Magazine article Mortgage Banking

Regulators Target Fair Servicing: Regulators Are Now Analyzing Whether Minority Borrowers Are Receiving Loan Modifications on Par with Similarly Situated Non-Minority Borrowers. Consider the Following Risk-Mitigation Strategies for the Coming Wave of "Fair-Servicing" Examinations and Enforcement Actions

Magazine article Mortgage Banking

Regulators Target Fair Servicing: Regulators Are Now Analyzing Whether Minority Borrowers Are Receiving Loan Modifications on Par with Similarly Situated Non-Minority Borrowers. Consider the Following Risk-Mitigation Strategies for the Coming Wave of "Fair-Servicing" Examinations and Enforcement Actions

Article excerpt

Loan servicing has migrated to the forefront of national efforts to resolve the financial crisis. Government agencies and Congress have pressured loan servicers to modify home loans, usually by recasting payments or reducing principal, to aid homeowners whose loan balances exceed their home values. Simultaneously, the media, state attorneys general (AGs) and consumer advocates have spearheaded public scrutiny of loan administration, in the course of which some long-standing servicing industry practices have been challenged. * Although most homebuyers usually have some personal contact with the individuals involved in originating their mortgage loans, they typically are unfamiliar with the companies that service their loans. Borrowers, moreover, do not choose their loan servicers. * The loan servicer's traditional role has been as counterparty to an investor, obligated by a servicing agreement to protect the investor's interests. If a borrower is unhappy with the servicer's Loan administration practices, he or she cannot simply request a new servicer. * Loan administration is a complex undertaking requiring compliance with multiple laws, regulations, investors' and agency servicing guidelines, and privately contracted servicing agreements, performed in an environment where business customs and practices have developed over time. Some steps involved in residential loan servicing are not found in statutes or investor guidelines, but are business-process responses to particular needs or technology developments. * For example, the increasing use of personal fax machines a decade ago led to consumer requests for faxed payoff statements, despite a previous industry tradition of providing payoff statements by mail. Some servicers responded with modest "fax fees" to compensate for the additional work of faxing documents, leading to legal challenges to the propriety of the fees. Several states eventually adopted laws regulating the frequency and amount of fax fees, but others are still silent on the issue.

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Today, with e-mail replacing fax machines, borrowers may prefer to have electronic statements, but laws have not yet emerged to regulate servicer use of e-mail for borrower communications. Where laws are silent, servicers adopt internal procedures to guide their operations.

In a robust housing finance economy, servicing procedures are largely invisible to most people, because prompt monthly payments minimize the need for communications between borrowers and lenders. On the other hand, in a souring economy with a rising tide of mortgage foreclosures, more borrowers are receiving escalation letters, demand letters, collection notices and foreclosure notices, and loan servicing practices become the object of more intense regulatory and consumer focus.

A delinquent homeowner's first priority is to avoid foreclosure. As a response to the skyrocketing numbers of foreclosures from 2007 forward, lenders have put renewed emphasis on non-foreclosure alternatives such as short sales, loan modifications and payment-forbearance plans. These specialized loss-mitigation options are usually complex and document-intensive; moreover, borrowers must navigate the particulars of these alternatives at a stressful time in their lives.

Modification programs sprout foreclosure-rescue scams

Responding to a need for foreclosure alternatives in a souring economy, the Obama administration announced the Making Home Affordable program in 2009, claiming that as many as 7 million to 9 million homeowners could remain in their homes through refinanced or modified mortgages. Despite these predictions, the Congressional Oversight Panel, which monitors the state of financial markets and the regulatory system, reported in April 2010 that the Making Home Affordable program will prevent only about 1 million foreclosures, with 10 times as many homes being lost to foreclosure as saved through loan modification. …

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