Freddie Mac and Fannie May have announced new
requirements for managing law firms retained for bankruptcies and
default-related legal matters including foreclosures, deeds-in-lieu of
foreclosures and related litigation involving mortgages loans owned or
guaranteed by the two government sponsored enterprises (GSEs). The new rules are being issued at the
direction of the GSEs' conservator, the Federal Housing Finance Agency (FHFA)
more than a year after FHFA's Office of Inspector General (OIG) found problems
with the GSEs' oversight of legal firms and FHFA's oversight of the GSEs.
In the report dated September 30, 2011, FHFA OIG said
the found three major deficiencies in the GSE's Retained Attorney Networks
indicators could have led FHFA to identify and address the heightened risk
posed by foreclosure abuses prior to late 2010.
planning and guidance do not adequately address default related legal services.
does not have a process for the GSEs to share information about problem law
Under the new rules, effective June 1, 2013, all law
firms selected and retained by servicers to handle GSE Default Legal Matters
must meet the Firm Minimum Requirements and the servicer must submit a form to
the GSE for review and an objection/no objection determination. Servicers may begin to send these forms for
review on or after March 1, 2013.
Law firms to which the GSEs do not object must enter
into a contract with the servicer and a limited retention agreement with the
firm GSEs that sets forth certain key retention provisions with the law firm
for each State in which the law firm has received a "no objection"
determination. This agreement will
recognize a joint attorney-client relationship between the law firm the
GSEs. Law firms selected to receive
referrals must attend GSE new firm training before the agreement is signed.
The new rules set out conditions and requirements for
monitoring legal firms, reporting on their performance and terminating their
Among other specific changes mandated in the new rules:
Servicers may no longer send foreclosure referrals directly to trustees.
Designated counsel will no longer determine the beginning and final bid
at a foreclosure sale.
Servicers rather than legal counsel must obtain a valuation from the
GSEs on the collateral property and set forth the foreclosure bid amounts.
Allowable limits for foreclosure and bankruptcy related legal fees are
under review. Servicers are to following
existing guidelines until the review is completed.
Except with respect to Legacy Matters, law firms that
are currently part of Freddie Mac's designated counsel program are not exempt
from the new selection and engagement process.
Congressman Elijah Cumming (D-MD) requested the OIG
investigation in February 2011 following alleged abuses and illegal activities
by mortgage servicing companies including wrongful foreclosures, inflated fees,
and the filing of improperly executed legal documents related to
foreclosures. He released a statement
on Friday in which he said in part, "I am disappointed that it has taken
FHFA so many years to acknowledge these serious problems and finally develop
the guidelines that will terminate these networks. As I review the policies announced today, I
will look to see that they will truly ensure that the firms selected by
servicers to handle foreclosure cases are staffed, compensated, and supervised
in a way that will prevent future abuses."
Cumming said that when the OIG report was issued he sent
a letter to FHFA Acting Director Edward DeMarco requesting additional documents
and information regarding these oversight failures. Cummings requested that the
agency "give serious consideration to terminating the existing Fannie Mae
Retained Attorney Network program."
He also requested that "FHFA take immediate and decisive action to
remedy these failures and ensure that no additional borrowers suffer similar