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New Requirements for Managing Default-Related Legal Services

November 9, 2012

New requirements will give Servicers responsibility for the selection and management of law firms to handle default-related legal services associated with Freddie Mac mortgages, including foreclosures, loss mitigation, bankruptcy and related litigation, for all new referrals effective June 1, 2013, as outlined in today’s Single-Family Seller/Servicer Guide (Guide) Bulletin 2012-25.

Under the new requirements, Servicers will have sole responsibility to screen and select law firms with expertise in end-to-end default-related legal services: foreclosure, eviction, bankruptcy and other litigation matters involving mortgages owned or guaranteed by Freddie Mac, for all new referrals on or after June 1, 2013.  The new requirements will replace the existing Designated Counsel Program (DCP) as of the effective date. Current DCP law firms must be processed through the new selection and engagement requirements.

This initiative responds to an October 2011 directive from the Federal Housing Finance Agency (FHFA) for the government-sponsored enterprises to align their requirements, policies, and processes for default-related legal services. The directive is an extension of FHFA’s Servicing Alignment Initiative.

Requirements until June 1, 2013
For files referred to law firms or trustees before June 1, 2013, all existing requirements related to the retention of law firms or use of designated counsel remain in effect. These will be known as “Legacy Matters.”

Default-related legal matters referred to a Servicer’s existing law firms or DCP law firms under the current requirements can stay with those firms until those matters close. Servicers may decide to transfer Legacy Matters to firms selected and retained under the new requirements; however, such transfers will be made at the Servicer’s expense, and the Servicer will assume responsibility for any errors, omissions, and delays by the transferee firm.

Three new areas of Servicer responsibility for default-related legal services
Servicers will have responsibility for default-related legal services in three main areas under the new requirements: selection and engagement, management and oversight, and termination and suspension.

Selection and engagement
Servicers will choose their own attorneys, create their own processes for managing foreclosure processing, and maintain direct relationships with their law firms. If a Servicer determines that a law firm meets the minimum requirements, the Servicer must submit Guide Exhibit 99, Servicer Selection Form, for each selected law firm to Freddie Mac for review beginning March 1, 2013. If a firm practices in multiple states, the Servicer must submit Guide Exhibit 99 for each state office for which the Servicer wishes to retain the firm.  Note that new referrals cannot be made to trustees.

Freddie Mac will deliver a “No Objection” or an “Objection” determination on each Servicer Selection Form. Once a Servicer receives a “No Objection” response from Freddie Mac for a submitted law firm and the law firm has completed Freddie Mac’s mandatory new firm training, Freddie Mac will enter into a limited retention agreement with the law firm. Law firms must complete the mandatory new firm training and enter into the limited retention agreement with Freddie Mac before they can begin receiving new referrals on or after June 1, 2013. Law firm training will be available beginning April 15, 2013.

Management and oversight
Servicers will need to establish procedures to manage and monitor all aspects of the law firm’s performance and compliance with applicable Freddie Mac requirements. Servicers also will be required to report issues or concerns relating to a firm or a Freddie Mac Default Legal Matter to Freddie Mac within two business days or sooner, if circumstances warrant. All law firms will be required to report loan level data directly to Freddie Mac.

Termination and suspension
If issues arise that could lead to a firm’s termination or suspension, Servicers will be required to perform a due diligence review and provide Freddie Mac with those results, if requested.  If a Servicer decides to terminate, suspend, or transfer files from a law firm, the Servicer must notify Freddie Mac of the decision within five business days prior to implementing the decision.

For more information about law firm selection and engagement, management and oversight, or suspensions and termination, please review the Guide requirements.

Additional information is forthcoming
Freddie Mac will communicate more details about the new requirements in the near future. Should a law firm contact a Servicer, please relay that more information is forthcoming and will be available on www.freddiemac.com.

In the meantime, Servicers are encouraged to enroll in our new customer web training, Bulletin 2012-25: Servicer Selection and Management of Law Firms, available beginning November 19, 2012, through Freddie Mac’s Learning Center.

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