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Washington
Fed weighs in When do loan mods equal adverse actions
WASHINGTON (1/5/10)—Prompted by questions from consumer compliance examiners, the Federal Reserve last month issued a letter addressing whether adverse action notices under Equal Credit Opportunity rules are required for mortgage loan modification declinations, including those made under to the U.S. Department of Treasury's Making Home Affordable Modification Program (HAMP). Although credit unions have steadily been working with members on loan modifications—in fact, at a much accelerated rate compared to banks—few lenders are yet involved with the administration’s HAMP program. However, if the administration—through Freddie Mac and Fannie Mae—decides to move forward with ideas to tweak the program through such things as assistance with principal reductions, credit union use of the HAMP program may increase, as might that of other lenders. The December letter, signed by the Fed’s Sandra Braunstein, director of the division of consumer and community affairs, states that the “equal credit” rule (Regulation B) “makes clear that such notice requirements are inapplicable to borrowers in default (Reg. B, § 202.(c)(2)(ii)).” However, the letter also notes “a major caveat in that regard.” The letter outlines four questions to be answered to determine whether declining a HAMP or other loan modification constitutes a disclosure-triggering adverse action:
* First, is there an extension of credit? * Second, is there an application? * Third, was the application for extension of credit declined? * Fourth, was the borrower currently delinquent or in default?
The letter concludes: “Even if an adverse action notice is not required under Regulation B, borrowers may find it helpful to receive from institutions information regarding why their mortgage loan modification request was declined. "For example, we understand that Treasury has directed HAMP servicers to provide written notice to a borrower that has been evaluated for HAMP but is not offered a trial period plan or modification, or is at risk of losing eligibility for HAMP because the borrower has failed to provide the required financial documentation.” Use the resource link to access the Fed letter.
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