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FDIC Clarifies Rules for Banks on Abandoned Foreclosures

foreclosure-sign-twoIn a Financial Institution Letter issued on Wednesday [1], the Federal Deposit Insurance Corporation (FDIC [2]) 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:

Click here [1] to view the entire Financial Institution Letter.