[House Report 110-615]
[From the U.S. Government Publishing Office]
110th Congress Report
HOUSE OF REPRESENTATIVES
2d Session 110-615
======================================================================
EMERGENCY MORTGAGE LOAN MODIFICATION ACT OF 2008
_______
May 1, 2008.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Frank of Massachusetts, from the Committee on Financial Services,
submitted the following
R E P O R T
[To accompany H.R. 5579]
[Including cost estimate of the Congressional Budget Office]
The Committee on Financial Services, to whom was referred the
bill (H.R. 5579) to remove an impediment to troubled debt
restructuring on the part of holders of residential mortgage
loans, and for other purposes, having considered the same,
report favorably thereon with an amendment and recommend that
the bill as amended do pass.
CONTENTS
Page
Amendment........................................................ 2
Purpose and Summary.............................................. 3
Summary of Major Provisions...................................... 3
Background and Need for Legislation.............................. 4
Hearings......................................................... 5
Committee Consideration.......................................... 6
Committee Votes.................................................. 6
Committee Oversight Findings..................................... 6
Performance Goals and Objectives................................. 6
New Budget Authority, Entitlement Authority, and Tax Expenditures 7
Committee Cost Estimate.......................................... 7
Congressional Budget Office Estimate............................. 7
Federal Mandates Statement....................................... 8
Advisory Committee Statement..................................... 8
Constitutional Authority Statement............................... 8
Applicability to Legislative Branch.............................. 8
Earmark Identification.......................................... 8
Section-by-Section Analysis of the Legislation................... 8
AMENDMENT
The amendment is as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Emergency Mortgage Loan Modification
Act of 2008''.
SEC. 2. SAFE HARBOR FOR QUALIFIED LOAN MODIFICATIONS OR WORKOUT PLANS
FOR CERTAIN RESIDENTIAL MORTGAGE LOANS.
(a) Standard for Loan Modifications or Workout Plans.--Absent
contractual provisions to the contrary--
(1) the duty to maximize, or to not adversely affect, the
recovery of total proceeds from pooled residential mortgage
loans is owed by a servicer of such pooled loans to the
securitization vehicle for the benefit of all investors and
holders of beneficial interests in the pooled loans, in the
aggregate, and not to any individual party or group of parties;
and
(2) a servicer of pooled residential mortgage loans shall be
deemed to be acting on behalf of the securitization vehicle in
the best interest of all investors and holders of beneficial
interests in the pooled loans, in the aggregate, if for a loan
that is in payment default under the loan agreement or for
which payment default is imminent or reasonably foreseeable,
the loan servicer makes reasonable and documented efforts to
implement a modification or workout plan or, if such efforts
are unsuccessful or such plan would be infeasible, engages in
other loss mitigation, including accepting a short payment or
partial discharge of principal, or agreeing to a short sale of
the property, to the extent that the servicer reasonably
believes the particular modification or workout plan or other
mitigation actions will maximize the net present value to be
realized on the loan, including over that which would be
realized through foreclosure.
(b) Safe Harbor.--Absent contractual provisions to the contrary, a
servicer of a residential mortgage loan that acts in a manner
consistent with the duty set forth in subsection (a), shall not be
liable for entering into a qualified loan modification or workout plan,
to--
(1) any person, based on that person's ownership of a
residential mortgage loan or any interest in a pool of
residential mortgage loans or in securities that distribute
payments out of the principal, interest and other payments in
loans on the pool;
(2) any person who is obligated pursuant to a derivatives
instrument to make payments determined in reference to any loan
or any interest referred to in paragraph (1); or
(3) any person that insures any loan or any interest referred
to in paragraph (1) under any law or regulation of the United
States or any law or regulation of any State or political
subdivision of any State.
(c) Rule of Construction.--No provision of this section shall be
construed as limiting the ability of a servicer to enter into loan
modifications or workout plans other than qualified loan modification
or workout plans.
(d) Definitions.--For purposes of this section, the following
definitions shall apply:
(1) Qualified loan modification or workout plan.--The term
``qualified loan modification or workout plan'' means a
modification or plan that--
(A) is scheduled to remain in place until the
borrower sells or refinances the property, or for at
least 5 years from the date of adoption of the plan,
whichever is sooner;
(B) does not provide for a repayment schedule that
results in negative amortization at any time; and
(C) does not require the borrower to pay additional
points and fees.
(2) Negative amortization.--For purposes of paragraph (1),
the term ``negative amortization'' does not include the
capitalization of delinquent interest and arrearages.
(3) Residential mortgage loan defined.--The term
``residential mortgage loan'' means a loan that is secured by a
lien on an owner-occupied residential dwelling.
(4) Securitization vehicle.--The term ``securitization
vehicle'' means a trust, corporation, partnership, limited
liability entity, special purpose entity, or other structure
that--
(A) is the issuer, or is created by the issuer, of
mortgage pass-through certificates, participation
certificates, mortgage-backed securities, or other
similar securities backed by a pool of assets that
includes residential mortgage loans; and
(B) holds such loans.
(e) Effective Period.--This section shall apply only with respect to
qualified loan modification or workout plans initiated prior to January
1, 2011.
PURPOSE AND SUMMARY
H.R. 5579, the Emergency Mortgage Loan Modification Act of
2008, was introduced on March 11, 2008, by Mr. Castle and Mr.
Kanjorski. The purpose of the bill is to clarify certain
existing duties and responsibilities of mortgage loan servicers
in effecting modifications of mortgage loans that are in
default or for which default is imminent. The bill also
provides a safe harbor from lawsuits by investors for mortgage
servicers who engage in specified loan modifications and
workouts, consistent with those duties.
SUMMARY OF MAJOR PROVISIONS
Servicer duty of care
The duties and responsibilities of servicers of securitized
mortgage loan pools are established in contracts called
servicing agreements or pooling and servicing agreements
(Pooling and Servicing Agreements). Such agreements generally
include a requirement that a servicer follow accepted servicing
practices and procedures. While there is a degree of
standardization among Pooling and Servicing Agreements
regarding some provisions, other provisions may vary
substantially. For instance, some agreements will give
servicers broad authority to engage in loss mitigation on loans
that are in default or for which default is reasonably
foreseeable, so long as the servicers' actions are in the best
interests of the security holders. Other agreements may spell
out the types of permissible modifications or limit the number
or timing of modifications of loans in the pool.
Inadequate resources to identify, evaluate, conduct
outreach for and process the volume of loans in or near default
have plagued servicer efforts to engage in timely and
meaningful loan modifications in the face of the current
foreclosure crisis. Servicers say they are further hindered by
uncertainty about what modification actions may be permitted
under their agreements, and by the fear of litigation by
investors.
The servicer duty provisions are intended to provide a
measure of clarity and certainty to servicers by codifying
concepts that are consistent with existing contractual
obligations. The legislation makes clear that, absent any
contractual provisions to the contrary, the duty of the
servicer to maximize, or not adversely affect, the recovery of
proceeds from pooled mortgage loans is owed for the benefit of
investors in the aggregate, and not to any individual investor
or group of investors. This articulation of the servicer duty
is consistent with existing Pooling and Servicing Agreements,
and with servicer best practices as developed by the American
Securitization Forum (ASF) and reflected in their ``Statement
of Principles, Recommendations and Guidelines for the
Modification of Securitized Subprime Residential Mortgage
Loans'' (June 2007). The Committee expects that this
clarification will reduce servicer concerns about liability to
investors in securitization tranches that may be disadvantaged
by a servicer's loss mitigation actions.
The legislation also clarifies that, absent contrary
contractual provisions, a servicer is acting in the best
interest of all investors if it implements a modification or
workout plan or engages in other loss mitigation efforts,
including accepting a short payment or short sale, for a loan
that is in default or for which default is imminent or
reasonably foreseeable, to the extent the servicer reasonably
believes the modification will maximize the net present value
to be realized on the loan, including over that which would be
realized through foreclosure. Again, this generally is
consistent with existing Pooling and Servicing Agreements, as
well as with the ASF principle that loan modifications are
important loss mitigation tools and other loss mitigation
alternatives, including short sales and short payoffs, are
useful. The Committee expects that these changes will clear the
way for servicers to initiate long-term sustainable loan
modifications that will be a benefit to all parties.
Safe harbor
The legislation provides a safe harbor from lawsuits by
investors for servicers that meet their prescribed duties, and
enter into ``qualified loan modification or workout plans.''
``Qualified loan modification or workout plan'' is defined as a
plan that: (1) remains in place for at least five years, unless
the borrower sells the property or refinances the loan during
that time; (2) includes repayment schedules that do not result
in negative amortization; and (3) does not require the borrower
to pay additional points and fees. These conditions are
intended to result in long-term, sustainable and affordable
mortgage obligations for homeowners and a continued stream of
income for investors. The term ``negative amortization'' is not
intended to include extensions of loan terms to repay
delinquent interest and arrearages, so long as the structure
does not at any time result in negative amortization; that is,
the amounts are not added back into the loan principal and the
outstanding balance of the loan does not increase. The
Committee hopes, however, that servicers will carefully
consider forgiveness of arrearages in appropriate
circumstances.
The safe harbor would apply only to owner-occupied
residential mortgage loans, and only to qualified modifications
or workout plans initiated prior to January 1, 2011.
The legislation does not create statutory preferences for
loss mitigation activities, nor is it intended to limit the
ability of servicers to enter into modifications or workouts
other than those referenced in the legislation.
The legislation would provide a safe harbor only from
investor lawsuits and only for loan modification or workout
plans having the specified characteristics. It is the
Committee's intent that the legislation would not affect the
ability of consumers or borrowers to pursue claims against
lenders or servicers for fraud or for discriminatory or abusive
lending practices.
BACKGROUND AND NEED FOR LEGISLATION
The number of American families facing or at risk of
foreclosure has grown dramatically during the current upheaval
in the mortgage and housing markets. According to the Mortgage
Bankers Association (MBA), 5.82 percent of all loans on single-
family properties outstanding in the fourth quarter of 2007
were delinquent, the highest total delinquency rate in the MBA
survey in over 20 years. The percentage of loans in the
foreclosure process also stands at record highs. A complex mix
of circumstances has made it difficult for borrowers to
restructure or refinance their loans, including that many of
those loans were securitized into asset-backed securities and
sold in the secondary market.
One of the reasons given for the slow pace of loan
modifications is that some servicers are concerned about legal
liability to investors based on those modifications. While
servicers have been trying to work with borrowers under a
variety of programs, many of these efforts have been in the
form of short-term extensions of the initial, starter or
``teaser'' rates, or temporary repayment plans that do not
provide the long-term stability needed by borrowers, investors
or the markets.
This legislation is designed to facilitate loan
modifications and workouts by clarifying mortgage loan
servicers' responsibilities in effecting modifications of
mortgage loans that are in default or for which default is
imminent, and providing a safe harbor from lawsuits by
investors for mortgage servicers who engage in specified loan
modifications and workouts.
HEARINGS
The Financial Services Committee held a hearing on December
6, 2007, titled ``Accelerating Loan Modifications, Improving
Foreclosure Prevention and Enhancing Enforcement'' at which the
Committee considered a previous version of the bill, H.R. 4178,
introduced by Mr. Castle on November 14, 2007. The following
witnesses testified: The Honorable Sheila C. Bair, Chairman,
Federal Deposit Insurance Corporation; The Honorable Randall S.
Kroszner, Governor, Board of Governors of the Federal Reserve
System; The Honorable John C. Dugan, Comptroller, Office of the
Comptroller of the Currency; The Honorable Gigi Hyland, Board
Member, National Credit Union Administration; Mr. Scott M.
Polakoff, Senior Deputy Director and Chief Operating Officer,
Office of Thrift Supervision; Mr. Mark E. Pearce, North
Carolina Deputy Commissioner of Banks, on behalf of the
Conference of State Bank Supervisors; Mr. Tom Deutsch, Deputy
Executive Director, American Securitization Forum; Ms. Faith
Schwartz, Executive Director, HOPE NOW Alliance; Mr. Hilary O.
Shelton, Director, National Association for the Advancement of
Colored People; Mr. Damon Silvers, Associate General Counsel,
AFL-CIO; Dr. Richard Kent Green, Oliver T. Carr, Jr. Chair of
Real Estate Finance, The GW School of Business, George
Washington University; Mr. Laurence E. Platt, Partner, K&L
Gates, on behalf of the Securities Industry and Financial
Markets Association; Mr. Michael Calhoun, President, Center for
Responsible Lending; and Mr. John Taylor, Vice President for
Policy, National Community Reinvestment Coalition.
At a hearing of the Financial Services Committee on April
9, 2008, titled ``Using FHA for Housing Stabilization and
Homeownership Retention,'' provisions of H.R. 5579 were
addressed by members and witnesses. Specifically, the Honorable
Sheila Bair, Chairman, Federal Deposit Insurance Corporation,
and the Honorable John C. Dugan, Comptroller, Office of the
Comptroller of the Currency, expressed support for the
legislation. Other witnesses at the hearing included: The
Honorable John M. Reich, Director, Office of Thrift
Supervision; The Honorable Randall S. Kroszner, Governor, Board
of Governors of the Federal Reserve System; The Honorable Brian
Montgomery, Assistant Secretary for Housing-Federal Housing
Commissioner, United States Department of Housing and Urban
Development; Mr. Brian Wesbury, Chief Economist, First Trust
Advisors L.P.; Dr. Alan S. Blinder, Ph.D., Gordon S. Rentschler
Memorial Professor of Economics and Public Affairs, Princeton
University; and Dr. Allen Sinai, Chief Global Economist,
Strategist and President, Decision Economics, Inc.
The Subcommittee on Capital Markets, Insurance and
Government Sponsored Enterprises held a legislative hearing on
April 15, 2008, titled ``H.R. 5579, The Emergency Mortgage Loan
Modification Act of 2008.'' The following witnesses testified:
Mr. Ralph DaLoisio, Managing Director, Natixis Structured
Finance Group, on behalf of the American Securitization Forum;
Mr. Robert E. Story, Jr., President, Seattle Financial Group,
and Vice Chairman, Mortgage Bankers Association, on behalf of
the Mortgage Bankers Association; and Mr. Marlo A. Young,
Partner, Thacher Proffitt & Wood LLP.
COMMITTEE CONSIDERATION
The Committee on Financial Services met in open session on
April 23, 2008, and ordered H.R. 5579, the ``Emergency Mortgage
Loan Modification Act of 2008'', as amended, favorably reported
by a voice vote.
COMMITTEE VOTES
Clause 3(b) of rule XIII of the Rules of the House of
Representatives requires the Committee to list the record votes
on the motion to report legislation and amendments thereto. No
record votes were taken in conjunction with the consideration
of this legislation. A motion by Mr. Kanjorski to report the
bill, as amended, to the House with a favorable recommendation
was agreed to by a voice vote.
During the consideration of the bill, the following
amendment was considered:
An amendment by Mr. Kanjorski, No. 1, a manager's amendment
making various technical and substantive changes, was agreed to
by a voice vote.
COMMITTEE OVERSIGHT FINDINGS
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the Committee has held hearings and
made findings that are reflected in this report.
PERFORMANCE GOALS AND OBJECTIVES
Pursuant to clause 3(c)(4) of rule XIII of the Rules of the
House of Representatives, the Committee establishes the
following performance related goals and objectives for this
legislation:
To the extent that existing duties and responsibilities of
mortgage loan servicers are clarified, and a safe harbor from
lawsuits by investors for mortgage servicers who engage in
specified loan modifications and workouts is created, mortgage
servicers will increase efforts to initiate long-term
sustainable loan modifications.
NEW BUDGET AUTHORITY, ENTITLEMENT AUTHORITY, AND TAX EXPENDITURES
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee adopts as its
own the estimate of new budget authority, entitlement
authority, or tax expenditures or revenues contained in the
cost estimate prepared by the Director of the Congressional
Budget Office pursuant to section 402 of the Congressional
Budget Act of 1974.
COMMITTEE COST ESTIMATE
The Committee adopts as its own the cost estimate prepared
by the Director of the Congressional Budget Office pursuant to
section 402 of the Congressional Budget Act of 1974.
CONGRESSIONAL BUDGET OFFICE ESTIMATE
Pursuant to clause 3(c)(3) of rule XIII of the Rules of the
House of Representatives, the following is the cost estimate
provided by the Congressional Budget Office pursuant to section
402 of the Congressional Budget Act of 1974:
April 28, 2008.
Hon. Barney Frank,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 5579, the
Emergency Mortgage Loan Modification Act of 2008.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Susanne S.
Mehlman.
Sincerely,
Peter R. Orszag.
Enclosure.
H.R. 5579--Emergency Mortgage Loan Modification Act of 2008
H.R. 5579 would protect mortgage servicers from legal
liability if they perform loan modifications according to
specific criteria established under the legislation. CBO
estimates that enacting this legislation would have no
significant impact on the federal budget and would not affect
direct spending or revenues.
Residential mortgages are often pooled together and sold to
investors as securities. The pools of loans are overseen by
mortgage servicers, who have a fiduciary responsibility to
maximize returns to the investors. Many pooling and servicing
agreements give servicers authority to modify the terms of
securitized loans if that action is in the interest of
maximizing the value of the loan pool, but some agreements are
more restrictive. Pooling and servicing agreements can be
amended with the consent of investors. However, not all
investors in mortgage-backed securities share losses equally,
which may limit servicers' ability to obtain permission to
modify the terms of loans to ensure maximum value for all
investors. H.R. 5579 would provide legal protection for
servicers of mortgage pools when they modify mortgages.
H.R. 5579 contains both intergovernmental and private-
sector mandates as defined in the Unfunded Mandates Reform Act
(UMRA), but CBO estimates that the costs of those mandates
would not exceed the annual thresholds for intergovernmental or
private-sector mandates established in UMRA ($68 million and
$136 million, respectively, in 2008, adjusted annually for
inflation). By preventing investors, both public and private,
from seeking damages on grounds that the servicing agreement
had been violated, the legislation would impose a mandate on
governmental and private-sector entities that invest in pooled
residential mortgages. CBO concludes, however, that servicers
would be unlikely to alter mortgages in ways that would be
significant enough to cause investors to seek damages because
they would still be required to ensure the greatest return to
investors under their fiduciary obligations.
The CBO staff contact for this estimate is Susanne S.
Mehlman. This estimate was approved by Theresa Gullo, Deputy
Assistant Director for Budget Analysis.
FEDERAL MANDATES STATEMENT
The Committee adopts as its own the estimate of Federal
mandates prepared by the Director of the Congressional Budget
Office pursuant to section 423 of the Unfunded Mandates Reform
Act.
ADVISORY COMMITTEE STATEMENT
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
CONSTITUTIONAL AUTHORITY STATEMENT
Pursuant to clause 3(d)(1) of rule XIII of the Rules of the
House of Representatives, the Committee finds that the
Constitutional Authority of Congress to enact this legislation
is provided by Article 1, section 8, clause 1 (relating to the
general welfare of the United States) and clause 3 (relating to
the power to regulate interstate commerce).
APPLICABILITY TO LEGISLATIVE BRANCH
The Committee finds that the legislation does not relate to
the terms and conditions of employment or access to public
services or accommodations within the meaning of section
102(b)(3) of the Congressional Accountability Act.
EARMARK IDENTIFICATION
H.R. 5579 does not contain any congressional earmarks,
limited tax benefits, or limited tariff benefits as defined in
clause 9 of rule XXI.
SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION
Section 1. Short title
This section establishes the short title of the bill, the
``Emergency Mortgage Loan Modification Act of 2008.''
Section 2. Safe harbor for qualified loan modification or workout plans
for certain residential mortgage loans
Subsection (a)--Standard for loan modifications or workout
plans
This subsection sets forth the duty of loan servicers to
maximize or not adversely affect recovery of proceeds from
pooled residential mortgage loans on behalf of the
securitization vehicle and in the best interest of the
investors in the aggregate, without regard to the interests of
individual investors or tranches. The duty applies only in the
absence of contrary contractual provisions.
This subsection further provides that a servicer acts in
the best interest of all investors if, for loans in default or
for which default is imminent or reasonably foreseeable, it
makes reasonable efforts to implement a loan modification or
workout plan, or engages in other loss mitigation efforts,
including acceptance of short payments, agreeing to short
sales, or accepting partial discharges of principal. The
servicer must reasonably believe that its loss mitigation
actions will maximize the net present value of the loan,
including over the value that would be realized through
foreclosure.
Subsection (b)--Safe harbor
This subsection provides that a servicer that acts in a
manner consistent with the duty in the legislation will not be
liable to investors or insurers for entering into qualified
loan modification or workout plans. The safe harbor would apply
only in the absence of contrary contractual provisions.
Investors subject to the provision are those who own
residential mortgage loans, hold any interest in a pool of
residential mortgage loans or in pass-through securities, or
through derivatives instruments the payments of which are
determined in reference to residential mortgage loans, pools or
other securities.
Subsection (c)--Rule of construction
This subsection specifies that nothing in the legislation
limits the ability of loan servicers to enter into other types
of modifications or workouts.
Subsection (d)--Definitions
This subsection defines terms used in the legislation,
including ``securitization vehicle,'' ``residential mortgage
loan,'' and ``qualified loan modification or workout plan.''
``Residential mortgage loan'' is defined as a loan secured by
an owner-occupied residential dwelling. This subsection also
defines ``qualified loan modification or workout plan'' as a
plan that (1) is scheduled to remain in place for at least five
years, unless the borrower sells the property or refinances the
loan; (2) does not include repayment schedules that result in
negative amortization; and (3) does not require the borrower to
pay additional points and fees. For purposes of this
subsection, negative amortization does not include
capitalization of delinquent interest or arrearages.
Subsection (e)--Effective date
Applies only to qualified loan modification or workout
plans initiated prior to January 1, 2011.