of indebtedness or merit, declarations, assignments, note endorsements, and lost note affidavits.

Single Point of Contact, Modifications, and Communications with the Borrower

Part 419 requires a servicer to maintain and make available to borrowers and borrowers’ authorized representatives current contact information to communicate and negotiate with the servicer’s designated loss mitigation staff who are authorized to discuss and negotiate loss mitigation options. The contact information must include toll-free telephone number(s) for direct communication with a loss mitigation staff person, fax number(s) for receipt of documents, and e-mail addresses. The agreement requires the servicer to provide a “single point of contact based on the consumer’s convenience.”

The agreement devotes much space to describing expected conduct of the “single point of contact,” describing the resources that must be available to that person, and providing detailed requirements for communications with borrowers. Among many other requirements, the single point of contact must have access to all electronic and paper-based records containing current borrower information relating to loss mitigation applications, pending foreclosure actions, and documentation requests, including details of missing or incomplete documentation. In addition, the single point of contact must coordinate with the borrower and in-house and third-party service providers to facilitate compliance with loss mitigation alternatives or non-foreclosure option timeframes outlined in state and federal laws and guidance and Making Home Affordable and Government Sponsored Enterprise program requirements. These detailed requirements likely reflect Banking Department expectations for all loss mitigation staff.

Part 419 requires servicers to consider a loan modification as an alternative to foreclosure in specified circumstances. The agreement provides very specific notice and conduct requirements for the parties to the agreement with respect to pending modifications, trial modifications, permanent modifications, and previously denied modification requests. While these requirements may be somewhat stricter and more detailed than those in Part 419, they provide guidance as to Banking Department expectations for loss mitigation efforts. There is at least one significant distinction between Part 419 and the agreement requirements for modifications. Part 419 does not expressly prohibit continuing the foreclosure process while seeking loss mitigation alternatives. However, the agreement requires the parties to the agreement to stay foreclosures while pursuing loss mitigation options.

Application of Payments

Part 419 provides that for all mortgage loans originated after January 1, 2011, except where inconsistent with federal law or regulation, payments must be credited to the interest and principal due on the home loan before crediting the payments to taxes, insurance, or fees. The agreement includes essentially the same requirement. Part 419 also requires prompt application of payments and requires a specific disclosure to the borrower when a payment is not credited or treated as credited by the due date or within 30 days from the date of receipt, whichever is earlier. The agreement places stricter rules on the parties to the agreement with respect to receipt of non-conforming payments and prompt application of payments.

Servicing Fees

With very minor exceptions, the requirements and limitations that apply to all servicers under Part 419 are consistent with the terms of the agreement addressing servicing fees. So, the parties to the agreement are under no greater restrictions than all servicers by virtue of Part 419. Under both the agreement and Part 419, a servicer must maintain and keep current a schedule of standard or common fees, make the schedule available on its website and to the borrower or borrower’s authorized representative upon request, and identify each fee, provide a plain English explanation of the fee, and state the amount of the fee or range of amounts or, if there is no standard fee, how the fee is calculated or determined.

In addition, a servicer may only collect a fee if the fee is for services actually rendered and one of the following conditions is met:

  • the fee is expressly authorized and clearly and conspicuously disclosed by the loan instruments and not prohibited by law;
  • the fee is expressly permitted by law and not prohibited by the loan instruments; or
  • the fee is not prohibited by law or the loan instruments and is a reasonable fee for a specific service requested by the borrower that is assessed only after clear and conspicuous disclosure of the fee is provided to the borrower and the borrower expressly consents to pay the fee in exchange for the service.

All servicers should evaluate each fee to determine whether it satisfies these requirements. In addition to these fees, both Part 419 and the agreement address attorneys’ fees, late charges, and force-placed insurance. There is little difference in the treatment of these fees in Part 419 and the agreement.

Summary

Part 419 applies to all residential mortgage loan servicers, including lenders servicing only their own loans. The agreement directly incorporates many of the servicer conduct requirements of Part 419. The agreement also provides greater detail of, and insight into, Banking Department expectations for servicer conduct. While some of the terms of the agreement may go beyond regulatory requirements, servicers would be well advised to review the agreement to better understand how the Banking Department might interpret and attempt to enforce Part 419.

Geoffrey C. Rogers is a partner in the New York office of Hudson Cook, LLP. Geoff can be reached at 518-383-9591 or by email at grogers@hudco.com.

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