As a new Congress is seated and Democrats take control of the House of Representatives, one of the favorite new parlor games for mortgage market observers has been predicting what the priorities will be of the House Financial Services Committee under the leadership of its new Chairwoman, Representative Maxine Waters.
While much of the discussion regarding those priorities has centered on GSE reform, Consumer Financial Protection Bureau oversight, affordable housing and financial institution investigations, mortgage servicers should be mindful that they, too, may find their industry impacted by the chairwoman’s priorities. In fact, even before it became certain that she would take the committee’s gavel, Waters introduced legislation that signaled her intent to address concerns regarding servicer loss mitigation and foreclosure activities.
Making servicer oversight a priority
In the last Congress, Waters introduced two bills related to servicer oversight. In April, she introduced the Federal Housing Administration Foreclosure Prevention Act of 2018. Then, in June, she introduced a bill entitled the Homeowner Mortgage Servicing Fairness Act of 2018, which included similar provisions to those found in her previous FHA bill, but for conventional loans. Both of these bills demonstrate a strong commitment to preventing foreclosures, and evidence that she believes servicer failure to provide adequate and compliant loss mitigation too frequently yields unwarranted foreclosures.
The FHA Foreclosure Prevention Act of 2018 includes a number of requirements for the U.S. Department of Housing and Urban Development to ensure that servicers of FHA-insured loans are properly engaging with borrowers and are following FHA loss mitigation requirements. Specifically, the bill would:
- Require servicers to document compliance with FHA’s loss mitigation requirements prior to payment of a claim
- Enable FHA to order servicers to take corrective actions, “including barring foreclosure and cancelling from the borrowers [sic] account balance and from any insurance claim any interest and other fees that accrued during periods of non-compliance”
- Mandate that HUD create a loss mitigation complaint procedure for borrowers, including a website for receipt of such complaints, an appeals process for borrowers who disagree with HUD’s determination regarding their complaint and a prohibition on foreclosure for any borrowers whose complaints are under review by HUD
- Require servicers to provide notices to borrowers prior to initiating foreclosure that detail the servicer’s application of FHA’s loss mitigation waterfall and reasons that the borrower was not determined to be eligible for any home retention options available under the waterfall
The Homeowner Mortgage Servicing Fairness Act of 2018 would require FHFA to develop regulations that set forth specific requirements for servicers of loans guaranteed by a GSE. Provisions of the bill include:
- The creation of regulations that govern servicer internal controls, risk management, internal audit systems, solicitation and review of borrower complaints and documentation of borrower contact and loss mitigation
- Requiring servicers to submit corrective action plans for any failures in complying with the aforementioned regulations
- Granting FHFA the authority to take action to correct any uncured deficiencies on the part of the servicer, including the imposition of civil monetary penalties, mandatory transfer (without compensation) of servicing rights to another servicer and limiting deficient servicers from doing business with the GSEs
- Permitting FHFA to collect a fee to cover costs associated with the mandates of the bill
One priority among many
Despite Water’s interest in correcting what she sees as lax servicer oversight, it remains to be seen when and how she might seek to address these issues in light of the myriad number of pressing matters that are of interest to the committee’s members and their constituents. There are also some considerations that could pose obstacles to the reintroduction of these bills as currently drafted.
For example, how would GSE reform impact the feasibility of the Homeowner Mortgage Servicing Fairness Act? Or, does HUD have the staffing and technology resources to implement the borrower complaint system envisioned in the FHA Foreclosure Prevention Act? How would the expected increase in servicing cost and corresponding deterioration of MSR value impact origination pricing, and are Democrats willing to risk limiting access to credit for new borrowers to protect existing homeowners?
There is also the issue of the Republican-controlled Senate’s willingness to even consider such a bill if it were to make it out of the House.
What is certain is that this is an issue that isn’t going away. The concerns that form the basis for both of these bills are ones that have repeatedly been raised by consumer advocacy groups – which will have substantially greater influence now that the Democrats have retaken the House. Servicers should expect these issues to continue to be of interest to Waters.
Implications for servicers
When these bills were introduced, I and others in the industry sought to make clear to Financial Services Committee staff that the ends the congresswoman sought would best be achieved not by adding to the cost and burden of servicing FHA and conventional loans, but by leveraging technology to give regulators greater transparency into the outreach and loss mitigation options made available to borrowers. Continued reliance on servicer-reported data does little to mitigate the risk of poor or fraudulent reporting by servicers. And the potential for increased servicing costs, reduced MSR values, and/or diminished access to credit resulting from heightened reporting and compliance requirements warrants a different approach to achieving the congresswoman’s goals.
Implementation of the right technology solutions could offer transparency that virtually eliminates the chances for fraud or errors in reporting, providing the kind of borrower protection and servicer oversight Waters seeks. The automation of mandatory reporting actually decreases compliance burdens. I expect that future iterations of these two bills will focus on the utilization of technology to document compliance with servicing guidelines.
To prepare for such requirements, servicers should evaluate their IT capabilities and look to invest in the development or acquisition of robust reporting and analytic mechanisms that could be used to electronically deliver servicing and loss mitigation data to insurers and regulators in real time. Not only will this be necessary from a compliance standpoint, but these are smart investments from a business perspective – automating reporting and analytics functions creates efficiencies, reduces costs and errors, and strengthens compliance.
Servicers have made substantial investments to improve processes and technology that contributed to the widespread failures that occurred in the aftermath of the housing crisis. Now, it’s time to move beyond correcting past failures and to start preparing for the future of servicing.
