10 Steps to Defusing Loan-Mod Bombs: There's More Than One Way to Save a Loan-And Even More Ways to Mess Up

Your regulator is encouraging you to work constructively with borrowers to prevent foreclosures, but don't forget that even bend-over-backwards loans remain fully subject to all applicable regulatory compliance requirements--no matter how flexible you are being to help your customers. [ILLUSTRATION OMITTED] Many customers are feeling extreme economic stress and are looking for relief. They're seeking payment holidays, rate relief, and principal reductions. Mortgage lenders are responding by refinancing or modifying loans, and helping consumers avoid foreclosure. (See Cover Story, p. 5.) But, in the meantime, there is no compliance holiday, and banks must continue to be alert to--and comply with--all the regulatory compliance requirements that apply to mortgage loan modifications and restructurings. Mistakes can have disastrous consequences. The victim consumer will seek help any way possible. This is no time for your bank to find itself the subject of headlines like: Bank Fined for Violating Consumer Protection Laws or Bank Found to be Using Unfair Practices. The cause of those headlines could be as minor as a technical error on a form or a missed Notice to the Cosigner. Or it could be a credit discrimination lawsuit brought by a consumer who didn't get his mortgage loan modified and felt unfairly treated. [ILLUSTRATION OMITTED] Here are ten compliance pitfalls associated with mortgage loan modifications that bankers must avoid. 1. Equal Credit Opportunity Act/Regulation B and the Fair Housing Act apply to ALL aspects of credit throughout the credit relationship. Even after a loan is approved and on the books, a bank is still subject to ECOA/Regulation B and fair-lending laws. How a bank treats each borrower or groups of borrowers through the loan-servicing and loan-workout process will be judged under the same equal credit opportunity standards as when the loan application process first began. Banks must avoid any unequal or discriminatory treatment on any prohibited basis when determining which loans should be modified or refinanced, and how the resulting loans will be structured and priced. To avoid this problem, develop and follow clear policies and procedures on loan marketing, underwriting, and pricing-and rewriting. Banks should have a defined plan for how to communicate loan modification program availability, handle customer requests, price the product, and determine qualifications. Some banks may be affirmatively soliciting consumers through advertising and active communications, while others may be waiting for customers to contact them. Banks should know the demographic implications of each approach. Banks should decide how much discretion to allow loan officers in making changes to loans. If clear guidelines are not provided by management, the treatment among borrowers could vary significantly, and the bank could be subject to allegations of disparate treatment on a prohibited basis. 2. Adding cosigners, guarantors, and other signers Banks may be tempted to shore up existing loans with additional signatures. If an additional signer for the loan is deemed necessary, the bank may not require that the borrower's spouse be the signer. However, the bank has the ability to evaluate the offered signer under its objective standards and determine if the signer is qualified. State laws should also be consulted, because state laws vary on spousal property rights and signatures needed for access to collateral. The Notice to Cosigners under Regulation AA may be required if a cosigner is added to a loan-other than a mortgage loan--that is modified. The notice informs the consumer who is assuming liability for an obligation without receiving goods, services, or money of the implications of that obligation, and must be provided to the cosigner in order for the obligation to be valid. Failure to provide the Notice to Cosigners is considered an unfair or deceptive practice. …