WASHINGTON, D.C. – As homeowners trying to stay in their homes face stonewalling and silence from banks, U.S. Sen. Sherrod Brown (D-OH) outlined a plan to prevent foreclosures. Brown’s Foreclosure Fraud and Homeowner Abuse Prevention Act would address many of the most common problems homeowners face when trying to modify their loans, would require banks to consider modification before proceeding to foreclosure, and would ensure adequate procedures and staffing levels to modify loans.
“We can’t expect our economy to fully recover until we stabilize the housing market – that means restoring trust for both for homeowners and investors,” Brown said. “Servicers often claim that homeowners didn’t meet their legal obligations, so they don’t deserve to stay in their homes. They claimed that homeowners lack ‘personal responsibility,’ but what about institutional responsibility? The Foreclosure Fraud and Homeowner Abuse Prevention Act will hold the banks to the same standards they impose on homeowners.”
Brown was joined on the call by a central Ohio woman whose home was set to be auctioned by Sherriff’s sale because her mortgage servicer misplaced critical loan modification paperwork after denying her a loan modification on two occasions. Bill Faith, executive director of the Coalition on Homelessness and Housing in Ohio (COHHIO), also joined the call to outline how Brown’s bill would prevent these miscommunications with mortgage servicers and keep more Ohioans in their homes.
The Foreclosure Fraud and Homeowner Abuse Prevention Act of 2011 would keep Ohioans in their homes. Though many of these changes were included as conditions in the multi-state settlement announced in February, Brown’s bill would make these provisions permanent and address many of the most common problems homeowners face when seeking loan modifications:
Providing Uniform and Effective Foreclosure Prevention Procedures
Problem: Servicers proceeding to foreclosure without considering modification. Servicers proceeding with a foreclosure before considering a loan modification results in benefits for servicers at the expense of investors and homeowners. Servicers are able to recover full costs at foreclosure, giving them an incentive to avoid doing modifications in favor of foreclosure. Accounting rules encourage servicers to drag out temporary modifications to delay recognizing the costs associated with mortgage modifications.
Solution: The bill would require servicers to participate in sustainable loan modifications when it is in investors’ best interest. It creates a defense to foreclosure when servicers fail to offer loan modifications, and gives servicers an incentive to work with homeowners by extending the protections of the Fair Debt Collection Practices Act. The bill also prohibits servicers from masking the non-performing loans by requiring them to mark to market loans that are more than 120 days delinquent and have not been granted a modification. Any homeowner denied a modification would be entitled to the documentation justifying their denial.
Problem: “Dual track.” Servicers have been known to file for, or continue, foreclosures against homeowners participating in the modification process. In a survey of consumer attorneys from 34 states, almost 99 percent said that they have represented homeowners placed in foreclosure while awaiting a loan modification. The dual track system results in “accidental” foreclosures, when one department of the servicer fails to communicate with another, or papers are lost, or instructions are not conveyed to the foreclosure attorney.
Solution: Consistent with guidance from the Office of the Comptroller of the Currency (OCC), this bill bars “dual track,” while a homeowner is participating in a modification Servicers are permitted to proceed with foreclosures only after working with borrowers on a modification.
Improving Mortgage Servicer Staffing and Procedures
Problem: Inadequate staffing and resources. Servicers lack the necessary staffing and resources to tackle the record rates of mortgage defaults and foreclosures. One commentator estimates that servicers would need to increase staffing 1000 percent in order to modify as few as 10 percent of the loans in default.25 And loan modifications require a higher skill level than collections work. In their rush to process foreclosures, banks hired inexperienced workers (“Burger King kids” as they have been referred to) who barely knew what a mortgage was.
Solution: The bill would require servicers required to provide appropriate staffing and training. Servicers of delinquent loans would impose a reasonable limit on the number of cases handled by each employee. To improve oversight and accountability, executive compensation could be clawed back if a servicer violates federal securities laws.
Problem: Lost and missing paperwork. Loan modifications typically take between 120 and 240 days, and process errors— such as multiple requests for paperwork, incorrect evaluation, lack of communication between departments, etc.—are common among servicers.
Solution: The bill would require servicers to create a single electronic record for each borrower, designate a single contact for each stage of the mortgage process, from loan servicing to loan modification to bankruptcy, and provide one team leader to coordinate between mortgage servicer departments. It would also require transferring servicers to update successor servicers on the status of the mortgage modification process, and would require successor servicers to continue the modification process or honor modification agreements.
The Foreclosure Fraud and Homeowner Abuse Prevention Act is endorsed by the Alliance for a Just Society, Center for Responsible Lending, Community Organizations in Action, National Association of Consumer Advocates (NACA), National Consumer Law Center (on behalf of its low-income clients), Coalition on Homelessness & Housing in Ohio (COHHIO), Neighborhood Housing Services of Greater Cleveland, and Columbus Housing Partnership (CHP). Click here for additional information on the bill.
Brown, chair of the Financial Institutions and Consumer Protection Subcommittee, is a leading proponent of providing assistance to communities affected by the housing crisis and population loss. In July 2010, he sent a letter to the executives of the nation's four largest banks calling on them to work with responsible homeowners to avoid foreclosure. Brown fought for the creation of the Neighborhood Stabilization Program (NSP) in the Housing and Economic Recovery Act of 2008 and the continuation of the program in the American Recovery and Reinvestment Act (ARRA) of 2009.