Although mortgage servicers may not be responsible for the mortgage meltdown, they are responsible for handling the fallout from origination practices that resulted in unaffordable mortgage payments, loss of income that resulted in both subprime and prime borrower defaults, and even strategic defaulters. The focus of the fix has been on home retention – servicers trying to find every possible strategy to avoid foreclosures, which devastate individuals, families and entire communities. The challenge is unprecedented in the servicing industry.
In an effort to reduce the number of foreclosures, about this time last year, the Treasury Department unveiled the details of Making Home Affordable (MHA), the first large scale “streamlined” program designed to stem the rising tide of foreclosures. One short year after its release, MHA includes the Home Affordable Modification Program (HAMP), the Second Lien Modification Program (2MP), the Home Affordable Foreclosure Alternatives Program (HAFA), and most recently, the Home Affordable Unemployment Program (UP). Each program includes prerequisites that a servicer must meet before a loan can be referred for foreclosure or before a foreclosure sale can take place. The prerequisites include specific outreach efforts, a mandate to exhaust all available home retention options, and a requirement to solicit borrowers for short sales or deeds-in-lieu of foreclosure.
On paper, the Supplemental Directives (which have been revised, replaced and explained through FAQs) that set forth the details of the various MHA programs don’t seem to leave much room for discretion in deciding which loans get modified, the terms of the modifications, or when a short sale or deed-in-lieu is the most appropriate resolution. Yet, the Department of Justice (DOJ) is turning its attention to the mortgage servicing industry amidst claims of discrimination in practices (primarily origination) and concerns about the low number of successful loan modifications under HAMP.
In January 2010, Assistant Attorney General, Thomas Perez, spoke before the Rainbow PUSH Coalition. In his remarks, Mr. Perez stated that loan servicers “failed to provide meaningful solutions to help save not just peoples’ homes, but neighborhoods and communities.” He announced the creation of a “fair lending unit” within the Civil Rights Division’s Housing Section that would be dedicated to rooting out lending discrimination in all forms. To that end, the fair lending unit will examine data from HAMP to ensure that “minority homeowners who have already been hit hardest by this crisis are not again subject to discrimination as they try to climb out of the hole.”
More recently, on April 29, Mr. Perez reiterated DOJ’s commitment to rooting out discrimination in lending and servicing when he testified before the House Subcommittee on the Constitution, Civil Rights and Civil Liberties. In his written testimony, he advised the Subcommittee that the Division is “working with [its] partners to identify potential fair lending violations where much of the lending activity is occurring today – at the back-end of the process – in mortgage modifications.”
Regulators have sounded the alarm. Mortgage servicing practices will be scrutinized for fair lending – perhaps more appropriately called “fair servicing” -- compliance.
So, where does a servicer begin to avoid being the target of a DOJ action?
As with any other good compliance program, ensuring that comprehensive policies and procedures are in place is the first step. Most servicers probably have some form of “fair lending” policies and procedures in place for servicing operations. Those policies and procedures should be updated to reflect the current practices, which have likely undergone significant changes in the last year in light of the ever-changing MHA programs and servicers’ own proprietary programs. Servicers should consider that much of the legwork on the policy end may already be done. Every MHA program requires participating servicers to have written policies and procedures in place. This means that servicers have identified participating (or non-participating) investors and investor limitations under pooling and servicing agreements that prohibit participation in all or part of one of the MHA programs. Reasons why certain loans are not eligible for certain MHA programs or features of a particular program must be documented. Alternative home retention program parameters should also be documented in policies and procedures.
Servicers should also identify areas where there may be discretion under offering loss mitigation options and develop clear and specific guidelines or criteria for the exercise of such discretion. Examples of areas that may allow for discretion under HAMP include determinations on imminent default, verifying borrower income and occupancy status, and calculating or verifying monthly gross expenses. Procedures should be designed to ensure that there is consistency in lost mitigation outreach efforts as well as decisions – HAMP and non-HAMP - based on objective criteria.
At the end of the day, consistency and documentation will be key to demonstrating fair servicing.
A fair lending/servicing program will be effective only if employees and third party service providers assisting with loss mitigation efforts receive training about the servicers’ fair lending/servicing policies and procedures.
Analysis of data is critical to understanding how the policies and procedures are working.
What will DOJ and other regulators look for?
Based on Mr. Perez’ statements, it appears that DOJ is not exactly sure what it will be looking for, hence the statements before Congress that DOJ will be examining the HAMP data as a starting point. At a high level, servicers should expect that DOJ and examining regulators will consider potential disparate treatment and disparate impact of strategies used to avoid foreclosure. In looking at policies and procedures consider the following questions:
Disparate Treatment: Have all borrower groups been treated and evaluated consistently for home retention and foreclosure alternatives, based on objective criteria?
Disparate Impact: Do the criteria have a disproportionate adverse impact on a minority group? If so, is there a strong and clear relationship between the criteria and legitimate business needs? What are the legitimate business considerations? Is there another way to meet them that could have a lesser negative effect on minorities?
These overarching questions should be answered in the policies and procedures; effective implementation can be measured by the data.
The Office of the Comptroller of the Currency’s 2010 Fair Lending Handbook is also instructive in identifying potential trouble spots in servicing operations. The Handbook now includes a section focused on examinations of loan servicing and loss mitigation practices. The OCC identifies 17 different “indicators” of potential disparate treatment in loan servicing and loss mitigation. These indicators include items such as:
-
Substantial disparities among loss mitigation servicing options by prohibited basis group characteristic
-
Substantial disparities in decision processing times by prohibited basis group characteristic
-
Significant disparities in completion of foreclosure actions once legal process initiated by prohibited basis group characteristic
-
Weak or non-existent process and controls to ensure ongoing fair lending compliance, including that of third party vendors
-
Lack of clear loan file documentation for servicing or loss mitigation decisions, granting of policy exceptions, or granting fee waivers
-
Broad employees discretion in determining loan servicing and loss mitigation options
-
Employee compensation based on workout, loss mitigation or foreclosure strategy adopted
-
Lack of clear consumer disclosures on loss mitigation options available, the costs of each option, and the risks involved.
Servicers should consult the OCC’s list to ensure that they have considered the “indicators” and have policies and procedures in place to ensure that all borrowers are treated consistently at every step of the loss mitigation process and evaluated consistently. Any disparities shown in statistical analysis should be justified by a legitimate business need that cannot be satisfied by other less discriminatory means. Servicers need to keep on top of employee training, and periodically evaluate employee incentives to determine whether there are any red flags.
Ideally, compliance with MHA programs should mean that there are no fair lending or servicing issues that servicers need to worry about. Unfortunately, nothing is ideal. As we learned from the HMDA data, understanding the numbers will go a long way in detecting and correcting any inequities, identifying the reason for what might be perceived as inequities, and preparing for and responding to regulator inquiries on fair servicing issues.
Lisa DeLessio is a partner with the Maryland office of Hudson Cook, LLP. Basis Points readers can reach Lisa at 410-865-5437 or by email at ldelessio@hudco.com.
Jean Noonan is a partner in the Washington, D.C., office of Hudson Cook, LLP. Basis Points readers can reach Jean at 202-327-9700 or by email at jnoonan@hudco.com.