- Bcac

Report
Flood Insurance Requirements &
Spotlight on Loan Servicing
BCAC Seminar
March 2012
Objectives and Summary
•
Flood Insurance Requirements
• Review & Best Practices
•
Spotlight on Loan Servicing
• Current Environment
• Notable Litigation
• Servicemembers Civil Relief Act
• Loss Mitigation & Foreclosure Practices
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Flood Disaster Protection Act
Flood Disaster Protection Act of 1973
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Written policies and procedures
Make, Increase, Renew or Extend (MIRE)
Amount of Insurance
Contents Insurance on Commercial Loans
Escrow Requirements
Force-Placement
Special Flood Hazard Determination Form
Life of Loan Coverage
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Objectives of the FDPA
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Providing flood insurance to owners of improved real
estate located in special flood hazard areas (SFHAs) of
communities participating in the National Flood Insurance
Program (NFIP).
Requiring communities to enact measures designed to
reduce or avoid future flood losses as a condition for
making federally subsidized flood insurance available.
Requiring federal financial regulatory agencies to adopt
regulations prohibiting their regulated lending institutions
from making, increasing, extending, or renewing a loan
secured by improved real estate or a mobile home
located, or to be located, in an SFHA of a community
participating in the NFIP unless the property securing the
loan is covered by flood insurance.
Prohibiting federal agencies, such as the Federal Housing
Administration, the Small Business Administration, and the
Department of Veterans Affairs, from subsidizing, insuring,
or guaranteeing any loan if the property securing the loan
is in an SFHA of a community not participating in the NFIP.
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Federal Emergency Management
Agency (FEMA)
 FEMA administers the National Flood Insurance
Program (NFIP). Its responsibilities include:
• Identifying communities with SFHAs
• Issuing flood-boundary and flood-rate maps for
flood-prone areas
• Making flood insurance available through the NFIP
‘‘Write Your Own’’ program, which enables the
public to purchase NFIP coverage from private
companies that have entered into agreements with
the Federal Insurance Administration
• Assisting communities in adopting flood plainmanagement requirements
• Administering the insurance program. Note:
Licensed property and casualty insurance agents
and brokers provide the primary connection
between the NFIP and the insured party. Licensed
agents sell flood insurance, complete the insured
party’s application form, report claims, and follow
up with the insured for renewals of the policies.
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Basic Requirements
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A lending institution must require flood insurance
for the term of a loan when all three of the
following factors are present:
• The institution makes, increases, extends, or
renews a loan (commercial or consumer)
secured by improved real estate or a mobile
home that is affixed to a permanent
foundation,
• The loan is secured by property located in a
special flood hazard area as identified by
FEMA, and
• The community participates in the NFIP.
(Information on whether a community
participates in the NFIP can be obtained
from FEMA’s web site, www.fema.gov.)
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Special Circumstances
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In the case of mobile homes, the criteria for
coverage relate to whether the mobile home is
affixed to a permanent foundation. An
institution does not have to obtain a security
interest in the underlying real estate in order for
the loan to be covered.
Flood insurance requirements also apply to
loans where a security interest in improved real
property is taken only ‘‘out of an abundance of
caution.’’
A typical table-funded transaction should be
considered a loan that is made, rather than
purchased, by the entity that actually supplies
the funds. Regulated institutions that provide
table funding to close loans originated by a
mortgage broker or mobile home dealer are
considered to be ‘‘making’’ a loan for purposes of
the flood insurance requirements.
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Amount of Flood Insurance Required
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The amount of flood insurance required must be
at least equal to the lesser of:
(1) the outstanding principal balance of the loan,
(2) the maximum amount available under the
NFIP, or
(3) the total value of the secured property (land
and improvements) minus the total value of the
land.
•
Since March 1995, the maximum amounts of
coverage for flood policies have been
• $250,000 for residential property structures
and $100,000 for contents
• $500,000 for nonresidential structures and
$500,000 for contents
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Commercial Loans &
Contents Insurance
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Reminder: Flood Insurance is required on
contents when the following conditions are met:
1) The Bank makes, increases, renews or
extends a loan secured by property in a
SFHA, and
2) A security interest is taken on building
contents or “all business assets.”
•
Word to the wise: Consider the value of the
building contents before taking as collateral
on the loan.
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Flood Insurance Monitoring
Procedures
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Consider adopting a Clear to Close procedure:
Require a pre-closing review of all flood
insurance documents by a designated individual
independent of the lending area and Loan
Administration before the loan officer is given
authority to proceed with loan closing.
Pre-closing review should include examination of
the Flood Insurance Policy declarations page or
the application and paid-receipt for compliance
with all flood insurance requirements, as well as
review of the completed flood insurance
coverage calculation form, to ensure the proper
amount of flood insurance has been obtained.
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Special Situations—Second
Mortgages and Home Equity Loans
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Both second mortgages and home equity loans
fall within the purchase provisions of the FDPA.
As only one NFIP policy may be issued for a
building, an institution should not request a new
flood insurance policy if one already exists.
Instead, the institution should have the borrower
contact the insurance agent
• To inform the agent of the intention to obtain
a loan involving a subordinate lien
• To obtain verification of the existence of a
flood insurance policy
• To check whether the amount of insurance
covers all loan amounts
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Second Mortgages
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After obtaining this information, the insurance
agent should increase the amount of coverage, if
necessary, and issue an endorsement that
identifies the institution as a lien holder.
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Special Situation— Condominium
Policies
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Condominium associations are able to manage
their flood insurance needs and meet their bylaw requirements without relying on the actions
of the unit owners under a special type of flood
insurance policy issued by FEMA—a Residential
Condominium Building Association Policy
(RCBAP).
For Condo Loans, the maximum amount of flood
insurance is the lesser of
1) the number of units X $250,000, or
2) 100% of the replacement value of the
condo buildings.
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Escrow Requirements
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An institution must require the escrow of flood
insurance premiums for loans secured by
‘‘residential improved real estate’’ if it requires
the escrow of funds to cover other charges
associated with the loan, such as taxes, hazard
or fire insurance premiums or other fees.
The escrow requirement does not apply if the
institution does not require the maintenance of
other escrows or the establishment of an escrow
account in connection with the particular type of
loan, even if permitted by the loan documents.
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Standard Flood Hazard
Determination Form
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Whenever an institution makes, increases,
extends, or renews any loan secured by
improved real property or a mobile home, it must
use the Standard Flood Hazard Determination
Form (SFHDF) developed by FEMA.
Form may be used in printed or electronic
format.
Retain a copy of the completed form, in either
hard copy or electronic format, for the period of
time your institution owns the loan.
A copy of the form is available on FEMA’s
website (www.fema.gov).
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Reliance on Prior Determination
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When determining whether flood insurance is
required, an institution may consider the
conclusions from a previous flood hazard area
determination if both of the following conditions
are met:
The previous determination is not more than
seven years old.
The basis for that determination was
recorded on the SFHDF mandated by the
Reform Act.
An institution may not rely on a previous
determination set forth on an SFHDF when it
makes a loan—only when it increases, extends,
renews, or purchases a loan.
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Force-Placement Requirements
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If at any time during the life of the loan the
institution or its servicer determines that flood
insurance is required or is deficient, then the
institution must take steps to ‘‘force-place’’ the
required insurance.
Under the Reform Act, an institution, or a servicer
acting on its behalf, must purchase, or force-place,
flood insurance for the borrower if the institution or
the servicer determines that the security property is
not covered by any insurance or by an adequate
amount of flood insurance. Before purchasing flood
insurance in the appropriate amount on the
borrower’s behalf, however, the institution must first
provide the borrower with a notice of the deficiency
and the opportunity to obtain the correct amount of
insurance. If the borrower fails to obtain the
insurance within forty-five days of the date of
the notice, then the institution may force-place the
insurance.
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FNMA on Force-Placement
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The issue of force-placed insurance has been thrust into
the limelight this month by Fannie Mae. Forced-place
insurance is a practice that some insurance
companies and banks utilize to force homeowners to
purchase expensive insurance policies.
Spurred by state, federal and consumer attention, Fannie
Mae has announced that it will be changing the rules
concerning forced-placed insurance.
Fannie Mae will be overseeing forced-placed insurance
policies itself instead of allowing banks and other financial
institutions to do so. The company notes that forced-place
insurance is often an issue because most homeowners
are required to purchase insurance coverage as a
provision of their mortgage. These mortgages sometimes
impose strict requirements regarding the type of coverage
homeowners must have, making their options slim. Fannie
Mae has issued a letter to several insurance companies in
the U.S. inviting them to compete in the market as a way
to bring more options to consumers and reduce the abuse
of forced-place insurance practices.
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Determination Fees
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An institution or its servicer may charge a
reasonable fee to the borrower for the costs of
making a flood-hazard determination under the
following circumstances:
• The determination is triggered by a borrowerinitiated transaction (that is, the lender is
making, increasing, extending, or renewing a
loan at the borrower’s request).
• The determination reflects FEMA’s revision of
maps.
• The determination results in the purchase of
flood insurance by the lender under the forcedplacement provision.
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Such reasonable fee can include a fee for life-ofloan monitoring by either the institution, its servicer,
or a third party, such as a flood-hazarddetermination company.
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Truth in Lending Act Issues
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The fee for conducting an initial flood-hazard
determination is excluded from the finance
charge. However, the exclusion does not apply
to fees for services to be performed periodically
during the term of the loan, regardless of when
the fee is collected.
If a creditor is uncertain about what portion of a
fee to be paid at consummation or loan closing is
related to the initial decision to grant credit, the
entire fee may be treated as a finance charge.
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Notice Requirements
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When the security property is or will be located
in a SFHA, the institution must provide a written
notice to the borrower and the servicer.
The written notice must contain the following
information:
• A warning that the building or mobile home is
or will be located in a SFHA
• A description of the flood insurance
purchase requirements contained in section
102(b) of the FDPA, as amended
• A statement as to whether flood insurance
coverage is available under the NFIP and
may also be available from private insurers
• A statement as to whether federal disaster
relief assistance may be available in the
event of damage to the building or mobile
home caused by flooding in a federally
declared disaster
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Timing of the Notice
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Delivery of notice must take place within a
‘‘reasonable time’’ before completion of the
transaction.
Best practice is to provide the Notice 10 days
prior to loan closing.
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Recordkeeping Requirements
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An institution must retain
• Copies of completed SFHD forms, in either
hard copy or electronic format, for as long as
the institution owns the loan
• Records of the receipt of the notice to the
borrower and the servicer for as long as the
institution owns the loan
No particular form is required for the record of
receipt; however, the record should contain a
statement from the borrower indicating that the
borrower has received the notification.
• A borrower’s signed acknowledgment on a
copy of the notice
• A borrower-initialed list of documents and
disclosures that the lender provided the
borrower
• A scanned electronic image of a receipt or
other document signed by the borrower
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Penalties and liabilities
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Civil money penalties may be imposed for
violations of the following:
• Flood insurance purchase requirements
• Escrow requirements
• Notice requirements
• Forced-placement requirements
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If an institution is found to have a pattern or
practice of committing violations, the agencies must
assess civil penalties in an amount not to exceed
$385 per violation, with a total amount against any
one regulated institution not to exceed $125,000 in
any calendar year. Penalties are paid into the
National Flood Mitigation Fund. Liability for
violations may not be transferred to a subsequent
purchaser of a loan. Liability for penalties expires
four years from the time of the occurrence of the
violation.
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Spotlight on Loan Servicing
Current Environment
Regulators and DOJ are currently scrutinizing mortgage servicing and default
management practices.
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Prudential Regulators
-OCC Bulletin 2011-29
-OCC guidance of June 30, 2011
-Interagency Review of Foreclosure Policies and Practices, April 2011
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CFPB
-Examination Guidelines published October 2011
-Every examination must consider
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Compliance Management
Potential UDAAP issues
Risks to Consumers
Discrimination
State Attorneys General
-Multi-state AG Settlement
-Several AGs moving forward with separate investigations
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Current Environment, continued
• Department of Justice
-Fair Lending MOU with FTC, HUD
-Fair Servicing focus
• FHFA Lawsuits
-Sued 17 financial institutions
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Summary of Multistate/Federal Settlement of
Foreclosure Misconduct Claims
• The settlement between the State AGs and 5 leading bank mortgage
services resulted in $25 billion in monetary sanctions and relief.
• $10 billion dedicated to principal reduction
• $5.2 billion for other forms of homeowner assistance such as
unemployed payment forbearance, relocation assistance, waiving of
deficiency balances, anti-blight programs and benefits for service
members
• $3 billion for refinancing underwater homes for current borrowers
• $2.5 billion paid to participating states
• Borrower Payment Fund - dedicated to providing cash payments to
borrowers affected in the foreclosure crisis. This fund is in addition
to a restitution fund being established by the prudential regulators.
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Current Focal Points
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Management of Foreclosure Process
Dual Track Processing
Affidavit and Notarization Process
Enhanced Documentation
Regulatory Compliance – e.g., SCRA and
Bankruptcy
Third Party Service Provider Oversight
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Interagency Review
of Foreclosure Policies and Practices
Guidance of April 2011
-The guidance stems from the prudential regulators’ (FRB, OTS and
OCC) review of mortgage services during Q4 2010.
Included Ally Bank/GMAC, Aurora Bank, Bank of America, Citibank,
EverBank, HSBC, JPMorgan Chase, MetLife, OneWest, PNC,
Sovereign Bank, SunTrust, U.S. Bank, and Wells Fargo
-Servicers must retain an independent firm to conduct a thorough
review of foreclosure actions that occurred between January 2009 and
December 2010.
Borrowers who have been identified as having been harmed through
foreclosure deficiencies must receive compensation.
These reviews will be subject to regulatory oversight.
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Interagency Review
of Foreclosure Policies and Practices
Because the interagency review only covered sample files and did not
review borrowers who were delinquent, yet not in foreclosure, it is
believed that all of the problems of the foreclosure crisis have not been
identified. Issues pertaining to misapplied payments, unreasonable
fees, and loan modifications may yet be discovered. In short, the
problems may be more widespread than previously thought.
The following areas were reviewed in the foreclosure assessment:
• Policies and procedures
• Organizational structure and staffing
• Management of third-party service providers
• Quality control and internal audit
• Compliance with applicable laws
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Interagency Review
of Foreclosure Policies and Practices
• Loss mitigation (i.e., the degree to which servicers offered loan
modifications and work-outs)
• Critical documents (i.e., assignments and endorsement of notes)
• Risk management (i.e., whether appropriate risks were identified –
financial, reputational, and legal risks)
Critical weaknesses in servicers’ foreclosure governance processes
were identified as well as inadequate supervision of third-party vendors,
including foreclosure attorneys.
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Interagency Review
of Foreclosure Policies and Practices
Although examiners found that borrowers subject to foreclosure action
were seriously delinquent on their loans, at the same time they also
found numerous instances were foreclosure actions moved forward
when it was not appropriate, including the following intervening
conditions:
-the borrower was covered by SCRA
-the borrower filed for bankruptcy prior to the foreclosure action
-the borrower qualified for or was paying in accordance with a
trial modification
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Renewed Focus on
Servicemembers Civil Relief Act (SCRA)
The SCRA covers all Active Duty servicemembers, Reservists and
members of the National Guard while on active duty. The protection
begins on the date of entering active duty and generally terminates
within 30 to 90 days after the date of discharge from active duty.
(1) Last year, Holly Petraeus was appointed by Elizabeth Warren,
founder of the federal Consumer Financial Protection Bureau, to
head the agency's Office of Servicemember Affairs. Her job is to
educate military consumers; to monitor their consumer complaints;
and to get other government agencies involved in the cause.
(2) Citi and other banks have gotten into trouble when they foreclosed
upon servicemembers
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SCRA continued
The Servicemember's Civil Relief Act (SCRA) expanded and improved
the former Soldiers' and Sailors' Civil Relief Act. The SCRA provides a
wide range of protections for individuals entering, called to active duty
in the military, or deployed servicemembers. It is intended to postpone
or suspend certain civil obligations to enable service members to
devote full attention to duty and relieve stress on the family members of
those deployed servicemembers. A few examples of such obligations
you may be protected against are:
•Outstanding credit card debt
•Mortgage payments
•Pending trials
•Taxes
•Terminations of lease
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Interagency Review
of Foreclosure Policies and Practices
Six Significant Weaknesses
(1) Foreclosure Process Governance
(2) Organization Structure and Availability of Staffing
(3) Affidavit and Notarization Practices
(4) Documentation Practices
(5) Third-Party Vendor Management
(6) Control (QC) and Audit
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Six Significant Weaknesses
1. Foreclosure Process Governance – Inadequate policies and
procedures, lack of monitoring and controls, lack of audit trails, lack
of compliance with applicable regulations, not enough audits, and
lack of communication of risks to boards.
2. Organization Structure and Availability of Staffing –
Disorganization, inadequate staffing levels, and an increased
volume of foreclosures.
3. Affidavit and Notarization Practices – Individuals signing
affidavits did not personally verify accuracy of document or have
personal knowledge attested to in the document.
4. Documentation Practices – Fees charged were often inaccurate,
resulting both in under-charges and over-charges.
5. Third Party Vendor Management – Not robust enough.
6. Control QC and Audit – Weak QC processes and not enough
audits.
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Interagency Guidance
Making Things Right
Six Elements of Making Things Right:
(1) Compliance Program
(2) Foreclosure Review
(3) Dedicated Resources – Single Point of Contact
(4) Third-Party Management
(5) Management Information Systems
(6) Risk Assessment
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Foreclosure File Review
• File collection process
• Require detailed checklists of all state laws and regulations for each
state being reviewed
• Checklists should include details pertaining to:
– Default servicing fees
– SCRA
– Bankruptcy
– Loss mitigation activity
• Checklists should be in format that minimizes reviewer discretion
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Foreclosure Risk Assessment
File Management and Documentation
Enhanced Checklists w/State Law Requirements
Purpose of file review
- Identify financial injuries to borrowers and reimburse as
appropriate
- OCC/FRB provided guidance on remediation / Consent Orders
- Identify technical errors in process – and fix going forward
- Use checklists that allow for a yes/no/could not be determined
- Determine problem foreclosure firms – and sever ties/fix
problems
- Document retention checklists
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CFPB Focus on Loan Servicing
• Focus on gathering information and complaints directly from
consumers.
• Agreement with FTC on access its Sentinel consumer complaint
database.
• Information-sharing MOUs and agreements with federal and state
agencies including banking regulators, FFIEC, FinCEN, NAAG, and
Conference of State Bank Supervisors.
• General CFPB exam guidance states that “every examination must
include a review” of
- Compliance management
- Potential UDAAPs
- Regulatory compliance matters presenting “risks” to
consumers
- Discrimination
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CFPB Examination Guidelines
Nine Modules:
1.
2.
3.
4.
5.
6.
7.
8.
9.
Servicing Transfers
Payment Processing and Account Maintenance
Customer Inquiries and Complaints
RESPA and Force-Placed Insurance
Credit Reporting
Information Sharing and Privacy
Collections
Loss Mitigation
Foreclosure Practices
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Fair Servicing Scrutiny
Increased regulatory, DOJ, and examination focus on fairness in
loan servicing and foreclosure practices.
• Regulators are engaged in heightened scrutiny of servicing issues, with
unprecedented attention to loan-level servicing data.
• Scrutiny of foreclosure disparities between protected classes and others.
• Increased consumer complaints alleging discrimination in loan servicing.
• Poorly documented or undocumented servicing decisions.
• High levels of litigation alleging loan servicing discrimination.
• Fair Lending Unit within DOJ Civil Rights Division analyzing discrimination in
loan modifications.
• Demographics at census tract level likely to be an analytical driver.
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Pamela C. Buckley, CRCM
Director, New England Region
P. 781.330.9341
E. [email protected]
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