Adverse Actions in Loan Modification Context

Adverse Actions in Loan Modification Context

    Stephen Ornstein, Matthew Yoon, and John Holahan of SNR Denton

In this commentary, Stephen Ornstein, Matthew Yoon, and John Holahan of SNR Denton examine a significant new development involving the provision of "adverse action" notices to borrowers who have been declined loan modifications. Specifically, the Board of Governors of the Federal Reserve System issued Consumer Affairs Letter 09-13 advising creditors of which instances require the furnishing of adverse action notices.

"On December 4, 2009, the Board of Governors of the Federal Reserve System (the "Board") issued Consumer Affairs Letter 09-13 (the "Letter") which advises creditors in which instances it must furnish borrowers adverse action notices. The Board is responsible for interpreting Regulation B which implements the Equal Credit Opportunity Act ("ECOA"), the statute that regulates, among other things, the furnishing of adverse action notices to consumers," the authors explain. "The promulgation of the Letter is significant, if not surprising, because up to this point it was widely believed that adverse action notices did not have to be provided to borrowers when modifications were declined as long as the borrower did not request additional credit. With the issuance of the Letter, however, the party rendering the decision to grant the modification (i.e., the servicer or owner of the loan) must provide an adverse action to a borrower if it declines a modification request and the borrower is not delinquent or in default on its existing loan."

"The Letter sets forth a four part test to determine when an adverse action notice is required under Regulation B with regard to the denial of a mortgage loan modification," Ornstein, Yoon, and Holahan report. "In describing the test, the Letter cites, as an example, the United States Department of Treasury's (the "Treasury Department") Making Home Affordable Modification Program ("HAMP")."

The authors then summarize the Board's four part test and analyze the adverse action notice requirements in the context of loan modifications. They emphasize "that the Letter is a policy statement from the Board, and takes immediate effect as guidance for the Board's consumer compliance supervisory staff. Consequently, it is highly recommended that servicers and owners of loans alike adopt the Board's position on adverse actions in connection with decisions that they render on modifications."

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Stephen F.J. Ornstein is a partner in the Washington, DC office of SNR Denton. Mr. Ornstein is a member of SNR Denton's Capital Markets Practice concentrating on banking and real estate law with an emphasis on federal regulation of real estate. He regularly counsels national mortgage companies, mortgage insurers, financial institutions and others in complying with mortgage and consumer lending regulations.

Matthew Yoon is an associate in the New York, NY office of SNR Denton. He practices in the areas of banking and real estate law with an emphasis on mortgage and consumer lending compliance issues.

John. P. Holahan is an associate in the Washington, DC office of SNR Denton. He represents federal and state-chartered banks, investment banks, consumer finance companies.