PERSON OF THE WEEK: Mortgage servicers handling loans in COVID-19 forbearance plans are under close scrutiny by the Consumer Financial Protection Bureau and other regulatory bodies to ensure that loss mitigation activities give borrowers every opportunity possible to stay in their homes.
And, in order to not draw additional scrutiny, servicers must deliver flawless customer service to borrowers in forbearance plans, so as to not draw complaints that will get them “red flagged” by the regulatory bodies.
To learn more about the regulatory compliance challenges mortgage servicers currently face, particularly with regard to borrowers in forbearance, MortgageOrb recently interviewed Pete Pannes, chief business officer for Covius, a provider of tech-enabled services to the financial services industry. Pannes oversees Clayton’s Servicing Oversight practice and Covius’ Compliance Services.
Q: Recently 20 state attorneys general addressed a letter warning servicers that they are being watched as forbearance rules expire and loss mitigation activities, including foreclosures, recommence. Do you think this was warranted and what has been your clients’ reactions to this development?
Pannes: I think it’s reasonable to expect regulators, not only at the state but also federal level, to scrutinize servicers’ responses to borrower needs brought on by the pandemic to ensure they are adhering to COVID-19-related requirements and relief options. The warning letter is respectful but lays out clear expectations as to certain borrower transitions out of loss mitigation as COVID-19-related forbearances end. The CFPB is ramping up its enforcement activities and has been very clear that “being unprepared is unacceptable.”
Clients, in turn, are making it clear to their vendors that they must stay abreast of all of the applicable regulations and that they will be held accountable for non-compliance when it comes to loss mitigation activities. So, the message the regulators are sending is being heard and passed down the line.
Q: What do you see as red flags that will draw regulators’ attention?
Pannes: Consumer complaints really drive increased scrutiny. An unusual uptick in consumer complaints will likely be viewed as a red flag that potentially non-compliant activities or interactions are occurring. Servicers should be prepared to address increases in consumer complaints and develop strategies to proactively manage escalations.
For example, are there complaints about unclear and/or “out-of-compliance” communication with borrowers – both written and verbal? Do they suggest that there may be a lack of defined processes or a need for better oversight and controls?
Regulators will expect clients to recognize these warning indicators and address them proactively.
Q: What steps should servicers take to make sure they are in compliance with federal, state, local and investor COVID-19 guidelines as they try to assist delinquent borrowers?
Pannes: Servicers need to have the structures in place to quickly implement new guidelines, which means identifying the impacts of new requirements and being able to operationalize them by the given deadlines.
The loss mitigation process often has lots of moving parts, and servicers need to make sure that all of their partners are effectively aligned and have the necessary tools to monitor and quickly identify new guidelines, ideally tracking them as they are proposed for maximum lead time.
At our firm, we track servicing-related legislation and regulation as it is proposed, and well before it is enacted. This provides both us and our clients maximum lead time to implement a change in a compliant way. It also enables us to quickly update and modify our template libraries, so servicers can be assured they are using compliant documents.
In activist states, like New York and California, we’re seeing servicers engage with outside counsel to augment internal Iegal and compliance resources. Clients are also sharing their insights with peers at compliance-focused events, such as our monthly compliance webinars.
The goal of all of these activities is to ensure that everyone in the servicer ecosystem has a clear understanding of any existing forbearance or loss mitigation agreements that are in place, and that they understand all of the options — loan mods, deed in lieu and short sales, for example –to avoid foreclosures.
Q: Not every borrower is going to be a good candidate for modification. Some will unfortunately move into foreclosure status. What would you say are the best practices for loss mitigation and foreclosure activities in the new post-COVID era?
Pannes: Currently, there are more than 940,000 seriously delinquent borrowers, many of whom were delinquent before the pandemic began. This group of borrowers is going to require different levels of assistance and treatment than the millions of borrowers who have already exited forbearance.
These borrowers, like all impacted customers, will require clear and documented information so they know their options as well as the options that do not apply to their scenarios.
Prior to undertaking more serious loss mitigation actions, servicers need to make sure their policies, procedures and vendors are compliant and will withstand scrutiny. Clayton’s Servicing Oversight Group routinely reviews and stress-tests servicer readiness in these areas and helps familiarize clients with the CFPB Reg X expansion that addresses a borrower transition from forbearance plans.
Q: When do you think more traditional remediation processes will really begin again? Are all participants in these processes – vendors, attorneys and even the courts – ready?
Pannes: If by traditional remediation you mean moving toward foreclosure, that will begin when servicers are confident that they have the processes in place to ensure adherence to all guidelines (e.g., federal and state laws and regulators as well as investor guidelines). Frankly, we’re seeing a range of approaches: some servicers that are now routinely and appropriately moving severely delinquent borrowers through the foreclosure process; while others have been reluctant to do so most likely because they don’t want to attract regulator attention and/or reputational risk.
To a certain extent, what’s thought of as “traditional,” like “normal,” has clearly been influenced by the pandemic and resulting new realities. Once a traditional remedy like foreclosure has been suspended, as has been the case for the last two years, it usually doesn’t return quickly. Although I believe that a return to traditional remediation processes will eventually occur, it will be a gradual process. For the foreseeable future, I believe that the expanded obligations to consider a pandemic-like impact on borrowers will continue.
