A new presidential administration and a clarion call from the Consumer Financial Protection Bureau has transformed fair servicing from a seemingly remote risk into a front and center mandate.
After the 2008 financial crisis, regulators enhanced long-standing fair lending examination guidelines to incorporate the concept of fair servicing. They began to scrutinize potential discriminatory loss mitigation and foreclosure practices and threatened to hold mortgage servicers accountable if such impermissible practices were identified.
Mortgage servicers prepared for the scrutiny, conducted fair servicing risk assessments, and brought in the quants to analyze their servicing portfolio for risk of disparate treatment and disparate impact — but the big discrimination actions did not follow.
Today’s regulatory environment feels different as COVID-19 has struck communities of color harder than others and equity and inclusion are at the heart of the Biden administration’s financial oversight initiatives. Whereas in the past it may have been acceptable for servicers to treat all borrowers uniformly, today, servicers are being pushed to double-down on active outreach.
Accordingly, it is crucial to refresh that fair servicing policy and create a fair servicing program, with attendant procedures, that reflects the environmental moment.
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Biden Means Business
On Jan. 26, President Biden signed an executive order committing to revitalize enforcement of fair lending laws to address the “ongoing legacies of residential segregation and discrimination [that] remain ever-present in our society.” The order pointed to the current racial gap in homeownership and the persistent undervaluation of properties owned by families of color as two such legacies.
Two days later, Acting CFPB Director Dave Uejio told staff the bureau’s twin priorities were protecting consumers facing financial hardship due to COVID-19 and racial equity.
This announcement promised additional supervisory and enforcement resources to ensure a “healthy docket intended to address racial equity.” It was accompanied by criticisms of mortgage servicer performance during the pandemic (even as servicers themselves disrupted by COVID-19 moved to remote operations and quickly began implementing new procedures to comply with a wave of requirements from regulators, legislators, and investors).
So What’s a Servicer to Do?
To be sure, mortgage servicers did not get a pass after the last financial crisis; the hammer dropped, but through a different legal vehicle. Regulators relied not on antidiscrimination laws, but on their sweeping authority to prohibit unfair and deceptive acts and practices to attack loss mitigation and foreclosure activities.
In so doing, the population of consumers who became focal points was broader, encompassing both members of protected classes and many others who were financially vulnerable.
Today’s cultural moment is potentially different than it was 10 years ago, and it is anticipated regulators will deploy the Equal Credit Opportunity Act and Fair Housing Act, and even state anti-discrimination laws, in novel ways to nudge servicers to do their part to support the equity agenda.
To that end, mortgage servicers should:
- Clearly define the commitment to serving borrowers in a fair and equitable way. A clear fair servicing policy setting forth the expectations of the board, or management, is a must, ideally accompanied by a written fair servicing program detailing roles, responsibilities, and controls. Off-the-shelf training reciting the basics of ECOA, the FHA, and other anti-discrimination laws may check the box, but consider whether you’ll be proud showing that to the regulator when asked for your fair servicing training materials.
- Confirm the sufficiency of outreach. At least one study has shown that borrowers in regions with a higher likelihood of COVID-19-related economic shocks and minority populations were more likely to obtain debt relief, but such results may not be sufficient to quell previously expressed policymaker concerns that investor and agency response has been insufficient to assist minority communities. The CARES Act forbearance requirements eliminated discretion regarding whether to offer forbearance, and on what terms, but servicers will undoubtedly be called upon to demonstrate that they engaged in sufficient outreach to offer borrowers of all races and ethnicities appropriate loss mitigation.
- Lock in your LEP strategy. On her way out the door, former CFPB Director Kraninger issued guidance on how financial institutions should engage the millions of U.S. consumers for whom English is a second language. The challenge is significant, given the complexities inherent to explaining mortgage servicing, but servicers who have not thought through the process do so at their own peril, and will no doubt be called to account for a lack of preparation.
- Document the great service you offered borrowers before making that referral to foreclosure. Hopefully a foreclosure tsunami like the one that hit during the last financial crisis can be avoided, but a backlog will surface given that foreclosures have essentially been frozen for almost a year. A good pre-referral checklist that documents outreach, consideration for a range of loss-mitigation options, and satisfaction of borrower concerns, will be critical for those called on to demonstrate to regulators their equitable treatment of borrowers. Servicers with sufficient account volume may also benefit from conducting fair lending statistical analytics regarding assistance and loss mitigation outcomes.
Mortgage servicers tend to focus on the detailed operational and technical challenges associated with regulatory requirements. Compliance with fair lending laws requires a different mindset — one that mortgage originators have long dealt with, but one that may be new to servicing operations.
The Biden administration has made clear it will chart a course quite unlike its predecessor, and concerns over equity are likely to require servicers to build, or at least enhance, the many components of a fair servicing program.
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