Jonice Gray Tucker and Valerie Hletko on Mortgage Fairness: Guideposts for Servicers

Jonice Gray Tucker and Valerie Hletko on Mortgage Fairness: Guideposts for Servicers

Fair Lending Refocused: Loan Modification and Loss Mitigation Outcome Reviews

Mortgage loan servicers are under growing pressure to proactively ensure "fair servicing" for all borrowers -- especially concerning loan modifications. In this Analysis, Jonice Gray Tucker and Valerie L. Hletko of BuckleySandler LLP examine potential guideposts for servicers to use in the absence of clear standards. They write:

Regulatory and Enforcement Attention on Default Servicing

     When the Department of Justice established a new Fair Lending Unit within the Housing Unit of its Civil Rights Division in early 2010 ("the Fair Lending Unit"), Assistant Attorney General for Civil Rights Thomas Perez emphasized a heightened enforcement focus on lending practices and consumer protection. Perez indicated that the Fair Lending Unit would focus on loan modifications, stating on June 23, 2010, that the Fair Lending Unit was "identify[ing] potential fair lending violations where much of the lending activity is occurring today-at the back-end of the process-in the loss mitigation process where mortgage modifications and servicing occur." In more recent public statements, officials in the Fair Lending Unit have continued to emphasize scrutiny of loss mitigation practices.

     Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Consumer Financial Protection Bureau ("CFPB") is tasked with enforcing the requirements of most fair lending laws, as well as promulgating regulations to implement new federal requirements. The Office of Fair Lending and Equal Opportunity has specific duties for oversight and enforcement of fair lending laws and coordination of the CFPB's fair lending efforts with those of other regulators.

     ....

Old Tool in a New Light: Matched-Pair "Plus"

     Traditionally, in fair lending analyses, regulators have focused on the potential for race-based outcome disparities with respect to loan originations. Evaluation of Home Mortgage Disclosure Act ("HMDA") data has been a focal point, particularly with respect to loan pricing. In evaluating such data, statistical analysis often is coupled with loan-level file review. Statistical screening of mortgage loan originations typically is intended to identify HMDA outliers-financial institutions with the largest, statistically significant pricing disparities.

     Subsequent to such findings, regulators often undertake a comparative loan file review to discern whether observed statistical pricing disparities are likely to be the result of discrimination or legitimate pricing factors. Testers select a sample of loan files from the protected class and control groups, reviewing the key underwriting factors and outcomes in order to identify possible differentials on metrics such as denial rates, pricing, or product offerings. The analysis evaluates whether any disparities can be explained by legitimate non-discriminatory business justifications. Where the institution cannot provide such explanations, examiners and enforcement officials have (rightly or wrongly) inferred that the disparities are due to discriminatory conduct. Financial institutions have incorporated many of the same testing techniques when undertaking self-monitoring.

(footnotes omitted)

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