20 state attorneys general take aim at mortgage servicers

State officials claim servicers failed to adhere to FHA loan modification program

Some Federal Housing Administration-approved mortgage servicers have routinely flouted the agency’s loan modification program, according to Washington, D.C. Attorney General Karl Racine and 20 other state attorneys general.

The attorneys general wrote in a Dec. 21 letter that a number of mortgage servicers employed by FHA-approved lenders failed to adequately implement loan modification options the FHA introduced in July. The loan modification options allowed eligible borrowers to reduce their principal and interest payments by 25%. FHA required mortgage servicers to implement the program by Oct. 21, 2021.

But rather than adhering to the program, some mortgage servicers of FHA-insured loans allegedly sent borrowers notices that fail to mention the relief options, requiring paperwork and imposing qualifications that are not necessary under the FHA’s guidelines. Servicers also told borrowers that the loan modification option did not exist, the attorneys general claim.

A spokesperson for the Department of Housing and Urban Development said the agency takes the concerns raised in the letter very seriously.

“FHA is committed to assisting homeowners struggling because of the pandemic to keep their homes if at all possible, and expects servicers of FHA-insured mortgages to take all necessary steps to work with borrowers, based on their individual situations, to identify the best FHA loss-mitigation home retention option available to them,” a HUD spokesperson said. “No homeowner with an FHA-insured mortgage who is struggling financially because of the pandemic should be unnecessarily hindered by their mortgage servicer from receiving the assistance for which they are eligible.”

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It’s unclear how widespread the alleged misdeeds are. But according to the attorneys general, they spanned more than one mortgage servicer. In a press statement accompanying the letter, the Washington, D.C. Attorney General’s Office said “several mortgage loan servicers employed and approved by FHA” had not adhered to the program.

FHA’s loan modification plan was envisioned to especially help low-income households, first-time homeowners, and households of color that have been disproportionately impacted by the pandemic. But the program can only be effective if lenders implement it, the letter notes, highlighting a challenge of designing government relief programs that rely on the private sector to carry them out.

The state attorneys general demanded the FHA take “immediate action” to ensure mortgage servicers adhere to the loan modification program. They also asked FHA to require its lenders to demonstrate their loan servicers are taking affirmative steps to implement the program.

The state attorneys general also raised concerns that servicers adequately evaluate borrowers for loss-mitigation, even as they await the $10 billion in federal aid from the Homeowners Assistance Fund.

“HAF should be a fund of last resort and should not replace servicers’ obligations to evaluate homeowners for all loss mitigation options,” the attorneys general write.

In a statement, Racine called the mortgage servicers’ misdeeds “illegal, unacceptable, and dangerous.” He added that they discriminate against low-income borrowers and borrowers of color, groups the FHA disproportionately serves.

“The purpose of the federal program is to reduce the displacement of families from their homes, and, as a result, thwart homelessness during the pandemic,” said Racine. “The truth is that too many FHA approved mortgage loan servicers have not been honest and transparent about the FHA’s protections for borrowers.”

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