May 10, 2016
by Ronald S. Deutsch
Cohn, Goldberg & Deutsch, LLC – USFN Member (District of Columbia)
The Federal Deposit Insurance Corporation (FDIC) promulgated a Financial Institution Letter on March 2, 2016, FIL-14-2016, which clarified its supervisory expectations with respect to foreclosure abandonment. These expectations are part of its guidance for ensuring sound institutional risk management practices.
Sometimes after initiating the foreclosure process, financial institutions may decide to discontinue such process based on a financial analysis that the cost to foreclose, rehabilitate, and sell a property exceeds its current market value. The FDIC noted that the borrower may have ceased property maintenance. As a result, not only may blight occur but crime may increase. These unintended consequences negatively affect the property subject to the foreclosure process, and may also negatively impact the neighboring properties and the local community.
As the FDIC wrote in its Financial Institution Letter, “The FDIC continues to encourage institutions to avoid unnecessary foreclosures by working constructively with borrowers and considering prudent workout arrangements that increase the potential for financially stressed borrowers to keep their properties.” The FDIC further wrote: “When workout arrangements are unsuccessful or not economically feasible, existing supervisory guidance reminds institutions of the need to establish policies and procedures for acquiring other real estate that mitigate the impact the foreclosure process has on the value of surrounding properties.”
Institutions should develop and maintain appropriate policies and practices pertaining to decisions to discontinue the foreclosure process. These policies and practices should address (1) obtaining and assessing current valuations and other relevant information on a property, (2) releasing liens due to litigation risk, and (3) notifying local government authorities and borrowers as to its actions. If the borrower has vacated the property, insured institutions should employ reasonable means similar to those used with payment collection to locate a borrower and provide notice. The FDIC’s supervisory activity will include a review of these policies and practices.
Moreover, during safety and soundness examinations, a review of the analyses supporting the decision made to initiate, pursue, or discontinue foreclosure proceedings — as well as to release liens — will be examined. The management of this process will also be reviewed, including efforts to contact local authorities and borrowers. Examiners will further review whether the lender’s consumer inquiry and complaint process adequately address the concerns raised.
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