A recent report discusses actions undertaken by a number of advocacy groups to ensure payments made to borrowers are jointly paid to their lenders.

Activists Urge HUD to Give Banks Bigger Role in Gulf

Advocacy groups have asked the Department of Housing and Urban Development to make sure that the funds paid to mortgage borrowers from special block grants aimed at helping Mississippi and Louisiana recover get jointly paid to their lenders.

The request is a departure from the pressure servicers in the area have gotten on a similar issue. In perhaps the highest-profile case, Louisiana Attorney General Charles C. Foti Jr. pushed for faster disbursements of insurance payouts meant for borrowers rebuilding because of damage from Hurricanes Katrina and Rita last fall. At times he appeared to want to cut lenders out of the reimbursement loop altogether.

In contrast, the model whose adoption is sought by the 13 groups that sent a letter Monday to HUD Secretary Alphonso Jackson casts lender participation as a key safeguard against contractors with "predatory practices."

Decisions about how grant money is distributed could play a big role in the rebuilding of borrowers' properties and the repayment of loans. How such money will be handled became a more immediate issue this week.

On Tuesday, HUD said it had approved Mississippi's plan to direct about $3 billion of the community development block grant money to people whose homes were damaged by floods but who lived in areas where flood insurance was not required. And on Thursday, Louisiana released a plan for public comment that envisions payouts of $4.7 billion to the owners of flooded homes outside of floodplains and to those of low and moderate incomes whose homes suffered sizable damage. Both cap payouts at $150,000.

The Mississippi Development Authority's plan allows, but does not require, a lender to be a co-payee. And it would give borrowers discretion over the "management and use" of the funds. The Louisiana Office of Community Development's proposal says that "owners will be encouraged and assisted, and may be required," to open deposit accounts for the funds with financial institutions, with which the agency will create standards for managing the accounts and payouts.

The groups - including Catholic Charities USA, the Consumer Federation of America, the Consumers Union, the NAACP, the National Community Reinvestment Coalition, the National Consumer Law Center, and the National Fair Housing Alliance - are seeking a firmer role for lenders.

According to their letter, which the Mississippi Development Authority also received, they want to ensure that homeowners with mortgages get the same "significant consumer protections" against unscrupulous contractors that are provided by lenders' traditional joint control of insurance funds.

Usually when there are large amounts of flood or homeowners insurance payouts - which are almost always jointly paid to lenders and borrowers - servicers hold on to some of the money until they get proof that a contractor is completing work or that a borrower doing the work has received materials. Sometimes lenders require licensed contractors or want to review repair plans.

"In effect, this is a case where the interests of the borrower and lender are uniquely aligned," the groups told Mr. Jackson. And "this is particularly true when properties will need to be rebuilt to new, higher standards," they said.

A HUD spokesman said Thursday that the groups "should probably devote their energies to speaking with the" states. "We only approve the plans we get."

The Mississippi plan is aimed at homeowners looking to rebuild or repair. Louisiana's plan also offers payouts to homeowners who want to relocate in the state or sell their home to the state for 60% of pre-storm value, minus insurance and other federal aid. (In the latter situation, lenders might have to agree to forgive a portion of the loan.)

Steve Bradshaw, the head of servicing at Standard Mortgage Corp., a New Orleans lender with about 20,000 loans affected by the storms, said that if lenders have no role, "naturally there's a higher risk then of walk-aways" - borrowers who pocket the money instead of applying it toward rebuilding.

"I just hope the process is set up to help people keep their promises" about repaying the money borrowed to buy the properties.

In their letter, the consumer groups asked that consumers not be required to advance personal funds to a contractor before a servicer releases initial grant funds. They want servicers to be required to approve expenditures and contractors "within a reasonable time."

For loans under workout plans, they did not want the funds to pay for missed payments, late fees, or other charges from the six months after the storms. For loans not in such plans, or delinquent after being in one, they do not want servicers to use payouts to make loans current before taking other steps to cure delinquencies. If a borrower refinances, the funds should travel with him or her, they said.

Mississippi's plan does not obligate borrowers to use the money to pay past-due mortgage balances. Louisiana's says it will set up assistance centers for borrowers looking for help on "mortgage issues," but it does not get into specifics much.

In the background of the discussion over the grant process, some of the conflicts that emerged over how insurance funds were being handled are getting resolved. Mr. Foti's probe of Countrywide Financial Corp. is essentially closed, said Kris Wartelle, a spokeswoman for the attorney general.

She said Thursday that Countrywide resolved all but 20 of the 257 complaints the attorney general got, mainly on insurance issues.

She said that Mr. Foti's office is still looking into some of the 220 complaints about other lenders but that it is getting a lot of cooperation. She said many lenders have claimed that delays were related to computer system processes that had to be manually overridden. "We are giving them a chance to right that before going ahead legally."

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Activists Urge HUD to Give Banks Bigger Role in Gulf