Mortgage servicing – planning ahead for your next regulatory review
Mortgage servicers have been in reaction mode since the onset of the pandemic more than three years ago. The general consensus is that servicers performed very admirably when reacting to pandemic policies by implementing procedures quickly to avoid servicing challenges for borrowers. The success of the industry’s response, however, is clouded by inconsistency in how servicers are performing. In addition, the current inflationary situation and economic indicators are pointing to the possibility that this difficult environment will persist into 2024.
Previously, regulatory agencies have lacked the resources to effectively monitor the behaviors of servicers. However, as Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra suggested at the Mortgage Bankers Association’s National Secondary Conference in May 2022, servicing has been the focus for agencies. The prospect of a regulatory audit for a servicing operation can be daunting. However, with a detailed action plan and sufficient planning to shore up identified areas of concern it can be managed effectively—especially if the performance gaps fall within the key observations of CFPB reports. Results of these CFPB servicing audits can be found in the CFPB’s Supervisory Highlights publication at Supervisory Highlights | Consumer Financial Protection Bureau (consumerfinance.gov).
Conducting thorough policy review
The first order of business is to conduct a thorough review of the policies and procedures that define requirements for how the servicing operation runs in accordance with all applicable regulatory, agency, and Government Sponsored Enterprise (GSE) guidelines. Next, a gap analysis must be performed evaluating what is codified in the document against expected applicable practices. In addition, an effective change management process provides an auditable trail of updates that demonstrates a proactive approach to servicing policy management. The dissemination of policy and procedural changes—coupled with the relevant associate training—within the servicing organization further bolsters the foundation of effective and compliant operations. Having current and detailed policies and procedures is a great base, but periodic QC (Quality Control) testing is critical to understanding how the servicing operation performs to those expectations. QC testing results can signal the need for course corrections or provide confidence during regulatory findings.
The good news is that the CFPB is being transparent in signaling what their specific focus will be in terms of the mortgage industry. The Mortgage Servicing COVID-19 Pandemic Response report, issued in May 2022, noted some key observations:
Call center metrics – With a focus on hold times and abandonment rates, borrowers may not be able to secure the needed assistance to guide them through their mitigation options.
Delinquency and forbearance – Too many borrowers exited their forbearance plans in a delinquent status with no loss mitigation measures in place.
Data challenges – A lack of reporting data on key metrics raises questions about a servicer’s tracking and reporting capabilities, including but not limited to:
- Interactive Voice Response (IVR) navigation – A lack of data on time spent before reaching a live agent
- Demographics – Inconsistent tracking and maintenance of data on each borrower’s race, ethnicity, and language preference
- Language options – Potential disparate treatment and outcomes for limited English proficiency (LEP) borrowers versus non-LEP borrowers
Area of focus: The borrower experience
Using these key observations, a servicing operation should focus on the borrower experience and the metrics by which the CFPB will judge them: (1) the number of call center inquiries; (2) the average hold time for the borrower or average speed to answer; (3) abandonment rates; and (4) how long it takes to address the borrower’s reason for calling.
Because of the availability of data on the average answering speed, the CFPB was able to make a distinction between borrowers navigating the IVR system and the queue time to speak with a live person or just tracking (due to lack of data) queue time to speak with a live person after exiting the IVR system. A lack of awareness about IVR time could “indicate a potential weakness in a servicer’s monitoring and compliance with requirements.”
Area of focus: loss mitigation strategies
Since the pandemic started the industry reacted quickly when it needed to, providing CARES Act assistance to over 5 million borrowers and moving them into mortgage forbearance programs that allowed them to remain in their homes throughout the pandemic. The anticipated spike in loss mitigation activity has not manifested in a meaningful way yet but reviewing loss mitigation processes will help servicers prepare if foreclosures increase.
The activity should comply with all applicable loss mitigation requirements, including providing timely information about modification options and the timing and processing speed for the evaluation of modification applications while suspending foreclosure processes during the review and approval period.
Another important regulatory consideration is a servicer’s Fair Debt Collection Practices Act (FDCPA) compliance. The nuance of FDCPA compliance is still being refined through CFPB clarifications and court cases, but, in general, servicers should engage with borrowers without hint of behavior that results in the borrower feeling underserved or harassed. Additionally, in managing loss mitigation activities, servicers should have a sound Servicemembers Civil Relief Act (SCRA) compliance workflow to ensure that eligible service members and their families are afforded the protections defined in SCRA.
While not required by regulation, having a Homeowner Assistance Fund (HAF) policy in place is an effective loss mitigation tool to assist borrowers that have had a hardship associated with the pandemic and that meet the income limit requirements in the state in which the subject property is located. It also can be viewed as “useful extra credit” in the context of a broad regulatory audit.
In the event a borrower exhausts the available loss mitigation options—modification, short sale and deed-in-lieu—and the servicer is forced to foreclose, the servicer must have an effective policy and plan in place to address foreclosure-related activities. The servicer must know the occupancy status of the property and if there are appropriate protections in place for tenants if the property is a rental. Is the servicer managing the property disposition process or do they have effective oversight of their vendor to perform the required maintenance activities?
Area of focus: fair servicing analysis
Equity and non-discrimination are key themes of Chopra’s CFPB, and servicers should keep them in mind for all policy implementations. In terms of servicing practices, keeping a sharp eye on the results of servicing activities and outcomes across different social demographics, income strata and geographic variances will help servicers identify potentially disparate treatment issues within their portfolio.
Language preference deadline
The CFPB has noted that the failure of a servicer to provide access to information in a clear and transparent manner and in particular the lack of support for limited English proficiency borrowers could be viewed as being violations of the Equal Credit Opportunity Act (ECOA) and other federal consumer financial laws. The Federal Housing Finance Agency’s (FHFA) mandatory implementation for lenders to collect a borrower’s language preference to sell loans to Fannie Mae or Freddie Mac became effective in March 2023. It should be apparent to servicers that proactively managing future expectations would be well met in a regulatory audit.
Before the pandemic, servicing organizations had already been engaged with the development and deployment of alternative techniques to communicate with borrowers based on their preferences. This included determining preferred contact methods, customizing communications and leveraging the media to enhance reach, utilizing informational portals and self-help tools to educate borrowers independently, providing resources in multiple languages for LEP borrowers, and so on. The intensity of the pandemic and CARES Act response accelerated their use.
The CFPB has noted the following deficiencies in its recent publications:
Fees charged for phone payments were "sizable" when consumers were unaware of the fees (CFPB found that consumers were charged $15 for phone payments and this charge was not disclosed to the consumer)
Fees charged for loans under CARES Act forbearances were illegal (CFPB found that borrowers were injured as a result of imposed illegal fees charged to their accounts)
- Section 4022 of the CARES Act prohibits a mortgage servicer from imposing “fees, penalties, or interest beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the terms of the mortgage contract”
Failure to provide CARES Act requests for forbearances timely or not at all and additional fees were added to accounts
Servicers misrepresented payment amounts sufficient for the acceptance of a deferral offer
Servicers did not maintain policies and procedures "reasonably designed to achieve the objective of properly evaluating loss mitigation application,” including the following elements:
- Informing borrowers of all loss mitigation options available
- Proper evaluation by the servicer of all loss mitigation options available to the borrowers eliminating any improper denial of certain deferral options
Late fees were charged in excess of agreements (Notes)
Late fee amounts/percentages were charged based on state-level maximums rather than the amounts/percentages on the agreements (Notes)
Unnecessary property inspection visits were to known bad addresses
- Property inspections reports were provided to the servicer indicating the address was not valid; however, the servicer continued to request an inspection to the same, bad addresses and charge the accounts for these services
PMI charges that should have been invoiced and paid by the lenders (lender-paid PMI) but were charged to the borrowers
Failure to terminate PMI at 78% of the scheduled principal balance, if the loan is current
- [Ensure a data field within servicing system captures the date on which the scheduled balance is to reach 78% (this date is provided at closing to the borrowers)]
- [Please note that when a loan is modified, the cancellation, termination, or final termination date changes based on the new amortization schedule under the modification agreement – this is in accordance with 12 U.S.C. 4902(d)]
Late fees were charged in the month following the end of the forbearance period when the statements generated during the forbearance period (last month of forbearance) may have indicated $0 late charge
The general success of the industry’s response, however, is clouded by inconsistency in how servicers are performing. Economic indicators and the current inflationary environment are pointing to the potential for continued choppy waters for mortgage servicers into 2024. Advance planning, proactively assessing operational efficacy, and adhering to established policies and procedures will provide a great defense for a servicer in the face of a regulatory audit.
