Servicers Should Heed Fair Lending Compliance
Minneapolis-Servicers concerned about regulatory compliance may be overlooking or simply not paying enough attention to fair lending requirements when modifying loans. And that, insiders warn, is bound to eventually come to haunt them.
While modifying loans at risk of default as quickly as possible, servicers also need to make sure everyone is treated fairly and equally in the process, said Wolters Kluwer Financial Services senior consultant and statistician, Don Morrow.
Pro-active servicing platforms can be the first filter against CRA violations, which is why WKFS here expanded its loss mitigation offering to include state and federal lending compliance consulting services designed to help avoid discriminatory lending practices when modifying loans. The WKFS Loss Mitigation Service provides compliance information from HAMP, the Home Affordability Refinance Program and Hope for Homeowners, along with Freddie Mac, Fannie Mae, Treasury and Department of Housing and Urban Development guidelines. It also includes an online suite of settlement services. Plus, WKFS compliance consultants are available to help evaluate existing loan modification policies and procedures and help servicers address fair lending risks.
WKFS VP and mortgage business general manager Jason Marx, whose group has helped servicers initiate close to 60,000 HAMP trial modifications since the program began, says servicer challenges in meeting constantly changing HAMP guidelines include the complexity of implementation. And servicers will be even more pressured to meet HAMP requirements as they finalize trial modifications, so they should get ready, he said, because going forward regulators "will further intensify their scrutiny on fair lending compliance."
There are a few things to keep in mind, says CEO of Sterling Home Retention, Ron Morgan. First, Freddie Mac will audit all Fannie Mae servicers who are performing HAMP. Second, servicers need to be sensitive to fair lending compliance by offering the same borrower workout solutions across the board and not offer a variation of modifications that are outside the specific HAMP guidelines. They also need to look at RESPA violations because HAMP encourages lenders and servicers to look into refinancing options first. And to do that, banks need to comply with fair lending practices and RESPA requirements.
"Fannie says you cannot refi a borrower outside of the so-called negative 125% value of the property. They tried it at 110% and it did not work. Now they'll try at 125%."
Mr. Morgan finds that many servicers and service providers are not exercising fair debt compliance practices. Plus they are not licensed debt collectors, although some of them claim to be even though they are not. A recent audit showed that there are potential violations of these requirements, he says, which raises the question: Who has the credentials?
The reason some hedge funds and investors conduct a careful review of loan applications during originations is because it enables them to request from the originator or servicer to buy back the loan. And that is how these violations can come back to haunt servicers, Mr. Morgan says, even drain their funds with costly buyouts.
There are many reasons servicers need to pay special attention to fair lending requirements under HAMP, says Ed Kramer, EVP of regulatory programs for WKFS, and a former deputy superintendent of banks for the New York State Banking Department. "Right now we may not see regulators focus on CRA compliance," he said, but as they gear up to examine how lenders and servicers are complying with existing equal and fair lending opportunity requirements, and the law is very clear.
HAMP requires transparency and fair lending principles are applied throughout the loan modification process. A National Consumer Law Center report on updated HAMP recommendations notes, "Incentive payments for predefault homeowners are aimed at the necessary policy of ensuring that homeowners already facing hardship obtain sustainable loans, yet the additional funds for such reviews may implicate fair lending issues."
It warns that the home price decline protection program "may result in payments focused more on nonminority areas and should be reviewed for fair lending concerns," as are servicer incentives payments based on reductions in the dollar amount of a payment.
"If you discriminate your customer and a court of law decides that your firm exhibits a pattern of discrimination, the risk can be enormous," Mr. Kramer said, since it can be costly and damaging to the firm's public image.
Hence, he added, many servicers are evaluating all loan modification procedures starting with the data tied into a modification to certify it is consistent among borrowers of all demographic backgrounds.
Servicers need to make sure they review how fair lending complaints are handled, he said. "It helps avoid the risk of having a loan modification completed and denied for the wrong reasons if experienced staff monitor borrowers' minority status and CRA compliance." A last step in the process can be a statistical analysis of all completed modifications and a close look at compliance risk within the entire mortgage servicing cycle.
"Many fair lending mistakes can be caught during quality control," Mr. Morgan said. Sterling is currently conducting an internal review preparing for a Freddie Mac audit control on behalf of Fannie Mae loans since the company has processed approximately 20,000 such loans to date. "We're very sensitive to the fact that Freddie will make an example of a servicer, or service provider, just to show the world that they are doing their job."
It can result in financial and business reputation costs. In the case of United Security Bancshares Inc., Thomasville, Ala., allegations of unfair lending practices lead to a compensation settlement agreement with the Department of Justice to resolve allegations that its subsidiary First United Security Bank violated the Fair Housing Act and the Equal Credit Opportunity Act when dealing with African-American borrowers. Among other things USB agreed to and is now in the process of revising the standardization of its loan pricing policies, adopting marketing initiatives to expand its business base in predominantly African-American communities.