Magazine article Mortgage Banking

Avoiding the 'Predatory Servicer' Label. (Servicing)

Magazine article Mortgage Banking

Avoiding the 'Predatory Servicer' Label. (Servicing)

Article excerpt

EVEN A MORTGAGE SERVICER WITH A topnotch default and loss-mitigation department could find borrowers labeling it a "predatory servicer" if it does not have adequate customer service tracking and appropriate monitoring to alert senior management to potential problems. This column focuses on steps that lenders should consider taking to avoid actions that could be considered predatory servicing by a borrower or regulator, and to ensure that any inappropriate actions are identified and dealt with swiftly.

Default and loss mitigation

The cornerstones to avoiding the "predatory" label are detailed policies and procedures, training, reinforcement and monitoring. There are several areas to review to ensure the company has procedures in place to treat borrowers fairly and that they are being followed.

The earlier in a default that servicers intervene, the more likely the servicer will be successful. There should be a system in place to alert the servicer immediately when a loan is past due or a borrower has failed to make a payment based on an agreed-upon forbearance schedule. Notices to the borrowers and attempts to contact them should be made in a timely manner, in compliance with state and federal requirements and insurer, guaranty agency and investor guidelines.

Early in the delinquency--ideally before two payments are past due--the servicer should notify the borrowers of alternatives to foreclosure, to encourage them to provide the financial information that is necessary to make a recommendation for a loss-mitigation alternative. Rules-based programs (such as Back in the Black, from Baltimore-based MSTD Inc.) can help guide the servicer through a series of questions and help gather information from the borrower that will be used to support the recommendation to proceed with a loss-mitigation alternative. This information helps to avoid subjective treatment of borrowers in the default process. The information should include the following:

* What is the reason for the delinquency?

* How long will this affect the borrower's ability to pay?

* Does the borrower intend to keep the house?

* Has the borrower sought debt counseling?

* Has the borrower sought housing counseling?

* What is the borrower's current income situation?

Open-ended questions will allow the servicer to gather the information that is necessary, with the borrower's cooperation, to formulate an appropriate loss-mitigation alternative. The current wisdom is that even after foreclosure proceedings have started, servicers should continue to explore loss-mitigation options.

Insurers and investors require that the servicer gather and document the borrower's financial information approving a loss-mitigation alternative. Instituting systems and controls that ensure each borrower is afforded the opportunity to qualify for a loss-mitigation alternative, and documenting all steps taken can demonstrate that the servicer is asking the right questions, gathering the required information and not making subjective decisions. With full information in hand, the next considerations are: Does the borrower qualify for a loss-mitigation alternative? If so, what is the best alternative to recommend: forbearance/repayment plan, modification, assumption, preforeclosure sale or deed in lieu?

Even if the servicer does not use rules-based software, it can still devise a script that will require the representative to gather the required information that will be used in the decision-making process, so that all borrowers are treated equally in its loss-mitigation efforts. It is equally important to document the borrower's response to loss-mitigation efforts.

Servicers can also take a proactive role to identify uneven treatment of borrowers. For example, regularly review a report of loans that are delinquent more than 90 days but not in foreclosure and a report on loans less than 90 days delinquent but in foreclosure. …

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