Reps. Brad Miller (D-NC) and Keith Ellison (D-MN), both members of the House Financial Services Committee, introduced legislation last week that would require mortgage servicers to separate certain holdings of secondary mortgages from their servicing operations. Miller and Ellison seek an amendment to the Truth in Lending Act that would eliminate “conflicts of interest” at mortgage servicers that might be causing a delays to voluntary mortgage modifications. House Resolution (HR) 4953, the Mortgage Servicing Conflict of Interest Elimination Act, would prohibit mortgage servicers from holding another mortgage on a property that also secures the serviced mortgage, Miller and Ellison said in a joint statement last week. The bill would apply the restriction where servicers hold the additional mortgage outright — a second lien like a home equity line of credit, for example — or where servicers hold a security backed in part by the additional mortgage. The bill would allow servicers a “reasonable time” to eliminate either their interest in the additional mortgages, or their servicing authority, according to the press release. The outcome may be a spin-off of mortgage servicing businesses at the four largest banks, which Miller and Ellison said could resolve the conflicts of interest. Two-thirds of all distressed mortgages are now serviced by the four largest banks — Bank of America (BAC), Wells Fargo (WFC), JP Morgan Chase (JPM) and Citibank — which also own about $477bn in second liens, according to the press release. “Servicers are required to act in the best interests of the investors who own the mortgages,” Miller said. “In many, those four banks hold interests in other debt secured by the same home that would be affected by a decision to modify the mortgage or to foreclose, placing the banks’ interests in irreconcilable conflict with the interests of investors.” A representative at Chase could not comment before this story was published. Calls to BofA, Wells Fargo and Citigroup (C) — the parent company of Citibank — were not immediately returned. Write to Diana Golobay. Disclosure: The author holds no relevant investment position.

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