In May 2022 in New York at the National Secondary Conference, Consumer Financial Protection Bureau (CFPB) Director, Rohit Chopra, took the stage with the MBA’s President and CEO, Bob Broeksmit, CMB, for a candid conversation around technology, servicing and credit in the mortgage business. Chopra specifically called out mortgage servicers citing that their “failure would be very messy and not good for the homeowner.”
It is not surprising that the CFPB has increased its scrutiny of mortgage servicers, particularly as the industry moves from a COVID-19 pandemic-induced emergency state to a more normalized servicing environment. Early on in the CARES Act implementation, there was an acknowledgement that oversight of servicing responsibilities was light at best. A July 2020 report from the Federal Housing Finance Agency’s (FHFA) Office of Inspector General (OIG) noted that the agencies were relying on their representations and warrants with their servicers that all applicable laws and regulations were being adhered to. The OIG also acknowledged a lack of consistency in terms of eligibility of CARES Act claims and forbearance obligations post-pandemic.
The good news is that the CFPB is being fairly transparent in signaling what their specific focus will be in terms of the mortgage industry. The Mortgage Servicing COVID-19 Pandemic Response report, issued in May, noted some key observations:
The other good news is that the muscle memory developed out of the financial crisis of the late 00’s showed that the industry could move quickly to react and deploy meaningful resources in anticipation of the needs of their borrowers to assist them at the onset of the pandemic, and since then. As Broeksmit accurately pointed out and notwithstanding the acute economic crisis the country found itself in, over five million borrowers were directed into mortgage forbearance programs and millions of borrowers remained in their homes throughout the pandemic.
While servicing organizations had already been engaged with the development and deployment of alternative techniques pre-pandemic to communicate with borrowers based on their preferences, (e.g. determining preferred contact methods, customizing communications and the media leveraged to enhance reach, developing or enhancing informational portals and self-help tools to educate borrowers independently, providing resources in multiple languages for LEP borrowers, etc.) the intensity of the pandemic/CARES response accelerated their use.
The general success of the industry’s response, however, is clouded by inconsistency in how servicers are performing. In addition, economic indicators and the current inflationary environment point to the potential for continued choppy waters for mortgage servicers for the remainder of this year and into 2023.
The AEI Housing Institute’s National Mortgage Risk Index, which measures how a mortgage might perform if subjected to the same stress as seen in the late 00’s financial crisis, had reached a low water mark of 9.3% in September of 2020, meaning loans originated in September of 2020 would face an anticipated stress-based default rate of 9.3%. Since that time, the index has steadily climbed to 11.3% in February of this year (the most recent month available) and it is safe to presume that since the general financial outlook hasn’t improved, we’ll see the index continue to rise.
Holistically, the borrower’s experience with the servicer can be correlated to the originator of the loan. Regardless of the experience the borrower had with the loan originator, a substandard servicing experience can hinder the originator’s ability to build a meaningful repeat/referral relationship with the borrower, so it’s critical that mortgage originators factor in the servicing experience, be it from their own servicing operation or the subservicing relationship. According to the CFPB report, it appears servicers in general are doing well but there is much room for improvement.
Some considerations for your servicing obligations:
Has the servicing operation faithfully fulfilled all of its obligations under the CARES Act since it was enacted in March 2020? The regulatory agencies may have lacked the resources at the onset of the pandemic, but the clear signal from the CFPB on servicing oversight makes the question of a regulatory audit a matter of when, not if. In addition, having detailed policies and procedures is a great base, but understanding how the servicing operation performs to those expectations can signal the need for course corrections or provide insulation from regulatory audits.
The servicing operation should have a high-level assessment of the incumbent gaps known to exist between policies and procedures, regulatory requirements, and operational practices, and a detailed action plan to address them, particularly if the performance gaps fall within the key observations of the CFPB report. If there are new technologies being contemplated, does the organization have the appropriate resources to effectively manage the development, deployment, and ongoing management and optimization of those technologies?
Chopra spoke about technology and certainly encouraged the use of data, analytics and predictive modeling to help guide servicer actions, but also warned that servicers would need to be able to validate that the decision-making processes are not flawed by unintended but potentially discriminatory models.
Equity and non-discrimination are key themes of Chopra’s CFPB, and servicers should have this as a key underlying consideration for all actions moving forward. The CFPB has noted that the failure of a servicer to provide access to information in a clear and transparent manner and in particular the lack of support for LEP borrowers could be viewed as being violations of the Equal Credit Opportunity Act (ECOA) and other federal consumer financial laws.
By coupling the above mentioned CFPB key themes with the FHFA’s March 2023 mandatory implementation for lenders to collect a borrower’s language preference in order to sell loans to Fannie Mae or Freddie Mac, it should be apparent to servicers that proactively managing to regulatory future expectations for data collection would be well met by our regulators.