Last month we focused on the effects of a rising interest rate market on originations to a Compliance Management Program (CMP). Today, let’s look at the fair lending issues facing servicers in a rising interest rate environment. As many of us lived it, the mortgage servicing and loss mitigation business was dramatically changed during the financial crisis from 2007 – 2012. HAMP provided common methodologies for calculating modifications by reducing interest rates and extending mortgage terms. The Dodd – Frank Act, the CFPB and investors then codified many of these programs. The Federal Reserve embarked on a multiyear journey to lower rates which ended abruptly last year.
Although there is no evidence that there is a wave of defaults coming anytime soon, it is important to review your loss mitigation tools that you use to help borrowers that are having difficulties making payments. In this rate environment, rate reduction may not be available. Millions of homeowners bought homes when rates were low and/or refinanced to take advantage of the low rates.
Forbearance will be the tool of choice. Make sure that you have clear procedures for all your loss mitigation tools. For FHA borrowers with rates lower than the current market rates an assumption could be the best solution. All servicers should do a quality check to see if HAF information has been made available to customers who are eligible. A simple email with this link could ensure that customers are aware of programs and have a chance to apply for these funds.
The best way to ensure that your servicing program is compliant with fair lending laws is to make sure that it is fair overall. You will need to have monitoring of exceptions that include race ethnicity, gender and marital status to ensure that everyone is getting the best loss mitigation solution. There probably will not be enough defaults to create statistically significant results by category but knowing what is happening in your portfolio is essential.
Prioritize and compare home retention results by category and then compare other options. The best fair servicing programs make sure that all borrowers get the most appropriate solutions for their situation. An important part of a successful servicing program is complaint monitoring. Complaints around foreclosure and loss mitigation should be among the highest priority.
For this series, I am focused on sharing snippets of the critical compliance issues we are facing as an industry. For more details, please email me jjaffee@housingfinancestrategies.com.