By Edward Kramer, Executive VP, Regulatory Programs
As U.S. mortgage servicers ramp up their loan modification efforts to help slow the exploding number of home foreclosures, the primary focus on doing so is mitigating financial losses for both the financial institution and borrower. However, the Treasury Department recently issued guidelines reinforcing the importance of compliance with fair lending requirements when modifying loans within its Home Affordable Modification Program (HAMP). Regulators have put forth notice they’ll intensify their scrutiny of servicers’ fair lending compliance. Regulators are already in the process of perfecting a methodology for reviewing banks’ practices to ensure consumers are treated fairly and legally and that banks are in full compliance.
My prediction – loan modifications will be the next fair lending frontier.
Operationally, loan servicers need to process large spikes in loan servicing activity efficiently. At the same time, they need to meet all regulatory requirements related to refinancing, modifying and servicing loans in an increasingly-complex and rapidly-evolving compliance landscape. While modifying loans at risk of default as quickly as possible is paramount for servicers and their borrower, so is making sure everyone is treated fairly and equally in the process.
Regulators are now looking at the fair lending implications during these processes, so mortgage servicers and banks need to look first. Before your regulator arrives, look at your loan modification program and be able to answer these questions:
- What criteria are used to determine eligibility?
- How are you monitoring and testing to determine whether minorities and other protected classes are being offered the same programs under the same timing?
- What “types” of loan modifications are offered?
- What kinds of fair lending monitoring and testing are being done in servicing and loss mitigation?
- What is being done to mitigate the inherent compliance and fair lending risks associated with loan servicing?
My advice? Start testing, start measuring the impact, and start making adjustments to your programs to remedy any appearance of disparate treatment or disparate impact.
