By Melissa Richards
Wallace, Esq. of The Wolf FirmBy Melissa Richards
Wallace, Esq. of The Wolf FirmReprinted by permission from CALIFORNIA MBA'S CALIFORNIA FINANCE MAGAZINE
Loan
Servicing Issue July, 1997 (all rights reserved)
Introduction
During the past several years, the mortgage industry's focus in implementing and enforcing Federal fair lending laws has been on loan origination and pricing practices. However, loan servicers must be mindful that fair lending laws also apply to loan servicing and foreclosure practices.
Overview
Two of the principal Federal fair lending laws, the Fair Housing Act and the Equal Credit Opportunity Act ("ECOA") both prohibit discrimination by a lender against certain protected classes of borrowers during loan servicing, including loss mitigation/foreclosure servicing.
For example, the Fair Housing Act prohibits discrimination against protected classes of persons when providing "other financial assistance" in connection with residential real estate related transactions. In addition, the Fair Housing Act prohibits insurance redlining with a discriminatory animus. The U.S. Department of Housing and Urban Development's ("HUD") fair lending regulations illustrate loan servicing activities involving "other financial assistance" which it considers to be violative of the Fair Housing Act. They include:
- Failing or refusing to provide information regarding the availability of other financial assistance on a prohibited basis;
- Providing information concerning other financial assistance which is inaccurate or different from that provided to others on a prohibited basis;
- Adopting and/or applying different policies, practices or procedures in evaluating or in determining credit worthiness or other financial assistance on a prohibited basis;
- Setting different terms for other financial assistance based on a prohibited basis;
- Improperly taking into consideration prohibited factors when appraising residential real property; and
- Refusing to provide property or hazard insurance for dwellings, or providing such services differently, on a prohibited basis.
The prohibitions under ECOA are more straightforward. ECOA prohibits discrimination in any aspect of any credit transaction against the same protected classes of persons as the Fair Housing Act, with the exception of familial status and handicap. The term "credit transaction" includes every aspect of an existing credit extension including, but not limited to, information requirements; revocation, alteration or termination of credit; and collection procedures. In this regard, "credit transaction" includes the continuance of existing credit (i.e., loan forbearance, modification) without any special effort to collect at or after maturity.
Since these fair lending laws do have loan servicing implications, servicers' policies
and procedures should be reviewed, and their implementation continually monitored, for
equal treatment of all borrowers in the areas of collection, insurance, re-appraisal of
collateral, loss mitigation and foreclosure. In addition, the process of educating
protected classes on mortgage loan availability must not end once they are in the home;
the servicer must continue the education process throughout the loan term in order to
ensure that borrowers are availed an equal opportunity to remain homeowners and to
maintain their loans.
Credit Scoring Systems
Loan servicers are increasingly utilizing credit scoring systems (also referred to as "behavior models") in assessing the likelihood of a delinquent mortgage loan returning to current status through loss mitigation techniques (e.g., loan forbearance, modification, short sale) or continuing through to foreclosure. Proponents of these systems believe that they will reduce the risk of fair lending violations by removing the subjective judgment of a loan/collections/foreclosure officer. Cynics, on the other hand, caution that the use of these systems might increase the incidence of disparate impact on protected classes by replacing or downplaying the judgment, practicality and sense of fairness that humans can bring to the decision making process, particularly when the delinquent loan in question is marginal as to loss mitigation vs. foreclosure.
While the jury is out as to whether these systems will become a more effective tool in creating opportunity for delinquent borrowers to retain financing for their homes, the Federal Reserve Board ("FRB") has issued an amended Official Staff Interpretation to its Regulation B (ECOA) to require continued monitoring of the performance of credit scoring systems, in any aspect of the credit transaction, to ensure its predictive ability in a manner consistent with ECOA. If monitoring data reveals that the system is no longer identifying risk as predicted with statistical soundness, loan servicers must revalidate the system and adjust the variables for each score interval accordingly.
Until further definitive reports are published on the impact credit scoring systems have on protected classes, servicers should approach utilizing these systems as a useful and efficient tool for dealing with delinquent borrowers, and not as a final, definitive statement on eligibility for loss mitigation, particularly with respect to loans given marginal scores.
Addressing Compliance With Fair Lending Laws
To reduce the risk of fair lending violations, servicers should develop and implement policies and procedures covering these areas:
1. Homeownership Counseling Does Not End Once The Loan Is Funded. First time homebuyers, including persons in both protected and non-protected classes, require further educating on how to maintain homeownership once the loan is funded. Lenders should develop counseling programs addressing issues relating to, among others, collections, insurance/taxes, and loan delinquency.
2. Ensure Equality In Customer Service, Negotiations. All borrowers should receive the same beneficial presumptions and equal measures of assistance, diligence, patience and flexibility. Written policies and procedures for dealing with collections/loss mitigation/foreclosure proceedings should be created. Analysis should be done regarding to what extent there are deviances from those policies and who or what body approves those deviances?
3. Develop "Heightened Awareness" Training Programs. Lenders should develop training programs for loan servicing/loss mitigation/foreclosure staff in compliance with the Fair Housing Act, ECOA and their respective implementing regulations. Training programs should include ways of addressing actual and anticipated stereotype assumptions which might arise during all stages of loan servicing.
In understanding the impact that Federal fair lending laws have on loan servicing, we
as an industry can utilize those laws and related resources as a constructive tool in
educating the general public on retaining homeownership and truly realizing the
"American dream."
For further information please contact:
The Wolf Firm, A Law Corporation, is an "AV" rated law firm which concentrates on providing superior legal services to the mortgage banking industry. The firm's national clientele includes many of the largest mortgage bankers in the country, as well as a variety of savings banks, commercial banks, commercial finance companies, credit unions, and the Resolution Trust Corporation. With a staff of approximately forty individuals, including attorneys, certified paralegals, legal secretaries, administrators, clerical personnel, and a full time computer systems analyst, the firm represents its clients on a wide range of matters including all aspects of both residential and commercial/multifamily mortgage loan origination and servicing, securitization, regulatory compliance, bankruptcy, and litigation related to the foregoing in both federal and state courts throughout California. For more routine matters, such as residential bankruptcies, evictions and receiverships, The Wolf Firm has developed extremely cost-effective and efficient programs using specially trained paralegals and computer technology to assist its attorneys in handling these matters at rates that are the most competitive in the State of California and, through its membership in the USFN, the Firm is able to arrange similar services in virtually every state in the nation.
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