Joshua Rosner
646/652-6207
jrosner@graham-fisher.com
While the term sheet may be an effort by Attorney General Miller to deliver a headline
settlement worthy of an appointment as permanent head of the CFPB, given the vagaries
and lack of clarity, it should be seen as little more than a statement of purpose. In current
form, it will be difficult to move this plan forward other than as an agreement on servicer
best practices.
It is hard to believe that banks and servicers could feel it adequately identifies or ring-
fences their potential liabilities. Similarly, it appears that it will be difficult to find
overwhelming support from borrower groups, investors or even state AG’s in those states
with the greatest number of harmed parties or the greatest powers to prosecute.
This “term sheet” may well tie the hands of states from bringing actions against prior
improper servicing and back-end/foreclosure practices AS WELL AS improper front-end
or assignment practices. If state AG’s do not pursue cases and win those in actions
regarding such violations then the ability of borrowers and investors to pursue private
rights of action will be significantly weakened by a lack of precedent in court. Moreover,
the document fails to address appropriate enforcement mechanisms for the proposed
actions and does not spell out remedies for such failures.
If a private-sector lawyer, representing any harmed party, settled for damages without an
investigation of actual damages they would likely be exposing themselves to malpractice,
why would that not be the case here?
It is unclear if this is merely a series of best practices or if this is an actual settlement that,
if adhered to, would preclude legal actions by state or federal bodies. If it were the latter,
this agreement would be one of the greatest abdications of governmental responsibilities
to both borrowers and investors in modern history.
While the document does send the right message on principal reductions, requiring
second liens to be written down proportionally with the first mortgages, it is unclear what
legal authority states have to enforce this requirement. Moreover, rather than just
accepting a negatively amortizing open-end second lien loan that is making minimum
payments to be classified as current, were federal regulators to require accurate
Also, even if the industry is expected to pay around $25 billion towards principal write-
downs, that amount of money is clearly inadequate to cover the necessary principal
reductions where will the other monies come from? There is nothing in the document that
precludes inappropriate costs, which should be borne by the sell-side, from coming from
the pockets of investors in the same manner that Countrywide settled its actions against
state AG’s with investor funds.
The document does not prevent investors from being assessed the costs of bringing
servicers into compliance with practices that should already exist.
Section analysis:
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The Weekly Spew March 2011
http://www.ftc.gov/opa/2008/09/emc.shtm
http://www.ftc.gov/opa/2003/11/fairbanks.shtm
Section II B – Dual tracking prohibited: This states what should be considered best
practices but fails to address conflicts with private contracts (pooling and servicing
agreements).
Section II C – Single point of contact: Requires a single point of contact for borrowers
and government oversight. This is not particularly novel and also reflects practices that
should already exist. All incremental costs of compliance with these practices that should
already exist would likely be passed on to investors rather than be borne by servicers.
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The Weekly Spew March 2011
Section II G – Loss mitigation Timelines: This section creates a timeline for actions
that should already exist in best practice.
Section II H – Loss mitigation denials: This section would serve to allow borrowers to
request a process for review. While this is appropriate, current servicing contracts would
seem to allow such incremental costs to be passed on to investors rather than be borne by
servicers.
Section II N – Second lien relief: This section which includes only one sub-point
requires, at the time of a permanent modification of a first lien, seconds to be written
down proportionately. While this is laudable and probably acceptable to most investors, it
is worth noting that where a first has substantial negative equity the second should, in
most cases, be assumed to be worthless.
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The Weekly Spew March 2011
Section III A – General requirements: Requires fees levied on borrowers be fair and
reasonable and not marked up inappropriately. There are no protections for investors.
Section III B – Specific fee provisions: Again, this section is merely a restatement of
practices that already exist in multiple laws and best practice.
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The Weekly Spew March 2011
Force-Placed insurance
Section V:
Monetary relief:
Section VI: This section is vague and states (reserved for further discussion). Beyond
that is states servicers shall provide monetary relief as compensation or penalties for
unlawful conduct, to settle claims owed to the government, and/or to fund programs to
help homeowners avoid foreclosure, including support of non-profit housing counseling,
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The Weekly Spew March 2011
legal aid assistance, hotlines, web portal access, borrower education and outreach,
mediation, post-foreclosure relocation assistance and similar efforts. Servicers shall also
establish a fund to compensate victims of servicer misconduct. It also states that a
substantial portion of the funds will support and enhanced program of loan modifications.
There is no consideration of harm to investors resulting from illegal or poor servicing
practices nor does it address the likely costs that will be passed on to investors.
Section VII - This section requires undefined reports be presented to AG’s and the CFPB.
It does not define enforcement or penalties for non-compliance. It also fails to address the
risk of an insufficiently funded CFPB.
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