Industry Letter

Withholding Charges to Borrowers Due to Closing of the Baum Firm

DATE: December 19, 2011

To Mortgage Servicers:

Until recently, the Steven J. Baum P.C. law firm (“Baum firm”) handled a vast number of foreclosure cases for Mortgage Loan Servicers (“Servicers”) with respect to properties in the State of New York. With the announcement on November 21, 2011 that the Baum firm would be closing, the Department of Financial Services (the “Department”) became concerned that New Yorkers in the process of foreclosure would be subject to additional charges due to delays in Servicers appointing substituted counsel. Certain Servicers have already entered into agreements with the Department that they would not charge borrowers any penalties, fees, costs or interest accrued resulting directly from such delays. The Department writes to clarify that Servicers, pursuant to their duty of good faith and fair dealing in servicing practices, should not charge borrowers any penalties, fees, costs or interest accrued due to such delays.

The Baum firm represented Servicers in an estimated forty percent of New York foreclosures in 2011. The firm was subject to highly publicized scrutiny for its foreclosure practices, including allegations of “robo-signing” that led to an investigation by the U.S. Attorney’s Office for the Southern District of New York, that resulted in an agreement on October 6, 2011 requiring the Baum firm to pay $2 million and significantly change its servicing practices. In early November 2011, Freddie Mac and Fannie Mae removed the Baum firm from their lists of approved law firms. Hence the closing of the Baum firm should not come as a surprise to Servicers.

Part 419.2 of the Superintendent’s Regulations instructs Servicers that they have “a duty of good faith and fair dealing” in their business with borrowers. The Department wishes to clarify that, pursuant to this regulation, Servicers should not charge borrowers any penalties, fees, costs or interest accrued for any delays in court appearances including settlement conferences by substituted counsel, as a direct result of the closing of the Baum firm and the substitution of counsel.

The closing of the Baum firm will require Servicers across the state to hire new counsel, who will have to gather and review case files, and file with the court for substitution of counsel. Significant delays in pending foreclosure cases are therefore expected. Through no fault of the borrowers, their files may sit while additional interest charges, penalties, and fees accrue. For example, one Baum attorney has asked for a 60-90 day continuance of the settlement conference in order to facilitate a change in counsel. Based on a $150,000 mortgage at a 6.5% interest rate, 5 years into the loan, the monthly interest payment is around $770.00, resulting in $1540-$2310 of additional interest charges due to these delays.

The Department directs that Servicers make every effort to move the process of having substituted counsel appointed, and, to the extent there are delays in court appearances, including settlement conferences, resulting from the closing of the Baum firm and appointment of substituted counsel, Servicers should withhold the above-mentioned charges until the court appearances are rescheduled.

Should you wish to discuss this matter further please contact Executive Deputy Superintendent George Haggerty, Real Estate Finance Division, at (212) 709-1651.

Thank you for your cooperation.

Sincerely,

Benjamin M. Lawsky
Superintendent of Financial Services