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[House Report 110-615]
[From the U.S. Government Publishing Office]

110th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 2d Session                                                     110-615

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            EMERGENCY MORTGAGE LOAN MODIFICATION ACT OF 2008

                                _______
                                

  May 1, 2008.--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

                        [To accompany H.R. 5579]

      [Including cost estimate of the Congressional Budget Office]

  The Committee on Financial Services, to whom was referred the 
bill (H.R. 5579) to remove an impediment to troubled debt 
restructuring on the part of holders of residential mortgage 
loans, 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
Summary of Major Provisions......................................     3
Background and Need for Legislation..............................     4
Hearings.........................................................     5
Committee Consideration..........................................     6
Committee Votes..................................................     6
Committee Oversight Findings.....................................     6
Performance Goals and Objectives.................................     6
New Budget Authority, Entitlement Authority, and Tax Expenditures     7
Committee Cost Estimate..........................................     7
Congressional Budget Office Estimate.............................     7
Federal Mandates Statement.......................................     8
Advisory Committee Statement.....................................     8
Constitutional Authority Statement...............................     8
Applicability to Legislative Branch..............................     8
 Earmark Identification..........................................     8
Section-by-Section Analysis of the Legislation...................     8

                               AMENDMENT

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

SECTION 1. SHORT TITLE.

  This Act may be cited as the ``Emergency Mortgage Loan Modification 
Act of 2008''.

SEC. 2. SAFE HARBOR FOR QUALIFIED LOAN MODIFICATIONS OR WORKOUT PLANS 
                    FOR CERTAIN RESIDENTIAL MORTGAGE LOANS.

  (a) Standard for Loan Modifications or Workout Plans.--Absent 
contractual provisions to the contrary--
          (1) the duty to maximize, or to not adversely affect, the 
        recovery of total proceeds from pooled residential mortgage 
        loans is owed by a servicer of such pooled loans to the 
        securitization vehicle for the benefit of all investors and 
        holders of beneficial interests in the pooled loans, in the 
        aggregate, and not to any individual party or group of parties; 
        and
          (2) a servicer of pooled residential mortgage loans shall be 
        deemed to be acting on behalf of the securitization vehicle in 
        the best interest of all investors and holders of beneficial 
        interests in the pooled loans, in the aggregate, if for a loan 
        that is in payment default under the loan agreement or for 
        which payment default is imminent or reasonably foreseeable, 
        the loan servicer makes reasonable and documented efforts to 
        implement a modification or workout plan or, if such efforts 
        are unsuccessful or such plan would be infeasible, engages in 
        other loss mitigation, including accepting a short payment or 
        partial discharge of principal, or agreeing to a short sale of 
        the property, to the extent that the servicer reasonably 
        believes the particular modification or workout plan or other 
        mitigation actions will maximize the net present value to be 
        realized on the loan, including over that which would be 
        realized through foreclosure.
  (b) Safe Harbor.--Absent contractual provisions to the contrary, a 
servicer of a residential mortgage loan that acts in a manner 
consistent with the duty set forth in subsection (a), shall not be 
liable for entering into a qualified loan modification or workout plan, 
to--
          (1) 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;
          (2) 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 paragraph (1); or
          (3) any person that insures any loan or any interest referred 
        to in paragraph (1) under any law or regulation of the United 
        States or any law or regulation of any State or political 
        subdivision of any State.
  (c) Rule of Construction.--No provision of this section shall be 
construed as limiting the ability of a servicer to enter into loan 
modifications or workout plans other than qualified loan modification 
or workout plans.
  (d) Definitions.--For purposes of this section, the following 
definitions shall apply:
          (1) Qualified loan modification or workout plan.--The term 
        ``qualified loan modification or workout plan'' means a 
        modification or plan that--
                  (A) is scheduled to remain in place until the 
                borrower sells or refinances the property, or for at 
                least 5 years from the date of adoption of the plan, 
                whichever is sooner;
                  (B) does not provide for a repayment schedule that 
                results in negative amortization at any time; and
                  (C) does not require the borrower to pay additional 
                points and fees.
          (2) Negative amortization.--For purposes of paragraph (1), 
        the term ``negative amortization'' does not include the 
        capitalization of delinquent interest and arrearages.
          (3) Residential mortgage loan defined.--The term 
        ``residential mortgage loan'' means a loan that is secured by a 
        lien on an owner-occupied residential dwelling.
          (4) Securitization vehicle.--The term ``securitization 
        vehicle'' means a trust, corporation, partnership, limited 
        liability entity, special purpose entity, or other structure 
        that--
                  (A) 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
                  (B) holds such loans.
  (e) Effective Period.--This section shall apply only with respect to 
qualified loan modification or workout plans initiated prior to January 
1, 2011.

                          PURPOSE AND SUMMARY

    H.R. 5579, the Emergency Mortgage Loan Modification Act of 
2008, was introduced on March 11, 2008, by Mr. Castle and Mr. 
Kanjorski. The purpose of the bill is to clarify certain 
existing duties and responsibilities of mortgage loan servicers 
in effecting modifications of mortgage loans that are in 
default or for which default is imminent. The bill also 
provides a safe harbor from lawsuits by investors for mortgage 
servicers who engage in specified loan modifications and 
workouts, consistent with those duties.

                      SUMMARY OF MAJOR PROVISIONS

Servicer duty of care

    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.
    Inadequate resources to identify, evaluate, conduct 
outreach for and process the volume of loans in or near default 
have plagued servicer efforts to engage in timely and 
meaningful loan modifications in the face of the current 
foreclosure crisis. Servicers say they are further hindered by 
uncertainty about what modification actions may be permitted 
under their agreements, and by the fear of litigation by 
investors.
    The servicer duty provisions are intended to provide a 
measure of clarity and certainty to servicers by codifying 
concepts that are consistent with existing contractual 
obligations. The legislation makes 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. This articulation of the servicer duty 
is consistent with existing Pooling and Servicing Agreements, 
and with servicer best practices as developed by the American 
Securitization Forum (ASF) and reflected in their ``Statement 
of Principles, Recommendations and Guidelines for the 
Modification of Securitized Subprime Residential Mortgage 
Loans'' (June 2007). The Committee expects that this 
clarification will reduce servicer concerns about liability to 
investors in securitization tranches that may be disadvantaged 
by a servicer's loss mitigation actions.
    The legislation also clarifies 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. Again, this generally is 
consistent with existing Pooling and Servicing Agreements, as 
well as with the ASF principle that loan modifications are 
important loss mitigation tools and other loss mitigation 
alternatives, including short sales and short payoffs, are 
useful. The Committee expects that these changes will clear the 
way for servicers to initiate long-term sustainable loan 
modifications that will be a benefit to all parties.

Safe harbor

    The legislation provides a safe harbor from lawsuits by 
investors for servicers that meet their prescribed duties, and 
enter into ``qualified loan modification or workout plans.'' 
``Qualified loan modification or workout plan'' is defined as a 
plan that: (1) remains in place for at least five years, unless 
the borrower sells the property or refinances the loan during 
that time; (2) includes repayment schedules that do not result 
in negative amortization; and (3) does not require the borrower 
to pay additional points and fees. These conditions are 
intended to result in long-term, sustainable and affordable 
mortgage obligations for homeowners and a continued stream of 
income for investors. The term ``negative amortization'' is not 
intended to include extensions of loan terms to repay 
delinquent interest and arrearages, so long as the structure 
does not at any time result in negative amortization; that is, 
the amounts are not added back into the loan principal and the 
outstanding balance of the loan does not increase. The 
Committee hopes, however, that servicers will carefully 
consider forgiveness of arrearages in appropriate 
circumstances.
    The safe harbor would apply only to owner-occupied 
residential mortgage loans, and only to qualified modifications 
or workout plans initiated prior to January 1, 2011.
    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.

                  BACKGROUND AND NEED FOR LEGISLATION

    The number of American families facing or at risk of 
foreclosure has grown dramatically during the current upheaval 
in the mortgage and housing markets. According to the Mortgage 
Bankers Association (MBA), 5.82 percent of all loans on single-
family properties outstanding in the fourth quarter of 2007 
were delinquent, the highest total delinquency rate in the MBA 
survey in over 20 years. The percentage of loans in the 
foreclosure process also stands at record highs. A complex mix 
of circumstances has made it difficult for borrowers to 
restructure or refinance their loans, including that many of 
those loans were securitized into asset-backed securities and 
sold in the secondary market.
    One of the reasons given for the slow pace of loan 
modifications is that some servicers are concerned about legal 
liability to investors based on those modifications. While 
servicers have been trying to work with borrowers under a 
variety of programs, many of these efforts have been in the 
form of short-term extensions of the initial, starter or 
``teaser'' rates, or temporary repayment plans that do not 
provide the long-term stability needed by borrowers, investors 
or the markets.
    This legislation is designed to facilitate loan 
modifications and workouts by clarifying mortgage loan 
servicers' responsibilities in effecting modifications of 
mortgage loans that are in default or for which default is 
imminent, and providing a safe harbor from lawsuits by 
investors for mortgage servicers who engage in specified loan 
modifications and workouts.

                                HEARINGS

    The Financial Services Committee held a hearing on December 
6, 2007, titled ``Accelerating Loan Modifications, Improving 
Foreclosure Prevention and Enhancing Enforcement'' at which the 
Committee considered a previous version of the bill, H.R. 4178, 
introduced by Mr. Castle on November 14, 2007. The following 
witnesses testified: The Honorable Sheila C. Bair, Chairman, 
Federal Deposit Insurance Corporation; The Honorable Randall S. 
Kroszner, Governor, Board of Governors of the Federal Reserve 
System; The Honorable John C. Dugan, Comptroller, Office of the 
Comptroller of the Currency; The Honorable Gigi Hyland, Board 
Member, National Credit Union Administration; Mr. Scott M. 
Polakoff, Senior Deputy Director and Chief Operating Officer, 
Office of Thrift Supervision; Mr. Mark E. Pearce, North 
Carolina Deputy Commissioner of Banks, on behalf of the 
Conference of State Bank Supervisors; Mr. Tom Deutsch, Deputy 
Executive Director, American Securitization Forum; Ms. Faith 
Schwartz, Executive Director, HOPE NOW Alliance; Mr. Hilary O. 
Shelton, Director, National Association for the Advancement of 
Colored People; Mr. Damon Silvers, Associate General Counsel, 
AFL-CIO; Dr. Richard Kent Green, Oliver T. Carr, Jr. Chair of 
Real Estate Finance, The GW School of Business, George 
Washington University; Mr. Laurence E. Platt, Partner, K&L 
Gates, on behalf of the Securities Industry and Financial 
Markets Association; Mr. Michael Calhoun, President, Center for 
Responsible Lending; and Mr. John Taylor, Vice President for 
Policy, National Community Reinvestment Coalition.
    At a hearing of the Financial Services Committee on April 
9, 2008, titled ``Using FHA for Housing Stabilization and 
Homeownership Retention,'' provisions of H.R. 5579 were 
addressed by members and witnesses. Specifically, the Honorable 
Sheila Bair, Chairman, Federal Deposit Insurance Corporation, 
and the Honorable John C. Dugan, Comptroller, Office of the 
Comptroller of the Currency, expressed support for the 
legislation. Other witnesses at the hearing included: The 
Honorable John M. Reich, Director, Office of Thrift 
Supervision; The Honorable Randall S. Kroszner, Governor, Board 
of Governors of the Federal Reserve System; The Honorable Brian 
Montgomery, Assistant Secretary for Housing-Federal Housing 
Commissioner, United States Department of Housing and Urban 
Development; Mr. Brian Wesbury, Chief Economist, First Trust 
Advisors L.P.; Dr. Alan S. Blinder, Ph.D., Gordon S. Rentschler 
Memorial Professor of Economics and Public Affairs, Princeton 
University; and Dr. Allen Sinai, Chief Global Economist, 
Strategist and President, Decision Economics, Inc.
    The Subcommittee on Capital Markets, Insurance and 
Government Sponsored Enterprises held a legislative hearing on 
April 15, 2008, titled ``H.R. 5579, The Emergency Mortgage Loan 
Modification Act of 2008.'' The following witnesses testified: 
Mr. Ralph DaLoisio, Managing Director, Natixis Structured 
Finance Group, on behalf of the American Securitization Forum; 
Mr. Robert E. Story, Jr., President, Seattle Financial Group, 
and Vice Chairman, Mortgage Bankers Association, on behalf of 
the Mortgage Bankers Association; and Mr. Marlo A. Young, 
Partner, Thacher Proffitt & Wood LLP.

                        COMMITTEE CONSIDERATION

    The Committee on Financial Services met in open session on 
April 23, 2008, and ordered H.R. 5579, the ``Emergency Mortgage 
Loan Modification Act of 2008'', as amended, favorably reported 
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 in conjunction with the consideration 
of this legislation. A motion by Mr. Kanjorski 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 
amendment was considered:
    An amendment by Mr. Kanjorski, No. 1, a manager's amendment 
making various technical and substantive changes, was agreed to 
by a voice vote.

                      COMMITTEE OVERSIGHT FINDINGS

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee has held hearings 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:
    To the extent that existing duties and responsibilities of 
mortgage loan servicers are clarified, and a safe harbor from 
lawsuits by investors for mortgage servicers who engage in 
specified loan modifications and workouts is created, mortgage 
servicers will increase efforts to initiate long-term 
sustainable loan modifications.

   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:

                                                    April 28, 2008.
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. 5579, the 
Emergency Mortgage Loan Modification Act of 2008.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Susanne S. 
Mehlman.
            Sincerely,
                                                   Peter R. Orszag.
    Enclosure.

H.R. 5579--Emergency Mortgage Loan Modification Act of 2008

    H.R. 5579 would protect mortgage servicers from legal 
liability if they perform loan modifications according to 
specific criteria established under the legislation. CBO 
estimates that enacting this legislation would have no 
significant impact on the federal budget and would not affect 
direct spending or revenues.
    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. 5579 would provide legal protection for 
servicers of mortgage pools when they modify mortgages.
    H.R. 5579 contains both intergovernmental and private-
sector mandates as defined in the Unfunded Mandates Reform Act 
(UMRA), but CBO estimates that the costs of those mandates 
would not exceed the annual thresholds for intergovernmental or 
private-sector mandates established in UMRA ($68 million and 
$136 million, respectively, in 2008, adjusted annually for 
inflation). By preventing investors, both public and private, 
from seeking damages on grounds that the servicing agreement 
had been violated, the legislation would impose a mandate on 
governmental and private-sector entities that invest in pooled 
residential mortgages. CBO concludes, however, that servicers 
would be unlikely to alter mortgages in ways that would be 
significant enough to cause investors to seek damages because 
they would still be required to ensure the greatest return to 
investors under their fiduciary obligations.
    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. 5579 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. Short title

    This section establishes the short title of the bill, the 
``Emergency Mortgage Loan Modification Act of 2008.''

Section 2. Safe harbor for qualified loan modification or workout plans 
        for certain residential mortgage loans

            Subsection (a)--Standard for loan modifications or workout 
                    plans
    This subsection sets forth the duty of loan servicers to 
maximize or not adversely affect recovery of proceeds from 
pooled residential mortgage loans on behalf of the 
securitization vehicle and in the best interest of the 
investors in the aggregate, without regard to the interests of 
individual investors or tranches. The duty applies only in the 
absence of contrary contractual provisions.
    This subsection further provides that a servicer acts in 
the best interest of all investors if, for loans in default or 
for which default is imminent or reasonably foreseeable, it 
makes reasonable efforts to implement a loan modification or 
workout plan, or engages in other loss mitigation efforts, 
including acceptance of short payments, agreeing to short 
sales, or accepting partial discharges of principal. The 
servicer must 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.
            Subsection (b)--Safe harbor
    This subsection provides that a servicer that acts in a 
manner consistent with the duty in the legislation will not be 
liable to investors or insurers for entering into qualified 
loan modification or workout plans. The safe harbor would apply 
only in the absence of contrary contractual provisions. 
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.
            Subsection (c)--Rule of construction
    This subsection specifies that nothing in the legislation 
limits the ability of loan servicers to enter into other types 
of modifications or workouts.
            Subsection (d)--Definitions
    This subsection defines terms used in the legislation, 
including ``securitization vehicle,'' ``residential mortgage 
loan,'' and ``qualified loan modification or workout plan.'' 
``Residential mortgage loan'' is defined as a loan secured by 
an owner-occupied residential dwelling. This subsection also 
defines ``qualified loan modification or workout plan'' as a 
plan that (1) is scheduled to remain in place for at least five 
years, unless the borrower sells the property or refinances the 
loan; (2) does not include repayment schedules that result in 
negative amortization; and (3) does not require the borrower to 
pay additional points and fees. For purposes of this 
subsection, negative amortization does not include 
capitalization of delinquent interest or arrearages.
            Subsection (e)--Effective date
    Applies only to qualified loan modification or workout 
plans initiated prior to January 1, 2011.

                                  
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