Creating chaos: the amount of new red tape being created in the name of foreclosure avoidance is mind-boggling.

The foreclosure crisis, which is still growing as more borrowers fall behind on payments, is begetting a compliance crisis for lenders and servicers. The floodgates have opened, bringing more and more local, state and federal laws designed to deal with foreclosures. * "The hardest part of servicing loans today is keeping up with all the state, federal and local changes that are coming about," says Frank Binetti, vice president of residential lending at Lincoln Park Savings Bank, Chicago, and current president of the Illinois Mortgage Bankers Association (IMBA). * "You have federal rules laid over state rules laid over local rules," says attorney Laurence Platt, a partner at K&L Gates LLP, Washington, D.C., "and the consequence is chaos. There's not a single national approach to foreclosures, so it's very hard for servicers. They do what they have to do under the law. But it's another loss for the servicer."* "The common theme that I'm hearing from a lot of servicers is that there's been so many legislative changes in the last 18 months--and if you're a servicer servicing loans in 40 states, that's a lot for compliance departments to work with and to change policies and procedures to make sure that servicing people are in compliance with all of those state requirements," says Patrick J. Dobiesz, president of Santa Ana, California-based T.D. Service Co., which provides trustee services to lenders. * "It's delaying the foreclosure process. Servicers have to make sure that they've modified all of their collection efforts, pre-foreclosure letters and other things to comply with the statutes," says Dobiesz. "Many of these [various state] modification programs have been offered before, but maybe not to the degree that they are today."

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Lenders and servicers, under new or expanded regulations, are dealing with notification requirements, waiting periods, mediation obligations, loan-modification demands, moratoriums, additional filings, special fees, vacant-property registration and maintenance, and ongoing lawsuits over foreclosures. And judges sometimes add their own interpretations of regulations.

In Indiana, some judges are requiring servicers to hold settlement conferences with borrowers before proceeding with foreclosure, even when such a conference was not requested by borrowers as stipulated in the law, says attorney Craig D. Doyle, partner, Doyle Legal Corporation, Indianapolis.

"Most judges," he says, "are being overly cautious in trying to protect the rights of the debtor and prevent a foreclosure."

Some states have established new agencies to provide counseling help to homeowners facing foreclosures with the intent of modifying loans. Lenders and servicers are complying, or at least trying to. But their efforts are expensive and time-consuming.

"The situation is chaotic," comments Robert Klein, founder and chief executive officer of Valley View, Ohio-based Safeguard Properties, which provides property preservation services to lenders and servicers. "The entire industry has been caught off-guard the past year and a half. Servicers are scrambling."

Some lenders don't get directly involved in interpreting the fine legal details of compliance matters. "We just use our local counsel," adds Rick Simon, Calabasas, California-based vice president for corporate communications for Charlotte, North Carolina-based Bank of America.

"We hire local attorneys to do the work for us. They are aware of what the local rules are," says Tom Kelly, Chicago-based senior vice president with New York-based JPMorgan Chase. "Each state or municipality has its own rules, and it's not efficient for somebody sitting centrally to know the different rules in 50 states and hundreds of municipalities. They handle the work for us, checking with us, and we supervise them."

And with all the additional work as a result of the growing number of regulations and foreclosures, Chase may be hiring more law firms, he says.

"One firm can probably handle all of Idaho, but one firm probably can't handle all of California," Kelly points out, while mentioning Chase's increased volume of foreclosures. "Whether one firm can handle one metropolitan area or one state or two states depends on volume."

But Chase--although exempt from many state and local laws as a national bank supervised by the Office of the Comptroller of the Currency (OCC)--does get involved, working with municipalities and states when they are considering new regulations, he says.

Chase did have compliance with state and local regulations in mind, as well as its own delinquency and foreclosure problems, when, last spring, it began establishing Chase Home-ownership Centers in 27 different metropolitan areas, including Denver. The centers are designed to provide counseling and loan-modification help to borrowers from Chase; Washington Mutual (now owned by Chase); and EMC Mortgage, a Chase subsidiary, explains Mary Jane Rogers, Denver-based vice president of media and government relations, and a regional manager for Chase.

"Like every national lender, our goal is to have a comprehensive, effective process rather than 50 different processes," she says. "But in some cases states have required lenders to adjust our notification time frames and to put hotline information on the statement, and we're complying with those requirements."

An endless pipeline of new requirements

As regulations grow and the number of steps servicers must take in connection with foreclosure filings keeps increasing, the work that outside counsel and property maintenance firms are being asked to do also keeps increasing.

"We provide services to lenders, and are doing whatever we can to provide everything they need," says Safeguard's Klein.

"Up until now, we would do a property inspection and give them a report. That's all that was needed," he explains. "Now we have to accommodate new parameters that have been put in place. We need additional information that we had not been obtaining in the past. Before, we would touch the property for maintenance only if the properly was vacant. Now we have to help maintain the property even if it's occupied. That creates problems, but the problems are not insurmountable."

"In many states, they just turn it over to their counsel," says attorney Doyle. "They say, 'If there's any new notice required of us, could you do it? If there's any new debtor communications, could you do it? If there's any mediation, can you cover it?' Fannie and Freddie now pay us about S250 to cover a settlement conference in addition to the allowable we get," he says.

Colorado's new law, which establishes loan modification counseling for borrowers facing foreclosure, requires a Notice of the Opportunity for Foreclosure Deferment to be posted at the property address within 15 days of the public trustee accepting the foreclosure, explains attorney Caren Jacobs Castle, a partner with Castle Meinhold & Stawiarski LLC, Denver.

"It's more expensive now to do a foreclosure because there is a charge associated with posting," she says. "We're using an independent third party to do the posting."

Keeping on eye on what's brewing

Outside counsel also keep their mortgage clients informed of new regulatory developments.

"We advise our clients what to expect," says Larry R. Rothenberg, partner in charge of the real estate and foreclosure department at Welt-man, Weinberg & Reis Co. LPA's Cleveland office. "We analyze proposed or new legislation and case law, and advise our clients of the new laws' impact and the best procedures to follow. Then, when referring a case to us for foreclosure, our clients can be proactive in giving us the cleanest and strongest case possible," he says.

"Many foreclosures, even when uncontested, have become unnecessarily cumbersome due to some unintended consequences of new laws or courts' rules. For example, plaintiffs must now delay commencing foreclosures until they have a copy of an executed assignment of the mortgage from a prior lender, even though, in my opinion, other proof of ownership of the loan should be legally sufficient," adds Rothenberg.

"In the legislatures' and courts' well-intended desire to show that they are helping borrowers save their properties from foreclosure," he points out, "some new requirements have caused delays in the completion of foreclosures on abandoned and deteriorating properties, causing further harm to the neighborhoods in addition to increasing the lenders' losses."

Foreclosure moratoriums and mandatory mediation

Local and state laws and regulations are still imposing moratoria on foreclosures, but now such moratoria often are tied to mandated counseling and loan-modification efforts.

When stale legislatures began going into session early this year, says Chris Oswald, director of state legislative affairs at the Mortgage Bankers Association (MBA), "We saw a real push in many states to enact foreclosure moratoria. We saw proposals for moratoria in Minnesota, Michigan and Ohio, and a number of other states. That was a very viable threat to the industry."

MBA and some state associations fought these, often with success, Oswald says. "Legislators came to realize that blanket moratoriums simply kicked the problem down the road, [and did] not deal with it," he points out.

"We now have seen in several states--and it's something we'll see going into next year--mandatory mediation before a foreclosure sale. I think we'll see more of that going forward," Oswald says.

"One thing we have seen with these mediation conferences," he adds, is that "industry a lot of times will send their foreclosure counsel to respond to these additional requirements. That gets expensive. But our industry is going to abide by them."

Numerous states have adjusted their foreclosure timelines and procedures, often in combination with such things as required mediation, according to Oswald.

"Every state has different approaches," says attorney Jeff Weisserman, a partner with Trott & Trott PC, Farmington Hills, Michigan. "The basic concept we're seeing throughout the country is that states are slowing things down and doing something to encourage the borrower and the lender to get in a room and talk."

Notice requirements keep growing

The number of foreclosure-related notices lenders and servicers are required to send out or post keeps increasing, just as their required content keeps expanding, often promoting counseling and modification possibilities.

Servicers, under a new Indiana law, says Doyle, now are required to send by certified mail a pre-suit notification to delinquent borrowers 30 days before a foreclosure action can be filed, and attorneys often are hired to do this task.

In Illinois, under a new amendment to the state's Foreclosure Relief Act, pre-foreclosure notices must be sent to borrowers who are more than 30 days delinquent, advising them of counseling availability. No foreclosure action can be taken 30 days before and after the mailing and, if the borrower obtains counseling, foreclosure actions are delayed for another 30 days.

New York's Real Property Actions and Proceedings Law requires lenders to send foreclosure notices to delinquent borrowers at least 90 days before the filing of foreclosure. However, it applies only to loans originated between Jan. 1, 2003, and Sept. 1, 2008.

Notification requirements in Maryland, as of May 9, 2009, include notices of foreclosure; notices of pending foreclosure sales; and, after a sale has occurred, eviction notices--each within specified time frames.

In Oregon, notices of sale now must include notices to tenants.

The new Colorado foreclosure-deferment law, in addition to requiring the posting of a foreclosure notice at the property, also requires that an affidavit be provided to the public trustee, letting the trustee know that the property has been posted, says Castle.

"That puts an additional burden on servicers," she says. "There also is more responsibility for attorneys. We need to provide something to the public trustee indicating that we believe [House Bill] 1276 applies, and then we need to make sure that the property is posted timely and that the affidavit is provided [in] timely [fashion]."

In Michigan, under the state's Home Foreclosure Prevention Act, lenders at the beginning of the foreclosure process need to send two copies of the notice to the delinquent borrower--one by first-class mail and one by certified mail--and also publish the notice, explains Trott & Trott's Weisserman. The notice advises borrowers of their right to a meeting with the lender to discuss their alternatives to foreclosure, and provides a list of Department of Housing and Urban Development-approved (HUD-approved) counselors to contact.

Borrowers have 14 days to opt in, which is done by notifying a counselor who, in turn, has 10 days to notify lenders of the opt-in. Borrowers and lenders then have 90 days to meet and determine whether a loan modification is a possibility.

"The act entices borrowers to do something just because of the upside of getting 90 more days to live there for free potentially," points out David A. Trott, president and managing attorney at Trott & Trott.

If a modification is reached, the borrower must execute and return the agreement--or foreclosure can proceed. If a modification is not reached, then data must be run through a filter to determine whether a modification should have been reached. If the filter finds that a modification should have been made, a foreclosure action can proceed only judicially--"a slower, more expensive process," notes Weisserman.

A patchwork of foreclosure-pause requirements

Florida borrowers even will have the right to cancel any loan-modification agreement they and their lender reached within three days of its signing.

Defaulted borrowers in New Jersey, under an amendment to the state's Mortgage Stabilization and Relief Act enacted this year, also do not have to pay anything while negotiating a loan modification during a forbearance period that can continue for as long as six months, notes K&L Gates' Platt. But the forbearance period only becomes effective after a foreclosure action is filed, and it requires a written request from the borrower to the lender.

California's Foreclosure Prevention Act, which took effect June 15, also allows for a 90-day foreclosure moratorium while borrowers and lenders discuss modifications. But lenders can obtain an exemption by showing the appropriate state commissioner that they have "an aggressive loan-modification program that they're offering to borrowers," says T.D. Service Co.'s Dobiesz. Most major national lenders have been granted exemptions, he points out.

In Colorado, under the foreclosure-deferment law that took effect Aug. 2, borrowers can request a counseling session before a foreclosure can be filed. Then, if the borrower does not qualify for a modification, the foreclosure can take place after 90 days, according to Castle. But during that 90-day period, borrowers must continue to make escrow payments in full and mortgage payments equal to two-thirds of what was due prior to default. However, under the law, the servicer's acceptance of those payments does not constitute a waiver of the default.

A lot of added expense

"Our industry is complying with these [foreclosure] 'pause' proposals and laws that have extended the foreclosure process, require mediation or increase the notice requirements before you can go to foreclosure. It puts an added burden on the industry," says MBA's Oswald.

"There's a lot of additional expense that goes into complying with some of these laws," he says. "Many states have implemented additional notice requirements before you go to foreclosure. There even was a proposal that would have required that foreclosure notices be on different-colored paper.

He adds, "There's a whole raft of additional costs that go into compliance."

A number of states and municipalities also have laws that mandate the gathering of data on delinquencies and foreclosures, Oswald points out.

"That's basically the recognition of the need for data," he says. "You can't really understand the problem unless you have the information that underlies it. California and other states have passed statutes that require the reporting to a state agency the number of delinquencies and foreclosures and even loan modifications and things like that."

Cities also, starting last year, began enforcing local property maintenance ordinances and requiring the registration of vacant foreclosed homes so that code-enforcement officials would know who was responsible for maintenance, should problems arise, Oswald says.

"Cities, in passing these draconian ordinances, are saying to mortgage lenders, 'If you don't cut the grass, if you don't fix the windows, we're going to charge you--sometimes $ 1,000 per violation, per day,'" he explains. "This is a growing trend in cities throughout the country."

Lincoln Park Savings Bank's Binetti agrees. "The overall process of notifying the municipality has become more burdensome, and the municipalities now are creating more requirements for lenders to maintain the upkeep of the properties," he says.

"The municipalities are enforcing their requirements a lot more stringently because there are so many more properties being affected by foreclosures. There's more paperwork. There's more filings. There's more expenses. You have to keep them up-to-date. The maintenance and the updates you give to the municipalities are more frequent now. You just have to be more careful, because municipalities are watching the properties as well," Binetti says.

Fourteen days after a default in Kansas City, Missouri, lenders must send someone to visit the property to determine whether it is occupied. If not, they must register it with the city and inspect it again every month. They also must post a sign giving a contact name and phone number.

"Each municipality made up its own rules as they went along," says Safeguard's Klein.

"The biggest problem is that a servicer or lender is trying to comply with 5,000 different ordinances all dealing with the same exact issue, but with different requirements. Some ordinances require lenders to notify the municipality when a mortgage goes to foreclosure, whether the property is vacant or not. Other ordinances require lenders to notify municipalities only when a property becomes vacant," says Klein.

"The fee structure for property registration varies from $ 10 to $1,000. There's no rhyme or reason to that. To try to comply with the different types of requests is very complicated. There's a legitimate concern, because the vacant-property blight is causing havoc," Klein says.

In response, MBA convened the Vacant Property Registration Committee to come up with a solution to bridge that communication gap, explains Klein, who chairs the committee.

One solution, first tested with a pilot program in six cities and now in more than 50 cities, is to have servicers upload lists of all their vacant properties to Reston, Virginia-based MERS. Municipal officials can then go to the MERS Web site, type in the address of a vacant home needing attention, and determine who is responsible for maintenance--complete with phone numbers and e-mail addresses.

"It's been very successful," Oswald says. "Code-enforcement officials really like it. It's a great tool for them. And it obviates the need for them to pass these ordinances that are so draconian with their fines. That's something we're looking to ramp up nationwide."

The tenant issue and other challenges

Servicers also are struggling to comply with recent federal laws and regulations that leave many questions unanswered. Most problematic is the Protecting Tenants at Foreclosure Act of 2009, which requires servicers to allow renters to stay in foreclosed homes for a period after foreclosure.

"It started with the municipalities, then the states and now the federal government got involved in this issue. The idea is a good one, but the law is very broad. And because it doesn't specify between tenants who have been paying rent and those who have not, it's very hard to implement," Klein points out.

"The law mandates that the mortgagee take over the tenant's lease at least for 90 days or for the remainder of the lease. And if there is no lease, the mortgagee is to provide a new one for 90 days. That creates a [huge] problem for lenders and title-holders. Now all of a sudden a servicer is put in the category of being a landlord, collecting rent," he says.

"You have to verify that the property is occupied by a bona fide tenant or by the mortgagor," he adds. "That's difficult. Then you have to verify there is a lease in place and review that lease. Is the rent at market? If there's no lease, you have to create a three-month lease. Now you have all the liabilities, including maintaining the property. There's going to be additional cost for lenders and servicers."

Further, says Vicki Vidal, MBA's associate vice president, loan administration, the act says nothing concerning assignment of existing leases--it only talks about the remainder of the tenancy.

"There's also a mortgage transfer disclosure requirement, which is very expensive to do," she points out. "So it's causing some significant compliance burden. There's also going to be a pretty big fraud problem with phony leases, phony tenants and brothers-in-law in place."

"The new regulations take extra time, and you have to pay people to do the work, so it's more expensive," concludes Binetti. "But in the long run, if you can save people and keep the payments going, it ultimately ends up cheaper if you can stay out of foreclosure. But for many people, I think the new regulations are just delaying what's ultimately going to happen anyway."

Jerry DeMuth is a Chicago-based freelance writer. He can be reached at [e-mail].