Can Bank Foreclose During HAMP Loan Mod Process?

We have been writing and hearing about problems with foreclosure during the loan modification process for quite some time now.  The Treasury has finally made some attempts to deal with this national problem.  Borrowers are following the federal guidelines by complying with all loan modification requirements but lenders are taking borrowers homes right out from under them.  What is the Treasury's response?

The Treasury's new Supplemental Directive 10-2 written for loan servicers has a lot to say about foreclosure during the loan modification process.  It contains a prohibition against foreclosures and deals with some of the communication problems we've been seeing where servicers have failed to report to foreclosing attorneys and contractors that a borrower's loan modification request is pending with the servicer.  

Supplemental Directive 10-2 states that there is a "Prohibition against referral to foreclosure until either: (i) a borrower has been evaluated and determined to be ineligible for HAMP; or (ii) reasonable solicitation efforts have
failed."  This prohibition should help borrowers who have yet to be referred to foreclosure as long as the servicers comply with this requirement.  The Directive goes even further:

"Prohibition on Referral and Sale
A servicer may not refer any loan to foreclosure or conduct a scheduled foreclosure sale unless
and until at least one of the following circumstances exists:

1) The borrower is evaluated for HAMP and is determined to be ineligible for the program; or
2) The borrower is offered a trial period plan, but fails to make a trial period payment by
the last day of the month in which such payment is due; or
3) The servicer has established right party contact, has sent at least two written requests
asking the borrower to supply required information in accordance with this Supplemental
Directive and has otherwise satisfied the Reasonable Effort solicitation standard, and the
borrower failed to respond by the dates indicated in those requests; or
4) The servicer has satisfied the Reasonable Effort solicitation standard without
establishing right party contact; or
5) The borrower or co-borrower states he or she is not interested in pursuing a HAMP
modification and such statement is reflected by the servicer in their servicing system."

Directive 10-2 also addresses the issue of borrowers who are actively in foreclosure and have applied for a loan modification.  Part of Directive 10-2 states as follows: "With respect to a borrower who submits a request for HAMP consideration after a loan has been referred to foreclosure, the servicer shall, immediately upon the borrower’s acceptance of a trial period plan based on verified income as described in Supplemental Directive 10-01 and for the duration of the trial period, take those actions within its authority that are necessary to halt
further activity and events in the foreclosure process, whether judicial or non-judicial, including
but not limited to refraining from scheduling a sale or causing a judgment to be entered."

These guidelines should help borrowers if servicers comply with them.  We will address the "communication" requirements of this Directive in our next blog.