Federal banking regulators Thursday urged servicers to avoid conflicts of interest when modifying loans on properties with other liens.

In a statement by the Federal Financial Institutions Examination Council, the agencies said modifications on first lien loans should not be influenced by the effect on a subordinate lien holder. Likewise, servicers modifying a subordinate lien loan should focus on improving just the condition of that loan.

The agencies "recognize that entities that service first and subordinate liens on the same residential real estate property may be faced with potential conflicts of interest when making loan modification decisions," the council said.

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