Alert December 20, 2011

OCC Provides Guidance on Potential Issues with Foreclosed Residential Properties

The OCC provided guidance (the “Guidance”) to national banks and federal savings associations (together, “Banks”) setting forth the OCC’s expectation that Banks will adopt and implement policies and procedures to address several obligations and risks associated with the foreclosure of residential properties (“Policies and Procedures”).  The OCC notes that the risks and obligations associated with such foreclosure might differ depending on a Bank’s role in the foreclosure process, i.e. whether a Bank acts as owner of the of the foreclosed property, as servicer/property manager, or as securitization trustee, as well as on contractual terms, and focused the Guidance on the Bank as owner and as servicer.  The Guidance highlights the importance of understanding the requirements imposed by Fannie Mae and Freddie Mac and the U.S. Department of Housing and Urban Development (“HUD”) on servicers and states that when a Bank acquires title to properties through foreclosure, whether as owner or servicer, it subjects itself to operating, compliance and reputational risks.  

The Guidance mandates that Banks consider certain obligations and risks when establishing and implementing their Policies and Procedures.  When functioning as the owner of a residential foreclosed property, a Bank must consider the following obligations and actions: (i) the assumption of the primary responsibilities of an owner, including providing maintenance and security, paying taxes and insurance, and serving as landlord for rental properties; (ii) for Federal Housing Administration (“FHA”)-insured mortgages, a Bank must ensure compliance with property and preservation guidance issued by HUD to preserve the insurance claim and obtain reimbursements for allowable expenses; (iii) following foreclosure, a Bank must record its ownership interest in local land records; (iv) Banks must comply with the other real estate owned (“OREO”) appraisal and accounting requirements; (v) Banks should maintain appropriate insurance on the property; (vi) some localities may require registration of foreclosed properties, properties in foreclosure, or vacant properties, and Banks should be aware of and comply with such requirements; or (vii) compliance with the Protecting Tenants at Foreclosure Act of 2009, which provides tenants with protections from eviction as a result of foreclosure on the properties they are renting.  Additionally, when functioning as the owner of a residential foreclosed property, a Bank must consider the following: (a) having sufficient staffing levels to manage its foreclosed properties portfolios and having policies, procedures, and risk management systems in place to properly oversee and manage third-party relationships; (b) prior to undertaking the rehabilitation or improvement of foreclosed properties, considering the legal authority to make expenditures on OREO and any HUD requirements for mortgages insured by the FHA; (c) the various costs, risks and opportunities associated with the disposition of foreclosed residential properties, and, in the case of foreclosed residential properties from FHA-insured mortgages, HUD requirements regarding insurance payments and allowable reimbursements; and (d) holding period issues that could result from an inability to dispose of foreclosed properties.

The Guidance also highlights obligations and actions from two sources that a Bank must consider when functioning as a servicer: (1) the Fannie Mae and Freddie Mac servicing guidelines regarding foreclosed properties; and (2) in the case of private securitizations, the obligations set forth in the relevant pooling and servicing agreement (“PSA”).  The obligations and actions highlighted are: (A) that servicers may be required to assume many of the responsibilities of an owner, as discussed above; (B) that servicers may be required to register the foreclosed properties in certain localities; (C) that servicers should review the PSA for requirements and responsibilities regarding the disposition of foreclosed properties; and (D) responsibilities that servicers may have under the Protecting Tenants at Foreclosure Act or other applicable state law requirements that provide protections to tenants from eviction on the properties they are renting as a result of foreclosure.  Additionally, when functioning as a servicer, a Bank must consider the following: (i) having sufficient staffing levels and appropriate third-party vendor oversight to manage the foreclosed properties portfolios; (ii) complying with local building codes and licensing requirements, and requirements in servicing agreements, when rehabilitating or improving on foreclosed properties; and (iii) the various costs, risks and opportunities associated with the disposition of foreclosed residential properties. 

The Guidance notes that a Bank’s responsibilities as securitization trustee will be set forth in a PSA, trust agreement or indenture, and that, as permitted by the relevant document, the Bank should work with the servicer to ensure the performance of its obligations.  The Guidance also discusses considerations associated with the decision to release a lien, rather than to foreclose.  The OCC noted that while the Guidance focuses on residential foreclosed properties, many of the same principles apply to commercial properties.