[House Report 111-13]
[From the U.S. Government Publishing Office]



111th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 1st Session                                                     111-13

======================================================================



 
TO PROVIDE A SAFE HARBOR FOR MORTGAGE SERVICERS WHO ENGAGE IN SPECIFIED 
          MORTGAGE LOAN MODIFICATIONS, AND FOR OTHER PURPOSES

                                _______
                                

 February 10, 2009.--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

                             together with

                            ADDITIONAL VIEWS

                        [To accompany H.R. 788]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Financial Services, to whom was referred 
the bill (H.R. 788) to provide a safe harbor for mortgage 
servicers who engage in specified mortgage loan modifications, 
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
Background and Need for Legislation..............................     3
Hearings.........................................................     4
Committee Consideration..........................................     5
Committee Votes..................................................     5
Committee Oversight Findings.....................................     5
Performance Goals and Objectives.................................     5
New Budget Authority, Entitlement Authority, and Tax Expenditures     5
Committee Cost Estimate..........................................     6
Congressional Budget Office Estimate.............................     6
Federal Mandates Statement.......................................     7
Advisory Committee Statement.....................................     7
Constitutional Authority Statement...............................     7
Applicability to Legislative Branch..............................     7
Earmark Identification...........................................     7
Section-by-Section Analysis of the Legislation...................     8
Additional Views.................................................     9

                               AMENDMENT

    The amendment is as follows:
    Strike all after the enacting clause and insert the 
following:

SECTION 1. SERVICER SAFE HARBOR.

  (a) Safe Harbor.--
          (1) Loan modifications and workout plans.--Notwithstanding 
        any other provision of law, and notwithstanding any investment 
        contract between a servicer and a securitization vehicle or 
        investor, a servicer that acts consistent with the duty set 
        forth in section 129A(a) of Truth in Lending Act (15 U.S.C. 
        1639a) shall not be liable for entering into a loan 
        modification or workout plan with respect to any such mortgage 
        that meets all of the criteria set forth in paragraph (2)(B) 
        to--
                  (A) 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;
                  (B) 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 
                subparagraph (A); or
                  (C) any person that insures any loan or any interest 
                referred to in subparagraph (A) under any law or 
                regulation of the United States or any law or 
                regulation of any State or political subdivision of any 
                State.
          (2) Ability to modify mortgages.--
                  (A) Ability.--Notwithstanding any other provision of 
                law, and notwithstanding any investment contract 
                between a servicer and a securitization vehicle or 
                investor, a servicer--
                          (i) shall not be limited in the ability to 
                        modify mortgages, the number of mortgages that 
                        can be modified, the frequency of loan 
                        modifications, or the range of permissible 
                        modifications; and
                          (ii) shall not be obligated to repurchase 
                        loans from or otherwise make payments to the 
                        securitization vehicle on account of a 
                        modification, workout, or other loss mitigation 
                        plan for a residential mortgage or a class of 
                        residential mortgages that constitute a part or 
                        all of the mortgages in the securitization 
                        vehicle,
                if any mortgage so modified meets all of the criteria 
                set forth in subparagraph (B).
                  (B) Criteria.--The criteria under this subparagraph 
                with respect to a mortgage are as follows:
                          (i) Default on the payment of such mortgage 
                        has occurred or is reasonably foreseeable.
                          (ii) The property securing such mortgage is 
                        occupied by the mortgagor of such mortgage.
                          (iii) The servicer reasonably and in good 
                        faith believes that the anticipated recovery on 
                        the principal outstanding obligation of the 
                        mortgage under the particular modification or 
                        workout plan or other loss mitigation action 
                        will exceed, on a net present value basis, the 
                        anticipated recovery on the principal 
                        outstanding obligation of the mortgage to be 
                        realized through foreclosure.
          (3) Applicability.--This subsection shall apply only with 
        respect to modifications, workouts, and other loss mitigation 
        plans initiated before January 1, 2012.
  (b) Reporting.--Each servicer that engages in loan modifications or 
workout plans subject to the safe harbor in subsection (a) shall report 
to the Secretary on a regular basis regarding the extent, scope and 
results of the servicer's modification activities. The Secretary shall 
prescribe regulations specifying the form, content, and timing of such 
reports.
  (c) Definition of Securitization Vehicles.--For purposes of this 
section, the term ``securitization vehicle'' means a trust, 
corporation, partnership, limited liability entity, special purpose 
entity, or other structure that--
          (1) 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
          (2) holds such mortgages.

                          PURPOSE AND SUMMARY

    H.R. 788 was introduced on February 2, 2009 by Mr. 
Kanjorski, Mr. Castle and Mr. Frank. The purpose of the bill is 
to provide a safe harbor from lawsuits by investors for 
mortgage servicers who engage in specified loan modifications 
consistent with their statutory duties.

                  BACKGROUND AND NEED FOR LEGISLATION

    The number of American families facing or at risk of 
foreclosure has continued to grow to grow dramatically. 
According to the Mortgage Bankers Association, 6.99 percent of 
all loans on single-family properties outstanding in the third 
quarter of 2008 were delinquent, the highest total delinquency 
rate ever recorded in the MBA survey. The percentage of loans 
in the foreclosure process also stands at record highs. The 
economic downturn, the continuing credit and foreclosure 
crisis, employment layoffs and the rise in mortgage 
delinquencies have made it increasingly difficult for borrowers 
to restructure or refinance their mortgages, particularly those 
that were securitized into asset-backed securities and sold in 
the secondary market.
    Due in large part to loan modification programs initiated 
by the Federal Deposit Insurance Corporation and the housing 
government sponsored enterprises, as well as by portfolio 
lenders, there has been progress in the number of mortgages 
modified in certain circumstances. The pace of modifications of 
securitized mortgages, however, has continued to stall. 
Legislation was enacted to clarify that a mortgage servicer's 
duty to maximize or not adversely affect recovery of proceeds 
from pooled residential mortgage loans is owed to all investors 
in the aggregate, and to clarify that this duty is fulfilled 
when a servicer makes reasonable efforts to implement a loan 
modification or workout plan, or engages in other loss 
mitigation for loans in default or for which default is 
imminent or reasonably foreseeable and the servicer 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.
    Notwithstanding these legislative actions, servicers 
continue to cite concerns about legal liability to investors 
based on loan modifications. While servicers have been trying 
to work with borrowers under a variety of programs, many of 
these efforts have fallen short.
    This legislation is designed to complement previous 
Congressional action and further facilitate the loan 
modification process by providing a safe harbor from lawsuits 
by investors for mortgage servicers who engage in specified 
loan modifications and workouts.

Summary of major provisions

            Safe harbor
    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. Uncertainty 
about what modification actions may be permitted under their 
agreements, and continued fear of litigation by investors has 
hindered widespread modification efforts by servicers.
    Congress enacted legislation in the 110th Congress to 
provide a measure of clarity and certainty to servicers by 
codifying concepts that are consistent with existing 
contractual obligations. The Housing and Economic Recovery Act 
of 2008, Public Law 110-289 (July 30, 2008) (``HERA''). HERA 
made 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. HERA 
also clarified 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.
    This legislation supplements the provisions of HERA to 
provide a safe harbor from investor lawsuits for servicers who 
meet their prescribed duties, and enter into loan modifications 
pursuant to the specified criteria, notwithstanding any 
provision of law or any pooling and servicing agreement.
    The safe harbor would apply only to owner-occupied 
residential mortgage loans, and only to modifications or 
workout plans initiated prior to January 1, 2012.
    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.

                                HEARINGS

    The Committee on Financial Services held a hearing on 
February 3, 2009, entitled ``Promoting Liquidity and Lending 
Through Deposit Insurance, Hope for Homeowners, and Other 
Enhancements.'' The following witnesses testified: Mr. John 
Bovenzi, Chief Operating Officer, Federal Deposit Insurance 
Corporation; Ms. Meg Burns, Director of the Office of Single 
Family Program Development, U.S. Department of Housing and 
Urban Development; Mr. Edward L. Yingling, President and Chief 
Executive Officer, American Bankers Association; Mr. R. Michael 
S. Menzies, Sr., President and Chief Executive Officer, Easton 
Bank and Trust Company, on behalf of The Independent Community 
Bankers of America; Mr. John Taylor, President and Chief 
Executive, National Community Reinvestment Coalition; Mr. John 
A. Courson, President and Chief Executive Officer, Mortgage 
Bankers Association; Mr. Mike Calhoun, President and Chief 
Operating Officer, Center for Responsible Lending; Mrs. Robin 
Staudt; and Mr. Edward R. Morrison, Professor of Law, Columbia 
Law School.

                        COMMITTEE CONSIDERATION

    The Committee on Financial Services met in open session on 
February 4, 2009, and ordered H.R. 788, to provide a safe 
harbor for mortgage servicers who engage in specified mortgage 
loan modifications, as amended, favorably reported to the House 
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 with in conjunction with the 
consideration of this legislation. A motion by Mr. Frank 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 
amendments were considered:
    An amendment by Mr. Miller of North Carolina, No. 1, adding 
pursuant to a derivatives instrument, was agreed to by a voice 
vote.
    An amendment by Mr. Neugebauer (and Mr. Price), No. 2, 
regarding legal costs of unsuccessful actions, was offered and 
withdrawn.

                      COMMITTEE OVERSIGHT FINDINGS

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee held a hearing 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:
    H.R. 788 is designed to complement previous Congressional 
action and further facilitate the loan modification process by 
providing a safe harbor from lawsuits by investors for mortgage 
servicers who engage in specified loan modifications and 
workouts.

   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:

                                                  February 9, 2009.
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. 788, a bill to 
provide safe harbor for mortgage servicers who engage in 
specified mortgage loan modifications, and for other purposes.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Susanne S. 
Mehlman.
            Sincerely,
                                      Douglas W. Elmendorf,
                                                          Director.
    Enclosure.

H.R. 788--A bill to provide safe harbor for mortgage servicers who 
        engage in specified mortgage loan modifications, and for other 
        purposes

    H.R. 788 would protect mortgage servicers from legal 
liability if they perform loan modifications according to 
specific criteria established under the legislation. The 
federal government could realize additional receipts if 
enacting this legislation results in additional modifications 
of federally insured loans or loans held or securitized by the 
Federal National Mortgage Association or the Federal Home Loan 
Mortgage Corporation. (CBO considers the financial activities 
of those organizations to be components of the federal budget.) 
Other problems, however, such as the complex nature of 
modifying loans within mortgage securities, would likely 
continue to impede loan modifications following enactment of 
this legislation. CBO estimates that on balance, enacting the 
bill would probably not result in a significant number of 
additional modifications and thus would not have a significant 
impact on the federal budget.
    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. 788 contains intergovernmental and private-sector 
mandates as defined in the Unfunded Mandates Reform Act (UMRA). 
The bill would prevent governmental and private-sector entities 
that invest in pooled residential mortgages from seeking 
damages from servicers on the grounds that they violated their 
duty to maximize the value of the loans. The bill also would 
require certain mortgage servicers to provide reports to the 
Secretary of the Treasury and would preempt some state laws. 
CBO estimates that the costs of the intergovernmental and 
private-sector mandates would be small and would fall below the 
annual thresholds established in UMRA ($69 million for 
intergovernmental mandates and $139 million for private-sector 
mandates in 2009, adjusted annually for inflation).
    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. 788 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. Servicer safe harbor

            Subsection (a)--Safe Harbor for Loan Modifications or 
                    Workout Plans
    This subsection provides that a servicer that acts in a 
manner consistent with the duty set forth in HERA will not be 
liable to investors or insurers for entering into specified 
loan modification or workout plans, notwithstanding any other 
provision of law and notwithstanding any investment contract 
between a servicer and a securitization vehicle or investor. 
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.
    This subsection makes it clear that, notwithstanding any 
other provision of law and notwithstanding any investment 
contract between a servicer and a securitization vehicle or 
investor, a servicer shall not be limited in the ability to 
modify mortgages, the number of mortgages that can be modified, 
the frequency of loan modifications or the range of permissible 
modifications, and shall not be obligated to purchase mortgages 
out of the securitization vehicle in order to effect the 
modification.
    This subsection also specifies that the safe harbor applies 
only with respect to mortgages for which default has occurred 
or is reasonably foreseeable; the property is owner-occupied; 
and the servicer reasonably and in good faith believes that the 
anticipate recovery on the mortgage under the modification will 
exceed, on a net present value basis, the anticipated recovery 
on the mortgage to be realized through foreclosure.
    The safe harbor applies only to modifications initiated 
before January 1, 2012.
            Subsection (b)--Reporting
    This subsection requires servicers who engage in 
modifications under the safe harbor to report to the Secretary 
of the Department of Housing and Urban Development, pursuant to 
regulations promulgated by the Secretary, regarding the extent, 
scope and results of the servicer's modification activities.
            Subsection (c)--Definition of Securitization Vehicles
    This subsection defines the term ``Securitization Vehicle'' 
to mean a trust, corporation, partnership, limited liability 
entity, special purpose entity, or other structure that is the 
issuer or created by the issuer of asset backed securities, or 
that holds such mortgages.

                            ADDITIONAL VIEWS

    This legislation is a sensible tool for helping more 
families stay in their homes without any taxpayer exposure or 
cost. Mortgage servicers who make loan modifications in a 
manner that maximizes net present value should have a safe 
harbor from lawsuits brought by investors.
    However, we believe this legislation can do more. H.R. 788 
is missing an important provision that was included in Chairman 
Frank's House-passed bill, H.R. 384. The amendment proposed by 
Rep. Neugebauer, and considered during Committee consideration 
of H.R. 788, would have restored the provision from Chairman 
Frank's original language so that if an unsuccessful action is 
brought against a servicer, the person who filed the lawsuit 
must cover any legal costs incurred by the servicer.
    In a climate of mounting foreclosures, we need to do all we 
can to encourage servicers to voluntarily modify mortgages for 
credit-worthy borrowers. While the sponsors withdrew the 
amendment to H.R. 788 during the markup because of 
jurisdictional concerns, we believe the full House of 
Representatives deserves an opportunity to vote on this issue 
during House Floor debate. We appreciate Chairman Frank's 
commitment to support making this amendment in order.
                                   Spencer Bachus.
                                   Randy Neugebauer.
                                   Kenny Marchant.
                                   Leonard Lance.
                                   Christopher Lee.

                                  
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