Fair Lending Pitfalls: The CARES Act & Mortgage Loan Servicing
When Congress passed the Coronavirus Aid, Relief, and Economic Security Act (more commonly known as the CARES Act) last month, it included several provisions to help struggling consumers and borrowers—everyone from small businesses to mortgage holders.
Recognizing that different financial institutions, consumers, and small businesses would have a variety of different needs as a result of the COVID-19 pandemic, Congress built a lot of subjectivity into the law to increase flexibility. But with that subjectivity and discretion comes fair lending challenges.
When there are many legal ways to accomplish a task, it’s easy for lenders to make inconsistent decisions, opening the door to accusations of fair lending violations.
In this first blog in our series on the CARES Act and its potential fair lending pitfalls, we’ll focus on some of the fair lending challenges Mortgage Loan Servicers face as a result of the temporary servicing fixes of the CARES Act.
A Refresher on Servicing
COVID-19 has changed mortgage servicing processes as we know them with a series of temporary changes. Homeowners with federally-backed mortgages benefit from a foreclosure moratorium, including new and already initiated foreclosures, of at least 60 days as of March 18, 2020.
Financial institutions that service mortgage loans are very familiar with the servicing rules that first went into effect on January 10, 2014. They cover nine major topics:
- Providing billing statements
- Interest rate adjustment notices for adjustable-rate-mortgages (ARMs)
- Prompt payment crediting and payoff statements
- Force placed insurance
- Error resolution and information requests
- General servicing policies, procedures, and requirements
- Early intervention with delinquent borrowers
- Continuity of contact with delinquent borrowers
- Loss mitigation procedures
The CARES Act temporarily usurps the 2014 rules, changing early intervention, borrower contact, and loss mitigation procedures.
Early Intervention and Borrower Contact
Under the 2014 requirements, servicers need to:
- Make good faith efforts to connect with borrowers by the time they are 36 days delinquent to let them know of available loss mitigation options
- Present the same options in writing within 45 days of delinquency.
- Assign personnel and make them accessible to the borrower by telephone to answer questions about options, the status of any loss-loss application and any applicable timelines within 45 days of delinquency.
The CARES Act temporarily changes these rules. While regulators won’t cite FIs for not strictly following the mortgage servicing rule for early intervention, especially if there are staffing issues, FIs still need to have documented steps in place and demonstrate “good faith efforts.”
Make sure these policies and procedures address:
- Reaching out to the borrower. This includes calling the borrower more than once and sending written and/or electronic communications encouraging them to establish live contact.
- Deciding what constitutes “good faith.” Consider the length of the delinquency and failures to respond to repeated attempts at contact. Note: Live contact requirements don’t apply when a borrower is performing as agreed under the FI’s loss mitigation program.
- Updating written notice requirements. If the FI changes its written notice requirement as a result of the CARES Act, make sure this is documented.
- Maintain ongoing contact under loss mitigation procedures. The CARES Act’s requirements recognize the potential for staffing issues due to the pandemic. Policies and procedures should address these staffing shortages, including all areas of contact, borrower payment options, annual escrow statements, payoff statements etc.
Fair Lending Pitfall:
While flexibility during a pandemic is essential, an FI needs to decide how it will use these newly loosened options, document those choices in policies and procedures, and ensure they are properly executed. When guidelines for timeframes and contact methodology (i.e. phone calls, emails, letters, etc.) are left open-ended, it gives employees the ability to make their own choices.
The problem with employee choice is that it’s discretionary. Each employee will apply their own ideas to the decision-making process, which means similarly situated individuals may be treated differently, inadvertently leading to fair lending violations.
Under the 2014 rules, servicers are required to follow specific loss-mitigation procedures for mortgage loans secured by a borrower’s principal residence. The CARES Act changes several of them.
Eliminates need for loss-mitigation program applications.
Under the CARES Act, FIs may temporarily offer a short-term forbearance program or a short-term repayment plan without an application. A verbal request is enough. (Under normal circumstances, a borrower would have to submit an application for loss mitigation, which the servicer would have to acknowledge within five days, letting the borrower know if the application is complete or if any information is outstanding)
Fair Lending Pitfall:
An FI needs to decide how it will handle this allowance and then update policies, procedures, and guidelines to ensure that similarly situated borrowers are given the same lenience when it comes to applications (or lack thereof). These changes should be communicated to the necessary staff, including the length of time the temporary change will last.
Adjusts the rules for loss-mitigation and foreclosure.
Under the 2014 rules, FIs need to evaluate and provide a written decision for loss-mitigation applications within 30 days (if received more than 37 days before a foreclosure sale), determining whether the borrower is eligible for options like a loan modification or short sale. A borrower can appeal if the application is received 90 or more days before a scheduled foreclosure sale. Borrowers must be notified of incomplete applications within five days.
FIs can’t prepare to foreclose while evaluating a consumer for a loan modification (a practice known as dual tracking) or is appealing or compliant with the terms of a loss-mitigation option. They can’t begin the foreclosure process until a mortgage loan is more than 120 days delinquent. If a borrower submits an application after foreclosure has started but more than 37 days before a foreclosure sale, the foreclosure is put on hold until after a decision is made on the application.
The CARES Act makes temporary changes to these rules, including:
- FIs can offer short-term repayment or payment forbearance upon request.
- Flexibility on the five-day rule for incomplete applications. The five-day rule for an incomplete application isn’t a hard-and-fast rule. It simply must be sent before the forbearance or repayment period ends.
- Flexibility in notice. While two notices have to be sent, they don’t have to be tailored to each borrower and the FI can choose when to send them as long as it is prior the end of the forbearance period.
- Allows for incomplete applications. Servicers can choose to suspend reasonable diligence efforts to complete the borrower’s loss mitigation application while the borrower is performing under a short-term payment program.
Fair Lending Pitfall:
The loosening of time frames and loss mitigation requirements can lead to dissimilar treatment of requests. Management must determine how it will proceed with payment requests to ensure borrowers are treated consistently.
The temporary allowances provided for in the CARES Act will help many Americans stay in their homes. FIs need to carefully evaluate new options and account for their implementation in their policies, procedures, and processes—or face potential fair lending issues down the road.
Consistence processes allow similar individuals to receive similar treatment—the benchmark of any fair lending program. As always, Ncontracts is here to help you navigate your fair lending program during these challenging times. If you haven’t considered data analysis in the past now is the time. Let us show you how analytics can help your FI identify and help you mitigate disparities in lending practices.