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BOARD OF GOVERNORS 

OF THE 

FEDERAL RESERVE SYSTEM 

WASHINGTON, D.C. 20551 

DIVISION OF BANKING 

SUPERVISION AND REGULATION 

DIVISION OF CONSUMER AND 

COMMUNITY AFFAIRS 

SR 12-11

CA 12-10

July 11, 2012 

TO THE OFFICER IN CHARGE OF SUPERVISION 

 AT EACH FEDERAL RESERVE BANK 

SUBJECT: Guidance on a Lender’s Decision to Discontinue Foreclosure Proceedings 

Applicability to Community Banking Organizations: This guidance applies to state member 

banks, bank holding companies, and savings and loan holding companies with residential mortgage 

servicing operations, including those with $10 billion or less in consolidated assets. 

The Federal Reserve is issuing this guidance to emphasize the importance of appropriate 

risk management practices and controls in connection with a decision not to complete 

foreclosure proceedings after they have been initiated (a situation referred to in this guidance as 

an abandoned foreclosure). This guidance applies to state member banks, bank holding 

companies and savings and loan holding companies (collectively, banking organizations) with 

residential mortgage servicing operations. Information obtained on mortgage industry practices 

has revealed that lenders and servicers sometimes discontinue a foreclosure process without 

notification to borrowers or local authorities, which can raise a number of issues.1

 Banking 

organizations with residential mortgage servicing operations should ensure that the following 

key concepts are addressed in their policies and practices governing abandoned foreclosures: 

 Notification to Borrowers. Supervised banking organizations should notify the 

borrower(s) when a decision is made not to pursue a foreclosure action, and should 

inform the applicable borrower(s) of their (1) rights to occupy their property until a sale 

or other title transfer action occurs, (2) financial obligations regarding the outstanding 

loan balance and the payment of applicable taxes and insurance premiums, and (3) 

property maintenance responsibilities. 

 

1 The Government Accountability Office (GAO) released a study that discusses the scope of the issues that 

abandoned foreclosures pose for borrowers, communities, local governments, lenders, and servicers. This report, 

GAO-11-93, Mortgage Foreclosures: Additional Mortgage Servicer Actions Could Help Reduce the Frequency and 

Impact of Abandoned Foreclosures, is available on the GAO public website at 

http://www.gao.gov/new.items/d1193.pdf. 
 

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 Communications. Supervised banking organizations should use all means possible to 

provide the notification described above to affected borrowers, particularly those who 

prematurely vacated their homes based on the servicers’ initial communications regarding 

foreclosure actions. In particular, when attempting to provide the notification, supervised 

organizations should employ the same extensive methods they use to contact borrowers 

in connection with payment collection activities. 

 Notification to Local Authorities. Supervised banking organizations should ensure that 

their procedures include reasonable efforts to notify appropriate state or local government 

authorities of the organization’s decision to not pursue a foreclosure, including 

complying with applicable state or local government notification requirements. These 

local entities may include tax authorities, courts, or code enforcement departments. 

 Obtaining and Monitoring Collateral Values. Supervised banking organizations should 

have a process for obtaining the best practicable information on the collateral value of a 

residential property that may be subject to foreclosure, updating this information on a 

regular basis and using current information in their assessment as to whether to initiate, 

continue, or abandon a foreclosure proceeding.2 

Supervisory Process

 The objective of the supervisory process related to abandoned foreclosures is to confirm 

that a banking organization manages its decisions to initiate and/or discontinue foreclosure 

proceedings in a prudent manner. When determining the scope of a residential real estate 

examination, the attached examination procedures for the review of an organization’s abandoned 

foreclosure practices should be considered by safety-and-soundness and consumer compliance 

examiners. In particular, safety-and-soundness examiners will determine if an organization’s 

policies and procedures include regular monitoring of property values. This review may be done 

as part of the regular assessments of banking organizations’ appraisal and evaluation programs. 

Consumer compliance examiners will determine if the organization took appropriate 

steps to notify property owners and local authorities of a decision to discontinue a foreclosure 

proceeding, provided appropriate training to its staff, and conducted appropriate oversight of 

third party foreclosure service providers to ensure compliance with these guidance requirements. 

In addition, consumer compliance examiners will determine if the organization’s decisionmaking process for initiating and discontinuing a foreclosure proceeding reflects responsible, 

prudent business practices that consider the current collateral property value and effect of 

foreclosure abandonment on property owners, local authorities, and other interested parties, and 

minimizes any potential adverse effects.

 Federal Reserve Banks are asked to distribute this letter to state member banks, bank 

holding companies and savings and loan holding companies in their districts as well as to their 

supervisory and examination staff, as appropriate. For questions concerning consumer 

compliance issues, please contact Mayank Patel, Senior Supervisory Consumer Financial 

Services Analyst, Division of Consumer and Community Affairs, at (202) 452-2316. Questions 

 

2

 Refer to SR letter 10-16, “Interagency Appraisal and Evaluation Guidelines,” for supervisory expectations for a 

regulated banking organization’s policies and procedures on collateral monitoring in support of its loan modification 

or workout activity.
 

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concerning appraisals and collateral valuation issues should be directed to Carmen Holly, 

Supervisory Financial Analyst, Credit, Market and Liquidity Risk Policy, Division of Banking 

Supervision and Regulation, at (202) 912-4611. 

In addition, questions may be sent via the Board’s public website.3 

Michael S. Gibson

Director

Division of Banking Supervision

and Regulation

Sandra F. Braunstein

Director

Division of Consumer

and Community Affairs

Attachment: 

 Examination Procedures for Reviewing a Banking Organization’s Abandoned 

Foreclosures Process

Cross References to: 

 SR letter 10-16, “Interagency Appraisal and Evaluation Guidelines” 

 

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http://www.federalreserve.gov/apps/contactus/feedback.aspx.