A mortgage servicing settlement proposed by Iowa Attorney General Tom Miller is under intense scrutiny by several state attorneys general.
The settlement proposes a strict set of new mortgage servicing regulations. Opponents say that while it intends to address allegations against certain mortgage servicers for improper foreclosures and loan servicing, it could unfairly affect all mortgage servicers.
Oklahoma Attorney General Scott Pruitt said, "It has the potential to greatly affect all of these entities, including community banks and credit unions," Pruitt said. "It would be right for credit unions to be concerned about how this would affect their business and how they service loans to customers."
Pruitt, along with Attorneys General Jon Bruning of Nebraska and Luther Strange of Alabama, sent a letter to Miller stating as much on March 16.
Among the settlement’s proposals is a timeline servicers must follow when a borrower applies for a loan modification. It also mandates that servicers cannot move forward with a foreclosure if a loan modification is in process. Servicers would also be required to determine a single point of contact for a borrower and offer an online portal from which customers can electronically manage their loan documents.
Virginia Attorney General Kenneth Cuccinelli said the term sheet "goes beyond addressing the wrongdoings of mortgage servicers." He added that if credit unions choose to accept the terms, their business processes would become more cumbersome and therefore more expensive.
Credit union executives also voiced concern over the settlement, particularly its vague language, proposal of implementing principal write-downs as a modification option, and an electronic loan document management system requirement.
CU Members Mortgage President David Motley said the settlement is "overly broad, excessively prescriptive and has the potential to be massively subjective in its enforcement." He said it targets servicers’ agents, successors and assignees, meaning that "any purchaser of the servicer’s servicing would be subject to the agreement."
"It is unlikely that any other servicer would be willing to voluntarily sign up for this agreement, so the result is that the signers’ servicing would have no market value," Motley said.
He added that he does not agree with the settlement’s proposal to allow principal write-downs as a modification option, stating, "Congress has already defeated these cram-down proposals." He’s also against its suggestion that second liens be modified pro rata with the first lien. He said that by law, second-lien holders are subordinate to first-lien holders.
"Let’s address the problems but not restructure the entire industry," Motley said. "The cure could well be worse than the illness."
Mark Wilburn, the senior vice president and chief lending officer for Bartlesville, Okla.-based 66 Federal Credit Union, said he is worried the settlement’s principal write-down modification option and electronic loan document process requirement could negatively affect credit unions.
"The technology needed to submit documents electronically I imagine would be a huge technical expenditure when it’s not really necessary," Wilburn said. "I would hope there would be some exceptions for small servicers."
American Credit Union Mortgage Association President Bob Dorsa expressed the same sentiment regarding the increased expense and manpower the settlement would require of small mortgage servicers.
"Even the average credit union is not blessed with the human resources to deal with the procedures in this 27-page document," Dorsa said.
However, Wilburn said some parts of the settlement–the loan modification timeline, single point of contact requirement and prevention of foreclosures on properties in the loan modification process–would have little effect on credit unions that service a small number of loans. His credit union services $425 million in loans for Freddie Mac and $16 million in portfolio loans, making it a "micro-small servicer" in comparison to all U.S. mortgage servicers, Wilburn said.
"I think we could deal with that," Wilburn said. "As credit unions, we respond to our members very quickly."