In a Financial Institution Letter issued on Wednesday, the Federal Deposit Insurance Corporation (FDIC) clarified its supervisory expectations in existing guidance for the risk-management practices when banks make the decision to discontinue foreclosure proceedings, which are commonly known as abandoned foreclosures.

The FDIC noted in the letter that when banks stop the foreclosure process after it has already been started, the borrower may have already abandoned or stopped maintaining the property—which can often lead to accumulation of trash, blight, and crime, and have an adverse effect on the surrounding community.

“The FDIC continues to encourage institutions to avoid unnecessary foreclosures by working constructively with borrowers and considering prudent workout arrangements that increase the potential for financially stressed borrowers to keep their properties,” the letter said. “When workout arrangements are unsuccessful or not economically feasible, existing supervisory guidance reminds institutions of the need to establish policies and procedures for acquiring other real estate that mitigate the impact the foreclosure process has on the value of surrounding properties.”

When making the decision to discontinue the foreclosure process, institutions should have appropriate policies and procedures in place, according to the FDIC’s letter on Wednesday. Institutions should:

  • Obtain and use the most current market value information on the property and use current valuation and other relevant information when making the decision to initiate, pursue, or abandon the foreclosure process
  • Implement criteria for determining when their lien(s) should be released due to the financial considerations they may face due to stopping the foreclosure process. In some cases, the institution may face litigation.
  • Notify appropriate state or local government authorities such as tax authorities, courts, or code enforcement departments of their decision to abandon the foreclosure process, and they must comply with all applicable state and local laws.
  • Notify the borrower(s) that they will no longer be pursuing foreclosure, whether or not the mortgage holder has released the lien, the borrower has the right to occupy the property until a sale or title transfer occurs, and that the borrower is responsible for the remaining balance on the mortgage loan and for maintaining the property.
  • Use reasonable means to contact the borrower in order to provide the notice described above, particularly in cases where the borrower vacated the property because the foreclosure process was initiated.
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