The Office of the Comptroller of the Currency (OCC) has published guidance advising banks on the obligations and risks associated with foreclosed properties.
The guidance highlights legal, safety and soundness, and community impact considerations. Although the guidance focuses primarily on residential properties, the OCC says that many of the principles apply to commercial properties as well.
The guidance offers common issues banks encounter when they own a foreclosed property, act as a servicer of a foreclosed property or act as a trustee of the securitization trust that holds title to a foreclosed property.
‘Acquiring title to properties through foreclosure – either for the bank or as servicer for another mortgagee – results in new or expanded risks, including operating risk (which may include market valuation issues), compliance risk and reputation risk," the document says. "Banks should be sure they have identified all the risks and have policies and procedures for monitoring and controlling these risks.’
The OCC additionally states that lenders in some situations may decide to release the lien securing a defaulted loan rather than foreclose.
"Because the decision to release a lien is typically a financial decision, banks and servicers should ensure that their valuation of the property provides the best information practicable, while complying with investor requirements, before initiating foreclosure and subsequently deciding to release the lien," the OCC advises. "While the financial risk must be considered, banks and servicers should also consider the potential for reputation and litigation risk arising from their position as a prior mortgagee or servicer of a now-abandoned property."