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Regulators Urge Mortgage Lenders to be Flexible with Homeowners

Immediate Foreclosure Not Required when Lenders Fall Behind

April 17, 2007

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With foreclosures rising nationwide, the federal bank, thrift and credit union regulatory agencies are encouraging financial institutions to work with homeowners who are unable to make mortgage payments.

The agencies said they want to remind their institutions that existing regulatory guidance and accounting standards do not require immediate foreclosure on homes when borrowers fall behind on payments.

In addition, under the Homeownership Counseling Act, institutions are required to inform delinquent borrowers about the availability of homeownership counseling. Institutions should also consider working with reputable consumer-based organizations to help financially stressed borrowers avoid predatory foreclosure rescue scams.

As the regulators issued their advisory, a real estate information service said foreclosure notices sent to California homeowners in the first quarter of 2007 jumped to their highest level in almost ten years.

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The agencies advised lenders that prudent workout arrangements that are consistent with safe and sound lending practices are generally in the long-term best interest of both the financial institution and the borrower.

Institutions will not face regulatory penalties if they pursue reasonable workout arrangements with borrowers, according to a statement issued by the Office of the Comptroller of the Currency (OCC), oversees national banks. Joining OCC in the statement were the Federal Reserve Board, U.S. Department of Housing and Urban Development, National Credit Union Association, and Office of Thrift Supervision.

Borrowers who are unable to make their mortgage payments should contact their lender or servicer as soon as possible to discuss available options.

Examples of constructive workout arrangements include modifying loan terms, and/or moving borrowers from variable-rate loans to fixed-rate loans. Bank and thrift programs that transition low- or moderate-income homeowners from higher-cost loans to lower-cost loans may also receive favorable consideration under the Community Reinvestment Act (CRA), provided the loans are made in a safe and sound manner.

Federal credit unions are exempt from CRA requirements.

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