We’re now almost two years into the new RESPA rules dealing with mortgage servicing. Servicers have formulated and implemented policies and procedures around early intervention requirements, continuity of contact, and considering loss mitigation applications. The rules have very specific timing and documentation requirements, and significant energy has been spent getting things in order.
But that’s not the only concern when it comes to servicing. What’s the next challenge?
The Formerly-Wild West of Compliance?
Calling loan servicing the “Wild West” may be an overstatement, but the point is that up until January of 2014 (when the new rules went into effect), far fewer requirements applied to servicing than to most other areas of consumer compliance, and especially when compared to loan origination activities.
Not to say there were no rules at all: the Fair Debt Collection Practices Act (FDCPA) and certain requirements of the Flood Disaster Protection Act (FDPA) and Telephone Consumer Protection Act (TCPA) apply, and of course Unfair or Deceptive Acts or Practices (UDAP) standards are ever-present. But Regulation Z and RESPA rules were less intrusive, aside from periodic statement, servicing transfers, and Qualified Written Request (QWR) requirements, among others.
Servicing was often left to its own devices operationally, as well. In many banks, once a loan goes delinquent it is transferred to an entirely separate department to deal with loss mitigation, or eventually foreclosure or repossession. Typically compliance departments paid far less attention to those stages of the lending process.
That will now need to change, especially when considering fair lending risk.
Outcomes – Considering Who Got What
Many mortgage loan servicers have been through their first examinations under the new RESPA rules. Policies were scrutinized and procedures vetted to ensure compliance. But with such attention to the how of loss mitigation and foreclosures processes, the natural next question will be the what. In other words, who got what and (just as importantly) who did not? The focus will be on outcomes.
Consider a scenario: two borrowers (one male and one female, both the sole breadwinners of their families) live in the same neighborhood and worked at the same factory with the same job and pay. Further assume their credit profiles are almost identical. Unfortunately, six months ago both were laid off. Both have 30-year fixed rate mortgages with your bank, taken out at roughly the same time, that are now delinquent. In other words, we have similarly situated (and now delinquent and distressed) borrowers.
The new RESPA rules require the servicer to make a good faith effort to make live contact with a delinquent borrower within 36 days, and send a notice within 45. Assume these requirements are met, and the male borrower is immediately responsive and cooperative with documentation and information requests, as he applies for (and is granted) some help – maybe a payment holiday, rate reduction, or loan modification. The female borrower is just the opposite; she ignores all attempts from the servicer to reach out and eventually is she is foreclosed upon.
The fair lending question: we have similarly-situated borrowers, one of whom received loss mitigation assistance (and stayed in his home), and the other did not and lost her home. What is the only differentiating factor here? Gender, which of course is a prohibited basis under Regulation B.
But wait, you say, the real difference and reason for the dramatically different outcomes was that one borrower was proactive and forthcoming and the other ignored all offers for assistance. How can we help borrowers who ignore every attempt at outreach, no matter the demographic characteristics?
The real question here is can you prove why this happened? In other words, a look at the two files may show only disclosures and outcomes. Are there conversation logs and records of who responded and who did not? A lesson here is to clearly document how and why outcomes (whatever they are) were reached.
A common characteristic of loss mitigation personnel and departments is to allow discretion when employees deal with delinquent borrowers. It’s a sensitive topic: these are borrowers in trouble and looking at potentially losing their homes. Establishing trust and building a relationship between the employee and borrower is critical. Many servicers empower their people to “do what is best for the customer,” which may include crafting individual solutions. This creates situations where the assistance a particular borrower receives (or not) may depend simply on who they’re dealing with at the bank.
As in any other area of lending, discretion creates fair lending risk. This is not to say loss mitigation should be turned into a rigid, standardized process, but controls should be present to ensure that outcomes (as well as treatment – how easy or difficult was it to get to the solution) are monitored to detect disparities on protected bases.
Non-Mortgage Loans Too?
While the RESPA rules have shined a bright light on mortgage servicing, other loan types should not be ignored. How repossession of vehicles and credit card delinquencies, for example, are handled carry fair lending risk as well.
What should be done to monitor? The same types of fair lending analyses (including regression analysis, if appropriate) performed on the origination side can be done on loss mitigation. The biggest obstacle, though, is usually data. Many times appropriate data to analyze is not available since the servicer doesn’t collect it. That’s a matter of working with servicing and loss mitigation personnel to identify and obtain the necessary financial and other information that contributed to how and why decisions are made.
Another issue is the lack of demographic information on any loan that is not HMDA-reportable. In these cases servicers may consider using proxies. Despite questions around the reliability of proxy methodologies, regulators have shown their willingness to utilize them. The issue for servicers to consider is whether they’d prefer doing nothing at all to monitor fair lending risk as opposed to using proxies.
The bottom line is that fair lending compliance applies to the servicing, loss mitigation, and repossession/foreclosure processes just as it does any other aspect of the lending process. Although that’s always been true, closer attention is now being placed here. Fair lending compliance professionals should include appropriate controls, monitoring, and analyses (including statistical models if necessary and appropriate) to ensure that loss mitigation solutions, as well as foreclosures, are addressed fairly and in a nondiscriminatory manner.