Mortgage Servicers Face Forbearance-Exit Tsunami and Aggressive Regulators

By John Hintze

Millions of homeowners are anticipated to exit forbearance programs this fall and winter, with many behind on their mortgage payments, and mortgage servicers had better be ready. Indeed, in the headline of an April 1 compliance bulletin, the Consumer Financial Protection Bureau warned them that “unprepared is unacceptable.”

Panelists in two sessions of ABA’s 2021 Regulatory Compliance Conference agreed that the tsunami of troubled mortgages exiting forbearance represents an imminent challenge for lenders. In fact, mortgage servicers have faced unprecedented challenges since the start of Covid-19, when business suddenly turned remote and lenders were bombarded by new rules and guidance. This time around, however, regulators are emphasizing little leeway for lenders who fail to prioritize borrowers’ needs.

“There is no time to waste, and no excuse for inaction,” wrote former CFPB Acting Director Dave Uejio in the bulletin. “Servicers 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 bulletin notes that industry data points to nearly 1.7 million borrowers exiting forbearance programs in September and the following months, with many of them a year or more behind on their mortgage payments, and that servicers should be preparing now. It goes on to describe eight broad servicing areas on which to focus, making the overarching point that many borrowers are still impacted by Covid, will not be able to cover payment deficiencies immediately and will need long-term relief.

“The CFPB is making it clear that it’s going to pull out all the stops to ensure servicers are doing what they can to help borrowers impacted by Covid,” says Jason Bushby, partner at Birmingham-headquartered Bradley Arant Boult Cummings. “I would encourage servicers to really staff up if they haven’t already.”

Bankers participating in the conference panels noted several considerations for servicers in light of the bulletin and future examinations, and they pointed to customer complaints as a key indicator for where regulators will focus.

“Are you seeing complaints in certain areas and have you looked into them, dissected them to understand the root cause, and remediated them?” asks Lynn Tarantino, chief control officer at Cenlar FSB, a federally chartered thrift that provides subservicing for the 3.3 million loans of 141 financial-institution clients. “Getting ahead of those will be very important. We all know that complaints are the breadcrumbs leading to issues in the organization.”

Aaron Rykowski, chief compliance officer at WesBanco Bank, a West Virginia-based midsize institution with 25,000 loans, noted the importance of analyzing complaints in the CFPB’s database that have been leveled against the specific lender or the vendors it works with.

“That’s the first place [regulators]are going to go,” Rykowski says. “They’re going to pull the complaints, look at your response times and how you responded, and whether you identified issues that could have impacted other customers or just handled things on a one-off basis.”

Rykowski adds that complaints may prompt examiners to question how an account was handled, and servicers must carefully document the steps taken to address issues. Complicating matters is that the unprecedented nature of the pandemic likely required servicers to deviate at times from their standard procedures—to be expected as long as they were handled properly.

“What process deviations were approved by your management team, and how did you document the changes in your standards to get through the pandemic, so you could still accurately and adequately service your customer accounts?” he says.

The issue of how mortgage servicers handle customer accounts has come to a head this fall, as foreclosure and eviction moratoriums have mostly ended but gainful employment remains elusive for many.

“The biggest risk we’re going to see from a borrower perspective is what’s going to happen when all these assistance programs come to an end at the same time, leaving a gap,” Rykowski says.

The challenge for servicers, he says, will be addressing that gap and figuring out how to assist borrowers who had little control over the pandemic’s impact on their lives. He noted that many customers may face diminished employment opportunities. So how can servicers evaluate them in the context of more traditional methods to prevent foreclosures?

“Many servicers are going to have to go back to the drawing board and look at what we’ve designed and whether our standard products and options fit what’s going to happen in that period before we get back to full employment,” Rykowski says.

Tarantino added that servicers must seek to forecast as accurately as possible their pipeline of potentially problematic mortgages, to project the staffing implications not only for call centers but functions including loss mitigation, foreclosure and bankruptcy. She says that now is the time for servicers to review their pre-foreclosure checklists to make sure the critical regulatory requirements are embedded in policies and procedures, ensuring customers are not prematurely referred to foreclosure.

Another major risk, she adds, is how servicers are responding to borrowers’ requests for loss-mitigation assistance and processing loss-mitigation applications, and how they effectively helped those borrowers by promoting available options, reducing avoidable foreclosures and the related costs.

Seeking to help borrowers in the best way possible, however, can raise concerns about fairness if borrowers are perceived as being treated unequally.

“The guidance says one thing, but the best thing for a specific customer may be something else, so how does the servicer balance this?” Tarantino adds.

The unfair, deceptive or abusive acts or practices (or UDAAP) provision of the Dodd-Frank Act, for example, gives the CFPB rulemaking and enforcement authority to prevent unfair, deceptive or abusive acts or practices in the consumer-finance realm. Jonathan Kolodziej, partner at Bradley, says the CFPB has already indicated in public statements that it intends to use its UDAAP authority to enforce requirements under the CARES Act where there isn’t already an authority or agency tasked with its enforcement.

“We think the new administration will be aggressive and, quite frankly, willing to press the boundaries, since they can’t really know the limits of their authority unless they test it,” Kolodziej said.

Bushby points to loss-mitigation communications related to Covid as a key area where the CFPB will likely employ UDAAP, analyzing whether communications to borrowers were understandable and clearly reflected the programs the servicer had in place.

“Examiners will look at the CFPB’s servicing rules, but if they find other things that don’t smell or look right—something really confusing or employing a bait-and-switch-type approach—that’s where UDAAP comes in,” Bushby says. “We’ve already seen it and we’ll see more.”

The issue of unequal treatment can arise when borrowers speak English as a second language. Tarantino says she sees that as an important area for the CFPB, and one her federally chartered thrift’s prudential regulator has already focused on.

“Servicers need to make sure they were supporting homeowners for whom English is a second language, and having the statistical analysis to show that there was no disparate treatment is going to be very important,” she says.

The early days of the pandemic were unprecedented across virtually all industries and mortgage lending was no exception, with mortgage bankers and staff in home offices disrupted by their children and often working with insufficient technology. In addition, new laws, regulations and guidance were being issued at the federal and state levels, requiring lenders to make important decisions often in short order and without sufficient information. Mortgage servicers undoubtedly made mistakes, and to their chagrin examiners as well as potential litigants will be viewing those moves with the benefit of hindsight.

Bushby says he frequently hears clients saying that if the CFPB looks back a year ago or more and finds problems, there’s little to be done about it. That may be true to an extent, he added, but it also greatly benefits mortgage servicers in an examination or facing an enforcement action to show how they internally identified issues and remediated them.

“Get in there and fix it, and I think you’ll get some brownie points,” he says.

John Hintze is a frequent contributor to ABA Risk and Compliance.