Risk Management Principles

WHITE PAPER

Jonathan Foxx

Chairman and Managing Director

A number of years ago I coined the term “Mortgage Risk Management,” in order to differentiate managing mortgage risk from the many other types of risk management. At that time, risk management was associated mostly with such areas as pharmaceutical companies, stock brokers, and information technology firms. My view was that mortgage loan originations and mortgage servicing present a unique set of risks to consumers, loan originators, mortgage servicers, and those industries and individuals that depend on the foregoing for their financial well-being. The term became popular and is in now in commonplace use.

But I also realized that managing mortgage risk would require a strong commitment on the part of companies, because regulatory oversight would fluctuate, often prey to the prevailing politics, and that meant companies had to build out an environment where managing risk could be joined to complying with the regulations themselves. I felt that a company could be successful in managing its mortgage risk if it developed a “Culture of Compliance.”[i] I wrote articles on the Culture of Compliance and gave numerous talks on this subject. In due course, the term was picked up by regulators and made a feature of everyday parlance.

I think consumers, mortgage loan originators, and regulators read my articles and attend my lectures because I strive to give everyone a fair shake. I call it like I see it, without fear of whether some view or another is stepping on somebody’s sacred political toes. Sometimes there really is a right and a wrong, irrespective of the controversy surrounding a regulatory mandate.

My standard is simple: doing all we can to protect the consumer is the only way to protect the viability of the mortgage loan originator and mortgage servicer in the long run.

And the only effective way to ensure that the originator or servicer is protected is to manage its risk. That is the basis for the formation of our firm so many years ago. Lenders Compliance Group®, which has grown to a national mortgage risk management firm over the years, has never lost its original mission to not only provide comprehensive risk management to mortgage industry participants but also offer ways and means to help build a Culture of Compliance for our clients.

Every loan originator and mortgage servicer should be a consumer advocate. Consumers will flock to the companies that present the very best standards of ethics and reliability. If any originating or servicing entity waits for a regulatory agency to tell it what to do on behalf of consumer financial protection, it has already lost the right to expect the consumer’s loyalty.

OCC - Correcting Foreclosure Practices

On December 20, 2011, the Office of the Comptroller of the Currency (OCC) updated its announcement regarding correcting foreclosure practices. We have previously issued newsletters here, here, and here on this subject and also related matters regarding foreclosure processing.

Earlier in 2011, on April 13, 2011, the OCC, the Board of Governors of the Federal Reserve System (FRB), and the Office of Thrift Supervision (OTS) announced enforcement actions against 14 large residential mortgage servicers and two third-party vendors for unsafe and unsound practices related to residential mortgage servicing and foreclosure processing. The enforcement actions were based on interagency examinations conducted in the fourth quarter of 2010.

Through those enforcement actions (consent orders), federal regulators required servicers to engage independent firms to conduct a multi-faceted review of foreclosure actions in process in 2009 and 2010.

On January 4, 2012, the OCC announced that it was promoting public service advertisements about the Independent Foreclosure Review.

In this newsletter, we will consider several aspects with respect to implementation of the consent orders.

• Independent Foreclosure Review
• Mailings to Consumers
• Deadline for Review Requests
• Independent Foreclosure Auditor
• Eligibility for Review
• Notifying the Public
• Engagement Letters
• Interim Report
• Library

Independent Foreclosure Review

Under the consent orders, independent consultants are charged with evaluating whether borrowers suffered financial injury through errors, misrepresentations, or other deficiencies in foreclosure practices and determining appropriate remediation for those customers.

Where a borrower suffered financial injury as a result of such practices, the agencies' orders require financial remediation to be provided.

Mailings to Consumers 

As part of that program, the 14 mortgage servicers covered by the enforcement actions were required to begin mailings to consumers on November 1, 2011, continuing to December 31, 2011.

The mailings are intended to provide information to potentially eligible borrowers on how to request a review of their case if they believe they suffered financial injury as a result of errors, misrepresentations, or other deficiencies in foreclosure proceedings related to their primary residence between January 1, 2009 and December 31, 2010. The mailings will include a request for review form.

Borrowers may also visit the special Independent Foreclosure Review website for more information about the review and claim process. Telephonic assistance is given at this website.

Deadline for Review Requests

 Review requests must be received by April 30, 2012.

Independent Foreclosure Auditor

An independent foreclosure auditor must be a third-party. The independent foreclosure auditor will assess whether any errors, misrepresentations, or other deficiencies resulted in financial injury to borrowers.

Where a borrower suffered financial injury as a result of such practices, the consent orders require remediation to be provided. 

During the review, customers may be contacted by mortgage servicers for additional information at the direction of the independent consultant.

OCC Issues Foreclosure Guidance - Part II

In yesterday's newsletter, Part I of this two-part series, I outlined the role of the bank as owner and servicer of foreclosed property, as described in the recent guidance issued by the Office of the Comptroller of the Currency (OCC) with respect to a bank's obligations and risks related to foreclosed property. (See OCC 2011-49)

A bank's obligations with respect to foreclosed residential properties may differ depending upon the bank's role in the foreclosure. For instance, a bank may be (1) an owner of the foreclosed property, or (2) a servicer and/or property manager, or (3) a securitization trustee.

Additionally, there are specific obligations when lenders release a lien securing a defaulted loan rather than foreclose on a residential property.

In today's newsletter, Part II or this two-part series, I outline the role of the bank as trustee of a securitization trust, and also releasing a lien rather than foreclosing.

For detailed information and guidance, please consult with us or a regulatory compliance professional.

In this Newsletter
Safety and Soundness
Bank as Trustee of Securitization Trust
Releasing a Lien Rather Than Foreclosing
Library

Safety and Soundness

As a matter of safety and soundness banking practices, banks should have robust policies and procedures in place to address risks associated with foreclosed (or soon to be foreclosed) properties.

Acquiring title to properties through foreclosure - either for the bank or as servicer for another mortgagee - results in new or expanded risks, including operating risk (which may include market valuation issues), compliance risk, and reputation risk.

Banks should be sure they have identified all the risks, and have policies and procedures for monitoring and controlling these risks. In each risk management consideration, it is critical to establish and implement policies and procedures, and bank management and the Board of Directors should consider, at a minimum, the role of the bank in foreclosure procedures and obligations.

Bank as Trustee of Securitization Trust

The securitization trustee is primarily responsible for holding a lien on the trust assets for the benefit of the investors who purchase securities issued pursuant to the securitization and administering the trust in conformance with requisite agreements.

The trustee's duties and responsibilities are established by a PSA, trust agreement, or indenture. These agreements direct a securitization trustee to perform various complex administrative functions. Such functions usually include ensuring the timely receipt of payments from the servicer, calculating payments, remitting payments to the investors, circulating information to investors, monitoring compliance, and determining if an event of default is triggered.

As permitted by the PSA, the trustee should work with the servicer to ensure the performance of its responsibilities. The securitization agreements may require a trustee to appoint a successor servicer or to take over servicing in the event the original servicer fails to perform its duties or defaults. These agreements generally do not grant the trustee any powers or duties with respect to the foreclosure or with the maintenance, sale, or disposition of foreclosed properties. Instead, these responsibilities typically reside with the servicer.

Nevertheless, to the extent a servicer undertakes foreclosure actions in the trustee's name as the secured party, a bank trustee should be aware of potential reputation and litigation risks. (See my comments in Part I, relating to reputation risk.)

Additionally, if the securitization agreements require a bank trustee to act as a replacement servicer until a successor servicer is appointed, the bank trustee would also be exposed to credit risk.

Releasing a Lien Rather Than Foreclosing

At times, lenders may release a lien securing a defaulted loan rather than foreclose on the residential property.

This decision is often based on financial considerations when the bank or servicer and/or investor determines that the costs to foreclose, rehabilitate, and sell a property exceed its current fair-market value. When this decision is made after a bank or servicer has initiated foreclosure, the borrower may have already abandoned the property or discontinued the care and maintenance of the property, increasing the chance of a blighted property in the community.

Because the decision to release a lien is typically a financial decision, banks and servicers should ensure that their valuation of the property provides the best information practicable, while complying with investor requirements, before initiating foreclosure and subsequently deciding to release the lien. While the financial risk must be considered, banks and servicers should also consider the potential for reputation and litigation risk arising from their position as a prior mortgagee or servicer of a now-abandoned property.

If the decision is made to forego foreclosure and release the lien, the bank or servicer should notify, or attempt to notify, the borrower of the decision. Borrowers should be notified that (1) the mortgage holder is not pursuing foreclosure and has released the mortgage lien, (2) the borrower may continue to occupy the property, and (3) the borrower is obligated to maintain the property consistent with all local codes and ordinances and to pay property taxes and the debt owed. The bank or servicer should also make appropriate notifications to the local jurisdiction when it makes the decision to release a lien in lieu of foreclosure.

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Office of the Comptroller of the Currency (OCC)
Foreclosed Properties
Guidance on Potential Issues
With Foreclosed Residential Properties
OCC 2011-49
December 14, 2011

* Jonathan Foxx is the President and Managing Director of Lenders Compliance Group

OCC Issues Foreclosure Guidance - Part I

The Office of the Comptroller of the Currency (OCC) is providing guidance to banks on obligations and risks related to foreclosed property. Issued on December 14, 2011, this guidance highlights legal, safety and soundness, and community impact considerations. It primarily focuses on residential foreclosed properties. (See OCC 2011-49)

A bank's obligations with respect to foreclosed residential properties may differ depending upon the bank's role in the foreclosure. For instance, a bank may be (1) an owner of the foreclosed property, or (2) a servicer and/or property manager, or (3) a securitization trustee.

Additionally, there are specific obligations when lenders release a lien securing a defaulted loan rather than foreclose on a residential property.

Furthermore, understanding the requirements imposed by Fannie Mae and Freddie Mac (GSEs) or the U.S. Department of Housing and Urban Development (HUD) on servicers is particularly important.

I will analyze the OCC's guidance as it relates to the aforementioned three roles of the bank in foreclosing on residential properties.

This is a two-part newsletter. I will offer a brief overview of the OCC 2011-49 bulletin pertaining to guidance on potential issues with foreclosed residential properties. Today, in this first part, I will outline the role of the bank as owner and servicer of foreclosed property. Tomorrow, in the second part, I will outline the role of the bank as trustee of a securitization trust, and also releasing a lien rather than foreclosing.

For detailed information and guidance, please consult with us or a regulatory compliance professional.

In this Newsletter
Safety and Soundness
Bank as Owner of Foreclosed Property
Bank as Servicer of Foreclosed Property
Library

Safety and Soundness

As a matter of safety and soundness banking practices, banks should have robust policies and procedures in place to address risks associated with foreclosed (or soon to be foreclosed) properties.

Acquiring title to properties through foreclosure - either for the bank or as servicer for another mortgagee - results in new or expanded risks, including operating risk (which may include market valuation issues), compliance risk, and reputation risk.

Banks should be sure they have identified all the risks, and have policies and procedures for monitoring and controlling these risks. In each risk management consideration, it is critical to establish and implement policies and procedures, and bank management and the Board of Directors should consider, at a minimum, the role of the bank in foreclosure procedures and obligations.

Bank as Owner of Foreclosed Property

Obligations and Actions

• In acquiring title to foreclosed properties, banks assume the primary responsibilities of an owner, including providing maintenance and security, paying taxes and insurance, and serving as landlord for rental properties.
  • Banks should communicate with localities, including homeowner associations, about specific requirements with respect to foreclosed residential properties (i.e., localities may have requirements about certain aspects of upkeep, such as lawn mowing, property maintenance, and security, et cetera).
  • In the absence of these actions, banks should be aware of potential nuisance actions or the exercise of local receivership powers to seize properties.

• For FHA-insured mortgages, the bank must ensure compliance with property and preservation guidance issued by HUD to preserve the insurance claim and obtain reimbursements for allowable expenses.

• Following foreclosure, the bank must record its ownership interest in local land records.

• Banks must comply with the other real estate owned (OREO) appraisal and accounting requirements.

• Banks should maintain appropriate insurance on the property.

• Some localities may require registration of foreclosed properties, properties in foreclosure, or vacant properties. Banks should be aware of and comply with such requirements.

• The Protecting Tenants at Foreclosure Act of 2009 (PTFA) provides tenants with protections from eviction as a result of foreclosure on the properties they are renting.

• When a bank takes title to a house after foreclosure, it must honor any existing rental agreement with a bona fide tenant and must provide 90 days' notice to the tenant prior to eviction whether or not the tenant has a rental agreement.

• State laws may impose additional requirements that are not preempted by the PTFA.

• Additional potential requirements with respect to rental properties include:

• reviewing the lease to determine if the property can be shown to prospective purchasers; and

• returning any security deposit upon termination of the rental agreement.
  

OCC and OTS: Policy Integration

On December 8, 2011, the Office of the Comptroller of the Currency (OCC) issued a bulletin that outlines the process which the OCC intends to follow to fully integrate the Office of Thrift Supervision (OTS) policy guidance documents into a common set of supervisory policies that applies to both national banks and federal savings associations.

We have been monitoring the integration from its inception and informing our OCC and OTS clients accordingly. [For instance, see our newsletter OCC and OTS Synchronizing (6/8/11)]

If you are one of our OCC or OTS clients, please contact us for further information and discussion.

In this Newsletter
Overview
Process
Process: Phase I
Process: Phase II
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Overview

Dodd-Frank required that all functions of OTS relating to federal savings associations, and the rulemaking authority of the OTS relating to all federal savings associations, were transferred to the OCC on July 21, 2011. Consequently, the OCC assumed the responsibility for the ongoing supervision, examination, and regulation of federal savings associations.

Further, Dodd-Frank continues all OTS orders, resolutions, determinations, agreements, regulations, interpretive rules, other interpretations, guidelines, procedures, and other advisory materials in effect the day before the transfer date, while also permitting the OCC to administer these documents with respect to federal savings associations, until the documents are modified, terminated, set aside, or superseded by the OCC, by a court, or by operation of law.

The OCC issued an interim final rule on July 21, 2011, with request for comments that republished, with nomenclature and other technical changes, the OTS regulations formerly found in chapter V of title 12 of the Code of Federal Regulations. (These republished regulations became effective on July 21, 2011, and will be codified in chapter I at parts 100 through 197.1.)

Now, the OCC has announced in bulletin OCC 2011-47 that it is embarking on a comprehensive rulemaking project to integrate, when possible, these former OTS rules with OCC rules applicable to national banks. Concurrently, the OCC is integrating more than 1,000 supervisory policies of the former OTS into the OCC policy framework.

The OCC expects to produce a consistent, supervisory approach and integrated policy platform for national banks and federal savings associations, while recognizing differences anchored in statute.

Process

The OCC will group, to the extent possible, rescission notifications and other announcements related to the integration of OTS guidance, according to a two-phased process.

Process: Phase I

This phase involves rescinding a significant number of documents. The documents rescinded in this phase will include OTS documents that:

• transmitted or summarized rules, interagency guidance, or Examination Handbook sections (not the conveyed guidance or rule itself);

• are no longer useful because of the elimination of the OTS or the passage of time; and/or

• duplicate existing OCC guidance.

Additionally, the OCC will rescind outdated guidance issued to national banks. Forthcoming OCC bulletins will announce these rescissions.

NOTE: In order to minimize confusion, documents will be watermarked as rescinded on the OCC Web site or former OTS Web site, as applicable.

Process: Phase II

This phase focuses on guidance that requires further review, substantive revision, or combination or is considered unique to federal savings associations.

Guidance

Guidance that is linked to regulatory or statutory requirements will be coordinated closely with the concurrent integration of OCC and former OTS regulations. In many cases, guidance cannot be revised or combined until the revisions to the rules on which the guidance is based have been finalized.

Priorities

Prioritization of the work will be influenced by feedback from the OCC's supervision staff as it encounters policy differences in the day-to-day supervision of national banks and federal savings associations.

Cross-References

Former OTS policies and guidance remain applicable to federal savings associations until rescinded, superseded, or revised. In some cases, the OCC may amend an OTS rule, policy, or practice that is cross-referenced in more than one document or affects only a portion of a document.

Duplications

If overlapping guidance exists, any guidance or regulation issued by the OCC after July 21, 2011, that specifically includes federal savings associations in its scope, will prevail. If a document has not been rescinded, but a portion of the content no longer applies, the superseded portion will be grayed out electronically.

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Office of the Comptroller of the Currency
OCC 2011-47 (Bulletin)
Subject: OTS Integration
December 8, 2011

OCC: Fixing Deficient Foreclosure Practices

Jonathan Foxx
President & Managing Director
Lenders Compliance Group

The Office of the Comptroller of the Currency (OCC) issued a report on November 22, 2011 on the actions by 12 national bank and federal savings association mortgage servicers to comply with consent orders issued in April 2011 to correct deficient and unsafe or unsound foreclosure practices.

The report, entitled Interim Status Report: Foreclosure-Related Consent Orders, summarizes progress on activities related to the independent foreclosure review announced November 1, 2011, as well as other activities to enhance mortgage servicing operations, strengthen oversight of third-party service providers and activities related to Mortgage Electronic Registration Systems (MERS), improve management information systems, assess and manage risk, and ensure compliance with applicable laws and regulations.

Based on information in the relevant OCC issuances, much of the work to correct identified weaknesses in policies, operating procedures, various control functions, and audit processes would be substantially complete in the first part of 2012, but other, longer term initiatives will continue through the balance of 2012.

In addition to the interim report, please note that the OCC also released engagement letters that describe how the independent consultants, retained by the servicers, will conduct their file reviews and claims processes to identify borrowers who suffered financial injury as a result of deficiencies identified in the OCC's consent orders.

For those of you who have not had to respond to and implement a consent order, I would say that the engagement letters are generally pro forma and consistent with similar terms and conditions we require in our own commitments and proposals for such audits and due diligence reviews. As a general proposition, the review process being implemented at some companies may differ from that described in the engagement letters because of subsequent coordination with the OCC to ensure a consistent process among the servicers.   

The engagement letters identify the names of the independent consultants conducting the reviews and include language stipulating that consultants would take direction from the OCC throughout the reviews. In fact, the terms of engagement specifically prohibit servicers from overseeing, directing, or supervising any of the reviews. Limited proprietary and personal information has been redacted.

Newsletter Sections
Interim Report
Engagement Letters
Correcting Foreclosure Deficiencies
Professional Assistance
Library

Interim Report

The interim report summarizes actions taken by national banks and federal savings associations to correct deficiencies in mortgage servicing and foreclosure processing identified in consent orders issued on April 13, 2011, by the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) against 12 mortgage servicers.

The OCC took action against eight national bank servicers: Bank of America, Citibank, HSBC, JPMorgan Chase, MetLife Bank, PNC, U.S. Bank, and Wells Fargo. The OTS took action against four federal savings association servicers and two holding companies: Aurora Bank, FSB; EverBank (and the thrift holding company, EverBank Financial Corp.); OneWest Bank, FSB (and its holding company IMB HoldCo LLC); and Sovereign Bank.

The consent orders were based on examiner findings during an interagency review of major residential mortgage servicers conducted in the fourth quarter of 2010.

A summary of the findings of the interagency review is available in the "Interagency Review of Foreclosure Policies and Practices," produced by the OCC, Board of Governors of the Federal Reserve Board (FRB), and OTS.

Engagement Letters
Pursuant to 12 C.F.R. § 4.12(c), the listing order of the engagement letters at the OCC's election has no precedential significance.

The engagement letters were submitted by the independent consultants that were retained by servicers regulated by the OCC. These independent consultants will be conducting foreclosure reviews pursuant to the requirements of the April 13, 2011 consent orders. 

The engagement letters describe how the independent consultants will conduct their file reviews and claims processes to identify borrowers who suffered financial injury as a result of servicer deficiencies identified in the OCC's consent orders.  
Limited proprietary and personal information has been redacted from the engagement letters.

Since the acceptance of the engagement letters in September of this year, the independent consultants have further refined and made adjustments to the processes, procedures, and methodologies outlined in the engagement letters in consultation with OCC supervision staff.

For instance, there were a number of changes made to integrated claims processes to ensure a single, uniform process among the servicers.

Correcting Foreclosure Deficiencies

Independent Foreclosure Review

As part of those consent orders, federal regulators required servicers to engage independent firms to conduct a multi-faceted review of foreclosure actions in process in 2009 and 2010.

Under the orders, independent consultants are charged with evaluating whether borrowers suffered financial injury through errors, misrepresentations, or other deficiencies in foreclosure practices and determining appropriate remediation for those customers. Where a borrower suffered financial injury as a result of such practices, the agencies' orders require financial remediation to be provided.

As part of that program, 14 mortgage servicers covered by the enforcement actions will begin mailings November 1, 2011 that will continue through the end of the year. The mailings are intended to provide information to potentially eligible borrowers on how to request a review of their case if they believe they suffered financial injury as a result of errors, misrepresentations, or other deficiencies in foreclosure proceedings related to their primary residence between January 1, 2009 and December 31, 2010. The mailings will include a request for review form.

Borrowers may also visit the Independent Foreclosure Review for more information about the review and claim process. Furthermore, assistance with the form and answers to questions about the process are available at 1-888-952-9105, Monday through Friday from 8 a.m. to 10 p.m. (ET) and Saturday from 8 a.m. to 5 p.m. (ET).
Requests for review must be received by April 30, 2012.

The third-party consultant will assess whether any errors, misrepresentations, or other deficiencies resulted in financial injury to borrowers. Where a borrower suffered financial injury as a result of such practices, the consent orders require remediation to be provided. 

During the review, customers may be contacted by mortgage servicers for additional information at the direction of the independent consultant.

Professional Assistance

Library

Interim Status Report: Foreclosure-Related Consent Orders
November 2011

Interagency Review of Foreclosure Policies and Practices
April 2011

Resecuritizing the RMBS Portfolio

The Comptroller of the Currency (OCC) has recently concluded that the resecuritization of certain residential mortgage-backed securities by a bank is permitted through its subsidiary.

In its Interpretive Letter # 1133 (September 2011), the OCC determined that a bank could consummate a certain type of structured transaction in order to enhance the marketability of the underlying interests and its liquidity position and to address regulatory concerns relating to its exposure to non-investment grade securities.

The OCC's consent was based, among other things, on the petitioning bank's representations that it would adhere to prudential requirements and supervisory guidance on safe and sound banking practices and that it would establish and maintain, to the OCC's satisfaction, "an adequate and effective risk measurement and management program."

Re-Packaging Risk

 Here is a brief overview of this resecuritization plan:

• A real estate mortgage investment conduit (REMIC) is one type of vehicle used for securitizing mortgage loans, and it is subject to a specialized set of tax rules. [A Re-REMIC (Re-REMIC) transaction involves the resecuritization of the residential mortgage-backed securities (RMBS) issued by the REMIC. Re-REMIC transactions can have structural differences.]

• The Re-REMIC Transaction would involve a bank transferring the RMBS to a limited purpose subsidiary of that bank.

• This limited purpose subsidiary would form several trusts and transfer several RMBS to each trust.

• Each trust would then issue new securities backed by the RMBS (Re-REMIC Securities) to the limited purpose subsidiary.

• Thereafter, through its limited purpose subsidiary, the bank would hold the Re-REMIC Securities to maturity, but would have the ability to sell them if market conditions improve. It is believed that the Re-REMIC Securities, on the whole, would be more marketable and liquid than the original RMBS.

• A "nationally-recognized statistical rating organization" would rate the Re-REMIC Securities based on a credit and cash flow analysis of the underlying loans, rather than based on the RMBS.

Analysis

The OCC determined that the bank could consummate the transaction and hold the Re-REMIC securities resulting from the transaction. According to the OCC's Interpretive Letter, a bank's authority to securitize assets it holds includes the authority to securitize assets that are securities.

The Interpretative Letter states that a bank may securitize the RMBS through a Re-REMIC Transaction and hold the resultant Re-REMIC Securities.

The letter further states that there is no distinction between securitizing internally generated assets and securitizing other permissibly held assets.

The OCC also concluded that a bank may hold the investment-grade Re-REMIC securities as Type V securities. (A Type V security is a security that is rated investment grade; marketable; not a Type IV security; and fully secured by interests in a pool of loans to numerous obligors in which a national bank could invest directly. The aggregate par value of Type V securities held by the bank that are issued by any one issuer may not exceed 2% of a bank's capital and surplus.)

By restructuring its assets in the Re-REMIC transaction, a bank would enhance the marketability of the underlying assets, improving its liquidity position and reducing its amount of non-conforming assets.

The purpose of the Re-REMIC Transaction, then, is to allow for a "better reflection of the true economic value of the nonperforming and nonconforming RMBS as economic conditions improve," and to thereby enhance the marketability of the RMBS assets and the bank's liquidity position.

Some Notes

It should be noted that the Re-REMIC Transaction is not entered into for the purpose of obtaining "capital relief," and, accordingly, a bank would still hold capital against the RMBS (rather than the Re-REMIC Securities) for so long as the RMBS remain on the bank's balance sheet.

Also noteworthy is that the petitioning bank expects, based upon previous discussions with nationally recognized debt rating agencies, that "the aggregate book value of the non-investment grade Re-REMIC Securities will be substantially less than the aggregate book value of the investment-grade Re-REMIC Securities at the commencement of the Re-REMIC Transaction."

The OCC said that this transaction was a "modern variation" of the type of asset restructuring long recognized as permissible for national banks.

LIBRARY

Comptroller of the Currency (OCC)

Resecuritization of Certain
Residential Mortgage-Backed Securities

Interpretive Letter #1133

September 2011

OTS and OCC Synchronizing

On May 25, 2011, the Office of the Comptroller of the Currency (OCC) issued a proposed rule implementing several provisions of the Dodd-Frank Act (Dodd-Frank), including the transfer of functions from the Office of Thrift Supervision (OTS) and changes to national bank preemption and the OCC's visitorial authority.

Under Dodd-Frank, the OCC is required to assume responsibility for the ongoing examination, supervision, and regulation of Federal savings associations on July 21, 2011.

This Notice of Proposed Rulemaking (NPR) is the first step in the OCC's review of its own regulations and those of the OTS to determine what changes are needed to facilitate a smooth regulatory transition. The NPR was published in the Federal Register on May 26, 2011.

Comments Due: June 27, 2011

REVISIONS

The NPR would:

• Revise OCC rules that are central to internal agency functions and operations immediately upon the transfer of supervisory jurisdiction for Federal savings associations, including rules related to OCC organization, the availability and release of information, and post-employment restrictions for senior examiners.
• Amend the OCC's assessment fee rule to include Federal savings associations. Following a transition period, the proposal provides a single assessment schedule for both national banks and Federal savings associations. Banks and thrifts would be subject to identical assessment methodologies, rates, fees, and payment due dates.

Fee Schedule

As part of the transition of Federal thrift supervision from the OTS to the OCC, the OCC would compute assessment fees under both the OCC and OTS schedules for assessments charged in September 2011 and March 2012, and Federal savings associations will pay the lesser of the two fees.

Beginning with assessments charged in September 2012, the OCC will assess institution fees based on a single fee schedule regardless of charter.

Transfer Date

As part of the integration of the aforementioned OTS functions into the OCC, the OCC also plans to issue an Interim Final Rule with a request for comments, effective on the transfer date, that republishes those OTS regulations the OCC has the authority to promulgate and enforce as of the transfer date, renumbered and issued as new OCC rules, with nomenclature and other technical amendments to reflect OCC supervision of Federal thrifts.

The OCC will consider more comprehensive substantive amendments to these regulations, as appropriate, after the transfer date.

Preemption and Non-Preempted State Laws

Included in the NPR are changes to the OCC's regulations necessary to implement certain revisions to the banking laws that took effect on the enactment of Dodd-Frank.

These changes include implementation of a moratorium on changes in control of credit card banks and trust banks, revisions to Federal branch and agency rules to reflect the permanent increase in deposit insurance coverage, and amendments to OCC rules pertaining to preemption and visitorial powers.

These preemption-related amendments would:

• Eliminate preemption for national bank operating subsidiaries.

• Apply national bank and national bank subsidiary preemption standards, as well as the visitorial powers standards applicable to national banks, to Federal thrifts and their subsidiaries.

• Eliminate any ambiguity concerning the preemption standards in OCC regulations by removing language from OCC rules that provides that state laws that "obstruct, impair or condition" a national bank's powers are preempted.
• Revise the OCC's visitorial powers rule to conform to the holding of the Supreme Court's Cuomo decision, as incorporated by Dodd-Frank, recognizing the ability of state attorneys general to bring enforcement actions in court to enforce non-preempted state laws against national banks.

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Office of the Controller of the Currency (OCC):
Office of Thrift Supervision Integration (OTS)
(Dodd-Frank Act Implementation)
Federal Register - Vol. 76, No. 102
May 26, 2011

CFPB: Announces Forthcoming Rules Transfer

As required by the Consumer Financial Protection Act (Act) of 2010, the Consumer Financial Protection Bureau (CFPB) published a list of the rules and orders that it will enforce.  Section 1063(i) of the Act required publication in the Federal Register. The issuance is dated May 31, 2011.

A final list will be published not later than July 21, 2011, the Designated Transfer Date of the enumerated laws. Any orders for inclusion in the list should be noted by the deadline for comments. After considering any public comments, the CFPB will publish a final list in the Federal Register not later than the Designated Transfer Date.

 Comment Period Deadline: June 30, 2011

TRANSFER OF AUTHORITIES *

* Issuance contains specific citations.

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Under the Act, certain consumer financial protection authorities will transfer from seven (7) transferor agencies to the CFPB, and the CFPB will also assume certain new authorities.

Subject to the limitations and other provisions of the Act, the CFPB will be authorized to enforce, inter alia, rules and orders issued by the transferor agencies under the enumerated consumer laws.

Categorized by their current, respective Agency oversight, the following is the list of enumerated authorities that will be transferred on the Designated Transfer Date.

Board of Governors of the Federal Reserve (FRB)  

1. Equal Credit Opportunity Act (Regulation B)

2. Home Mortgage Disclosure (Regulation C)

3. Electronic Fund Transfers (Regulation E)

4. Registration of Residential Mortgage Loan Originators (Regulation H, Subpart I) (12 CFR 208.101-105 & Appendix A to Subpart I)

5. Consumer Leasing (Regulation M)

6. Privacy of Consumer Financial Information (Regulation P)

7. Fair Credit Reporting (Regulation V), except with respect to §§ 222.1(c) (effective dates), 222.83 (Disposal of consumer information), 222.90 (Duties regarding the detection, prevention, and mitigation of identity theft), 222.91 (Duties of card issuers regarding changes of address), & Appendix J (Interagency Guidelines on Identity Theft Detection, Prevention, and Mitigation)

8. Truth in Lending (Regulation Z)

9. Truth in Savings (Regulation DD)

Federal Deposit Insurance Corporation (FDIC)  

1. Privacy of Consumer Financial Information

2. Fair Credit Reporting, except with respect to §§ 334.83 (Disposal of consumer information), 334.90 (Duties regarding the detection, prevention, and mitigation of identity theft), 334.91 (Duties of card issuers regarding changes of address), & Appendix J (Interagency Guidelines on Identity Theft Detection, Prevention, and Mitigation)

3. Registration of Residential Mortgage Loan Originators (12 CFR 365.101-.105 & Appendix A to Subpart B)

Office of the Comptroller of the Currency (OCC)   

1. Adjustable-Rate Mortgages (but only as applied to non- federally chartered housing creditors under the Alternative Mortgage Transaction Parity Act ("AMTPA"))

2. Registration of Residential Mortgage Loan Originators (12 CFR 34.101-.105 & Appendix A to Subpart F)

3. Privacy of Consumer Financial Information

4. Fair Credit Reporting, except with respect to §§ 41.83 (Disposal of consumer information), 41.90 (Duties regarding the detection, prevention, and mitigation of identity theft), 41.91 (Duties of card issuers regarding changes of address), & Appendix J (Interagency Guidelines on Identity Theft Detection, Prevention, and Mitigation)

Office of Thrift Supervision (OTS)

1. Adjustments to home loans (but only as applied to non-federally chartered housing creditors under AMTPA)

2. Alternative Mortgage Transactions (but only as it relates to AMTPA)

3. Registration of Residential Mortgage Loan Originators (12 CFR 563.101-.105 & Appendix A to Subpart D)

4. Fair Credit Reporting, except with respect to §§ 571.83 (Disposal of consumer information), 571.90 (Duties regarding the detection, prevention, and mitigation of identity theft), 571.91 (Duties of card issuers regarding change of address), & Appendix J (Interagency Guidelines on Identity Theft Detection, Prevention, and Mitigation)

5. Privacy of Consumer Financial Information

National Credit Union Administration (NCUA)     

1. Loans to members and lines of credit to members (but only as applied to non-federally chartered housing creditors under AMTPA)

2. Truth in Savings

3. Privacy of Consumer Financial Information

4. Fair Credit Reporting, except with respect to §§ 717.83 (Disposal of consumer information), 717.90 (Duties regarding the detection, prevention, and mitigation of identity theft), 717.91 (Duties of card issuers regarding changes of address), & Appendix J (Interagency Guidelines on Identity Theft Detection, Prevention, and Mitigation)

5. Requirements for Insurance, but only with respect to §§ 741.217 (Truth in savings), 741.220 (Privacy of consumer financial information), & 741.223 (Registration of residential mortgage loan originators)

6. Registration of Mortgage Loan Originators

Federal Trade Commission (FTC)      

1. Telemarketing Sales Rule

2. Privacy of Consumer Financial Information

3. Disclosure Requirements for Depository Institutions Lacking Federal Depository Insurance

4. Mortgage Assistance Relief Services

5. Use of Prenotification Negative Option Plans

6. Rule Concerning Cooling-Off Period for Sales Made at Homes or at Certain Other Locations

7. Preservation of Consumers' Claims and Defenses

8. Credit Practices

9. Mail or Telephone Order Merchandise

10. Disclosure Requirements and Prohibitions Concerning Franchising

11. Disclosure Requirements and Prohibitions Concerning Business Opportunities

12. Fair Credit Reporting Act (16 CFR Subchapter F, Parts 603 et seq.), except with respect to Part 681 (Identity Theft Rules), Part 682 (Disposal of Consumer Report Information and Records), & Appendix A to Part 681 (Interagency Guidelines on Identity Theft Detection, Prevention, and Mitigation)

13. Procedures for State Application for Exemption from the Provisions of the Fair Debt Collection Practices Act

Department of Housing and Urban Development (HUD)      

1. Hearing Procedures Pursuant to the Administrative Procedure Act

2. Civil Money Penalties: Certain Prohibited Conduct (but only as applied to the Real Estate Settlement Procedures Act of 1974 ("RESPA") and the Interstate Land Sales Full Disclosure Act ("ILSA"))

3. Land Registration

4. Purchasers' Revocation Rights, Sales Practices, and Standards

5. Formal Procedures and Rules of Practice

6. Real Estate Settlement Procedures Act

7. Investigations in Consumer Regulatory Programs (but only as applied to RESPA and ILSA)

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Bureau of Consumer Financial Protection
Identification of Enforceable Rules and Orders, Notice for Public Comment
Federal Register, Vol. 76, No. 104.
May 31, 2011 - Rules and Regulations

OCC: "Foreclosure Irregularities"

In his testimony today to the Senate Committee on Banking, Housing, and Urban Affairs, Acting Comptroller of the Currency John Walsh discussed implementation of initiatives required by the Dodd-Frank Wall Street Reform and Consumer Protection Act before.

There are several areas of interest to the residential mortgage originations community. However, Mr. Walsh's statement about the "Foreclosure Processing Irregularities" merits attention. 

The following is a brief outline of the Acting Comptroller's testimony on Dodd-Frank Initiatives.

DUE DILIGENCE REVIEW

Policies and Procedures

Examiners determined if the policies and procedures in place ensured adequate controls over the foreclosure process and that affidavits, assignments, and other legal documents were properly executed and notarized in accordance with applicable laws, regulations, and contractual requirements.

Organizational Structure and Staffing

Examiners reviewed the functional unit(s) responsible for foreclosure processes, including staffing levels, qualifications, and training programs.

Management of Third-Party Service Providers

Examiners reviewed the financial institutions' governance of key third parties used throughout the foreclosure process.

Quality Control and Internal Audits

Examiners assessed foreclosure quality control processes. Examiners also reviewed internal and external audit reports, including government-sponsored enterprise (GSE) and investor audits and reviews of foreclosure activities, and institutions' self-assessments to determine the adequacy of these compliance and risk management functions.

Compliance with Applicable Laws

Examiners checked compliance with applicable state and local requirements as well as internal controls intended to ensure compliance.

Loss Mitigation

Examiners determined if servicers were in direct communication with borrowers and whether loss mitigation actions, including loan modifications, were considered as alternatives to foreclosure.

Critical Documents

Examiners determined whether servicers had control over the critical documents in the foreclosure process, including appropriately endorsed notes, assigned mortgages, and safeguarding of original loan documentation.

Risk Management

Examiners determined whether institutions appropriately identified financial, reputation, and legal risks, and whether these risks were communicated to the board of directors and senior management.

FINDINGS

In general, the examinations found critical deficiencies and shortcomings in foreclosure governance processes, foreclosure document preparation processes, and oversight and monitoring of third party law firms and vendors.

These deficiencies have resulted in violations of state and local foreclosure laws, regulations, or rules and have had an adverse affect on the functioning of the mortgage markets and the U.S. economy as a whole.

By emphasizing timeliness and cost efficiency over quality and accuracy, examined institutions fostered an operational environment that is not consistent with conducting foreclosure processes in a safe and sound manner.

Despite these deficiencies, the examination of specific cases and a review of servicers' custodial activities found that loans were:

-seriously delinquent
-servicers maintained documentation of ownership
-servicers had perfected interest, thus legal standing to foreclose.

Case reviews evidenced that servicers were in contact with troubled borrowers and had considered loss mitigation alternatives, including loan modifications.

A small number of foreclosure sales should not have proceeded because of an intervening event or condition, such as the borrower:

(a) being covered by the Servicemembers Civil Relief Act;

(b) filing bankruptcy shortly before the foreclosure action; or

(c) being approved for a trial period modification.

While all servicers exhibited some deficiencies, the nature of the deficiencies and the severity of issues varied by servicer.

STANDARDS AND CORRECTIVE ACTIONS

Handling borrower payments, including applying payments to principal and interest and taxes and insurance before they are applied to fees, and avoiding payment allocation processes designed primarily to increase fee income.

Providing adequate borrower notices about their accounts and payment records, including a schedule of fees, periodic and annual statements, and notices of payment history, payoff amount, late payment, delinquency, and loss mitigation.

Responding promptly to borrower inquiries and complaints, and promptly resolving disputes.

Providing an avenue for escalation and appeal of unresolved disputes.

Effective incentives to work with troubled borrowers, including early outreach and counseling.

Making good faith efforts to engage in loss mitigation and foreclosure prevention for delinquent loans, including modifying loans to provide affordable and sustainable payments for eligible troubled borrowers.

Implementing procedures to ensure that documents provided by borrowers and third parties are maintained and tracked so that borrowers generally will not be required to resubmit the same documented information.

Providing an easily accessible single point of contact for borrower inquiries about loss mitigation and loan modifications.

Notifying borrowers of the reasons for denial of a loan modification, including information on the NPV calculation.

Implementing strong foreclosure governance processes that ensure compliance with all applicable legal standards and documentation requirements, and oversight and audit of third party vendors.

Not taking steps to foreclose on a property or conduct a foreclosure sale when the borrower is in a trial or permanent modification and is not in default on the modification agreement.

Ensuring appropriate levels of trained staff to meet current and projected workloads.

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Testimony of John Walsh, Acting Comptroller of the Currency,
before the Committee on Banking, Housing and Urban Affairs, U. S. Senate
February 17, 2011

Agencies: Commence NMLS Registration

The federal bank, thrift and credit union regulatory agencies, along with the Farm Credit Administration, announced today that the Nationwide Mortgage Licensing System and Registry (Federal Registration) will begin accepting federal registrations, effective immediately.

Under the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) and the agencies' final rules, residential mortgage loan originators employed by banks, savings associations, credit unions, or Farm Credit System institutions must register with the registry, obtain a unique identifier from the registry, and maintain their registrations. 

Agencies

Farm Credit Administration

Federal Deposit Insurance Corporation

National Credit Union Administration

Office of the Comptroller of the Currency

Office of Thrift Supervision 

Following expiration of the 180-day initial registration period on July 29, 2011, any employee of an agency-regulated institution who is subject to the registration requirements will be prohibited from originating residential mortgage loans without first meeting these requirements.

(The registration rules exclude mortgage loan originators that originated five or fewer mortgage loans during the previous 12 months and who have never been registered.) 

Initial registration: January 31, 2011 to July 29, 2011.

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Registration of Mortgage Loan Originators
Interagency Announcement
January 31, 2011

Mortgage Performance Metrics: A Quick Look

COMMENTARY: by JONATHAN FOXX

Jonathan Foxx, former Chief Compliance Officer of two publicly traded financial institutions, is the President and Managing Director of Lenders Compliance Group, the first full-service, mortgage risk management firm in the country.

The Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) released their 3rd quarter 2010 mortgage Mortgage Metrics Report.

Published in December 2010, the findings are compiled from data on first-lien residential mortgages serviced by national banks and federally regulated thrifts.

The report provides information on loan performance through September 30, 2010, the year's 3rd quarter.

I think the report offers a broad view of mortgage performance, because the mortgages in this portfolio comprise 64% of all mortgages outstanding in the United States, that is, 33.3 million loans totaling almost $6 trillion in principal balances.

According to the report, mortgage delinquency levels:

• Remained "elevated" and foreclosures (new, in process, and completed) increased during the 3rd quarter of 2010.

• New home retention actions (modifications, trial-period plans, and payment plans) decreased during the quarter.

• The overall credit quality of the portfolio of first-lien mortgages serviced by the largest national banks and thrifts seems to have remained "steady" during the 3rd quarter of 2010, after showing some improvement during the previous two quarters.

The full report is available in our Library.

Let's look now (see below) at five tables from the report and consider some statistical analysis.

According to this table, servicers implemented 470,321 new home retention actions during the 3rd quarter. This represents a 17% decline from the previous quarter.

• HAMP modifications decreased by 45.7% during the quarter while other modifications increased by 10.1%.

• New HAMP trial plans decreased by 33.2%, and other trial-period plans decreased 21% from the previous quarters.

The report indicates that servicers attribute this decline resulted from requirements to obtain, verify, and analyze borrower income before beginning a trial period plan and the falling number of borrowers who are eligible for existing modification programs.

The findings indicate that servicers modified 1,506,025 loans from the beginning of 2008 through the 2nd quarter of 2010.

• At the end of the 3rd quarter of 2010, 48% of these modifications remained current or were paid off.

• Another 10.2% were 30 to 59 days delinquent.

• Almost 24% of the modifications were seriously delinquent, 9.4% were in the process of foreclosure, and 4.2% had completed the foreclosure process.

• Modifications that reduced payments by 10% or more performed better than modifications that reduced payments by less than 10%.

• At the end of the third quarter, 58.9% of modifications that reduced payments by 10% or more were current and performing, compared with the 33.4% of modifications that reduced payments by less than 10%.

This table shows that more recent modifications have performed better than earlier modifications every quarter since the end of the first quarter of 2009, though the rate of improvement "appears to be moderating."

• At 6 months after modification, 20.2% of the modifications made in the 4th quarter of 2009 were seriously delinquent compared with 33.5% of the modifications made during the second quarter of 2009.

• The report states that this trend of lower delinquency rates following modification "corresponds with the increasing emphasis on repayment sustainability through reduction of the borrower's monthly payment, verified borrower income, and payment affordability relative to income."

One of the more interesting tables is this one, because it indicates that modified mortgages held in the servicers' portfolios performed better than modified mortgages serviced for others.

• The report asserts that this variance may result from differences in modification programs, servicers' additional flexibility to modify mortgage terms, and the underlying quality of loans serviced for different investors.

• Note that the modified government-guaranteed mortgages had the highest delinquency rates at 6, 9, and 12 months following modification, consistent with their higher overall delinquency rates.

This table charts modified loan performance, by change in monthly payments, a statistical array of data that we have commented on in previous compliance updates, particularly with respect to the HAMP program.

The report finds that modifications with decreased monthly payments consistently had lower re-default rates than modifications that left payments unchanged or increased payments.

• After 6 months, 14.6% of modifications implemented since the second quarter of 2009 that decreased monthly payments by 20% or more were seriously delinquent.

• In contrast, 28.1% of modifications that left payments unchanged and 42.% of modifications that increased payments were seriously delinquent.

The report asserts that while lower payments reduce monthly cash flows to investors, the payments may result in longer-term sustainability.

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OCC and OTS Mortgage Metrics Report -
Disclosure of National Bank and Federal Thrift Mortgage Loan Data:
Third Quarter 2010
Issued: December 2010