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 (RAN).

• Various indicators could have led FHFA to identify and address the heightened risk posed by foreclosure abuses prior to late 2010.
• FHFAs planning and guidance do not adequately address default related legal services.
• FHFA does not have a process for the GSEs to share information about problem law firms.

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 services.

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 abuses."