This piece originally appeared in the May 2022 edition of DS News magazine, online now.
During the pandemic lockdown, an unprecedented number of borrowers suddenly entered into forbearance plans as state and local governments issued stay-at-home orders, shutting down economies and preventing many Americans from being able to go. to work.
As their incomes were reduced or even eliminated amid subsequent layoffs and business closures, homeowners were unable to make their mortgage payments. But the federal government quickly mobilized to prevent the next housing crisis.
Servicers were required to offer forbearance plans to consumers with federally backed mortgages who were impacted by COVID-19, but no proof of hardship was required from those borrowers. Even those who were not eligible for forbearance could not be entered due to an eviction freeze put in place by the Consumer Financial Protection Bureau (CFPB).
However, many questions arose.
Forbearance shouldn’t affect a homeowner’s credit rating, but could it be noted on their credit report, making it difficult to get new loans? Could borrowers still refinance their mortgage as interest rates fall to lower their monthly payments? Could new homebuyers buy a home and go into forbearance immediately afterwards? How would money from missed payments be refunded?
Although these issues caused confusion when forbearance was first introduced, the Federal Housing Finance Agency (FHFA) and other housing agencies have since issued more guidance and given mortgage lenders and managers the time to prepare their systems for the end of forbearance periods.
Now, as increased loss mitigation efforts are demanded of managers to help borrowers choose the best option after their forbearance ends, on the back of FHFA guidelines, the CFPB will likely see an opportunity to switch to full loss mitigation application mode. It is a matter of timing for the consumption regulator. As a reminder, the forbearance could be extended for loans guaranteed by Fannie Mae and Freddie Mac for 18 months. Many borrowers who entered forbearance near the start of the pandemic have since exited those forbearance periods.
Additionally, the CFPB’s eviction freeze ended at the end of 2021.
Now, lenders and managers will need to step up their due diligence efforts to better serve their borrowers and avoid unwanted attention from the CFPB, which is watching the market closely.
Regulators ensure fair treatment of borrowers
The CFPB announced in March that it was modifying its surveillance operations in order to better protect itself against illegal discrimination in the financial space. The Bureau said it will review discriminatory behavior that violates the federal prohibition against unfair practices. He said he will go even beyond where fair lending laws apply. The Bureau said consumers can be harmed by discrimination, even if it is unintentional. He said he would look at discrimination in all consumer credit markets, including credit, services, collections, consumer reporting, payments, remittances and deposits.
“When a person is denied access to a bank account because of their religion or race, it is clearly unfair,” CFPB Director Rohit Chopra said. “We will expand our anti-discrimination efforts to address discriminatory practices at all levels in the area of consumer credit.”
The CFPB previously warned repairers to prepare for the end of forbearance, saying “the unprepared is unacceptable”. He said repairers should start taking the necessary steps to prevent “avoidable seizures”.
“There is a tidal wave of distressed homeowners who will need help from their mortgage departments in the months ahead,” former CFPB acting director Dave Uejio said at the time. “Responsible repairers should prepare now. There is no time to waste and no excuse for inaction. No one should be surprised by what is to come. Our first priority is to ensure that Struggling families get the help they need Repairers who put struggling families first have nothing to fear from our oversight, but we will hold accountable those who cause harm to homeowners and families.
The CFPB has made its point clear: repairers need to have their loss mitigation efforts prepared in advance in order to help owners. The FHFA released a list of loss-mitigation options for its borrowers, saying those with Fannie Mae or Freddie Mac-backed loans can exit forbearance via:
- A lump sum payment of what was missed;
- A repayment plan that increases monthly payments until missed payments are repaid;
- A permanent loan modification to help reduce monthly payments; or
- A deferral to repay missed installments by adding them to the end of the loan.
Managers who are not prepared to work with their borrowers and guide them through these options could face serious consequences from the CFPB; these are the kinds of questions that the CFPB could begin to examine by looking more closely at discriminatory practices.
Keep communication clear and consistent
As expectations heat up amid increased demand for loss mitigation and heightened scrutiny from regulators, lenders and managers can ensure they stay ahead of the game by staying in constant communication with borrowers and ensuring that communication is clear and concise.
Often homeowners don’t know what options are available to them, or even that they need to contact their servicer if they are having difficulty with their mortgage payments. Clear communication through the right channels can help increase homeowner education and provide them with the tools and information they need to make the financial decision that’s right for them.
Partnering with a good document provider can help bridge this communication gap. Partnering with the right vendor can help improve critical communications and increase maintenance efficiency. At Mortgage Connect, we personalize communications with consumers to create a single point of contact to simplify the process.
The right technology partner should provide borrower solicitation, critical communications, and document execution in one place so the borrower knows where to look when they need information about their mortgage and mitigation options. losses.
How to strengthen due diligence efforts
Over the past year, a surge in origination demand has forced many lenders on a hiring spree, even offering hefty signing bonuses to underwriters to join their team.
Amid shortages of staff and new hires, defect rates began to rise.
Freddie Mac explained that default rates increased in 2020 among small lenders due to multiple factors, including breaches of temporary COVID-19 flexibilities, loan manufacturing defects such as missing documents and miscalculations. income and missing income documents.
But now the CFPB will increase its focus on these defaults and demand higher levels of quality control among lenders as defaults are expected to rise.
When the CFPB announced it would redouble its efforts in its discrimination review, it also said it would require financial firms to show their discriminatory risk and outcome assessment processes, including documentation of data customer demographics and the impact of products and fees on different demographic groups. He said he will look at how companies test and monitor unfair discrimination.
For mortgage lenders and managers, now is the time to double down on their due diligence, quality control (QC), and quality assurance (QA). The CFPB will closely monitor defaults, and choosing the right fintech partner can help lenders and services achieve the best QC for their borrowers.
The right technology partner could not only help lenders navigate their quality checks, but could also be implemented from the origination stage to eliminate defects due to human error.
Due to this increased need for quality control efforts, even fintech companies are beginning to expand their portfolio of offerings. For example, Mortgage Connect recently announced its acquisition of ADFITECH, a provider of outsourced mortgage services such as quality control, due diligence, execution, and document management services.
Lenders and services should choose a technology company that will bolster their quality control efforts as the CFPB moves into full execution mode and borrowers increase their demand for loss mitigation services. Lenders can put their borrowers and their business first by ensuring their quality control and due diligence is strengthened, increasing their communication with borrowers, and reviewing their processes for any signs of even unintended discriminatory practices. . Moreover, with the CFPB stepping up its enforcement and monitoring efforts, technology could once again be what separates the lenders and managers who come out on top from those who will be left behind.