This is not easy to accomplish, given our country’s current, complex economic climate with loan modifications, forbearances, and all the related changing and confusing compliance requirements.
Regulators and lenders have not settled on specific fair servicing models, compliance practices, or uniform methodologies. Data is challenging and often not captured accurately or completely in standard servicing platforms. And, while regulators and lending institutions generally share a common understanding of fair lending pitfalls and what might constitute HMDA violations, fair servicing compliance very much remains a moving target.
The 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act introduced new loan forbearance requirements, with some guidelines issued subsequently by various agencies. While rules instruct servicers to offer payment holidays without penalizing borrowers’ credit or loan rates, servicers must guide borrowers through options and maintain the service quality that borrowers expect—all while remaining compliant in handling, notifying borrowers of available options, or modifying the loan. This adds operational complexity in maintaining equitable treatment in loan servicing, where service team members must deal with the uniqueness of each loan and borrower, as well as the various people and systems involved in day-to-day processes and maintenance.
Borrower Service Challenges
J.D. Power recently surveyed borrowers who had originated or refinanced mortgages with more than 30 of the nation’s largest servicers, and reported long wait times and little proactive communication. The survey was conducted during the March-April 2020 timeframe, near the beginning of the COVID pandemic, in a time of historically low interest rates, record-high unemployment, and rising delinquencies. The survey report analyzed onboarding, billing and payment, escrow account administration, fees, communications, and digital, live, and automated phone interactions. It also explored borrower satisfaction with risk/loan status, servicing transfers, tenure with servicer, and demographics. Survey results highlighted ongoing challenges for many servicers with borrower satisfaction, digital, and call center experiences, all further magnified in the COVID-19 environment.
Besides borrower experience challenges, servicers face uncertainty around the expiration of unemployment benefits and general economic concerns, which may continue to drive residential mortgage forbearance requests and delinquencies, along with uneven guidance on borrower treatment. For instance, guidance for government-backed Federal Housing Administration (FHA) and Veterans Affairs (VA) loans makes it clear that there may not be a lump sum payment required after forbearance. However, there continues to be conflicting information about repayment options, confusion about how to make up deferred payments when forbearance ends, and a lack of knowledge regarding borrowers’ rights, including the eligibility to receive forbearance at all. Outstanding FHA and VA loans make up about 20 percent of the market.
Regulators are Coming
In a recent special report, the Federal Housing Finance Agency’s (FHFA) Office of Inspector General states that Fannie Mae and Freddie Mac do not have adequate procedures to ensure that mortgage servicers are following the forbearance provisions of the CARES Act.
In addition, Congress increasingly is questioning whether mortgage servicers’ management of forbearance requests complies with the CARES Act. Following the upcoming election, attention on these matters is likely to increase
Servicers Need to be Proactive
As loan servicers tackle these challenges, they will need better insight into their operations. Data limitations make it hard to know with certainty if a servicing operation’s staff members are being entirely fair and unbiased when dealing with borrowers. Discriminatory behaviors may be unconscious or inadvertent, and can be difficult to detect without robust analytical capabilities.
Like most compliance challenges, this one will require policies and procedures, uniformly applied with monitoring and reporting. New technologies can help.
- Legacy servicing platforms must be set up to enable forbearance and deferred foreclosures, to track those steps without penalties, and to make subsequent terms or modifications in a fair and compliant way.
- Analyzing performance against stated procedure is important. It allows management to steer, train, or otherwise correct problem areas.
- Software created for this specific challenge can help lenders and servicers track practices and performance and manage complex loan forbearances and modifications authorized under the CARES Act.
Millions of homeowners have already taken advantage of mortgage forbearance and deferred foreclosures. Mortgage servicers need to get started now, building strong measuring and monitoring capabilities in order to advance the process of managing fair servicing risks. Deferring such action until the moratoriums end will leave servicers behind the eight ball in managing the challenges ahead.