WASHINGTON — In a concession to Democrats, the Treasury Department is proposing that any company that services whole residential mortgages purchased by the government agree to rework loans.

In the most recent draft of Treasury's bill, which was obtained by American Banker and details the creation of a facility to buy and hold up to $700 billion in troubled assets, servicers must follow "industry best practices…including entering into sustainable modifications to avoid preventable foreclosures."

The draft, which is dated Sunday, does not specify such practices, but said they would be identified by the Treasury Secretary in consultation with bank regulators. It also specifies that the Treasury secretary may go beyond industry best practices to avoid preventable foreclosures.

Treasury is also required to agree to any reasonable modification for loans that underlie assets it purchases. It said that the secretary shall consent to "appropriate" requests for loss mitigation measures, including term extensions, rate reductions, and principal write downs.

Whether this will go far enough for Democrats is unclear.

House Financial Services Committee Chairman Barney Frank appears to be seeking language similar to what Treasury has proposed.

According to sources, Rep. Frank wants to add provisions that would require Treasury to maximize assistance to borrowers and use its new authority as an investor in mortgages to encourage servicers to take advantage of a new government program created by a July housing package to help struggling borrowers.

Rep. Frank also wants a requirement that Treasury consult with the Federal Deposit Insurance Corp., Federal Housing Administration and other federal government entities to improve the loan modification process.

The Massachusetts Democrat is also seeking other changes. He wants to require any entity participating in the buyout program to meet certain executive compensation and shareholder disclosure standards. These standards would include, but not be limited to, restrictions on executive compensation, a claw-back provision for senior executive pay based on earnings, gains, or other criteria, and limitations on entities paying severance compensation to senior executives.

Rep. Frank is also seeking provisions that would require the Government Accountability Office to oversee the buyout facility. The comptroller general would have access to any information, data, schedules, books, financial records and other papers or files from the facility. He also calls for annual audits and a system for internal controls for the facility.

Senate Banking Committee Chairman Chris Dodd was circulating his own bill on Monday that would require Treasury to exercise a systematic approach to modifying the underlying residential mortgage loans it purchases. Servicers have complained that they must go loan-by-loan to modify mortgages, while Federal Deposit Insurance Corp. Chairman Sheila Bair and others have pushed for more systematic alterations.

Sen. Dodd's bill also dictates that any government agency that holds an interest in obligations or pools of obligations secured by residential mortgage loans must encourage servicers to modify the loans and sell any foreclosed properties to state and local governments at a discount.

Sen. Dodd's bill also includes a controversial provision to allow judges to restructure mortgages in the bankruptcy process. Banks have vigorously fought that provision in the past, arguing it would raise interest rates.

Additionally, the Connecticut Democrat is seeking to create a mechanism to give the Treasury a stake in a financial institution's shares for those companies that use the facility.

Like Rep. Frank, Sen. Dodd is also seeking to limit executive compensation for those companies that use the facility.

His bill would also put limits on Treasury's money market mutual fund insurance program. The Connecticut Democrat's bill would require any mutual fund using the $50 billion fund created by Treasury last week to pay premiums akin to those banks pay to the FDIC. It would also cap insurance limits at $100,000 per accountholder.

The latest draft from Treasury also fleshes out other provisions of the proposed facility, including adding more detail on the process for purchasing and selling illiquid assets. The draft said that Treasury must obtain a wide range of proposals from private sector asset managers that want to run the program, and take appropriate steps to manage any conflicts of interest. The Treasury draft calls for giving the FDIC the power to select the asset managers of the loans.

Treasury also wants to take its plan global. The department is requesting to coordinate with foreign authorities and central banks to establish similar programs.

Treasury has left open the option to purchase assets from foreign institutions if they have significant operations in the United States. But in revised language, Treasury excludes any central bank or institution owned by a foreign government or any institution that is providing financing secured by troubled assets of a financial institution.

Under the revised language, the GAO is required within one year of enactment to study Treasury's operation of the buyout facility and the impact of the purchase of troubled assets on the market.

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