Fair Servicing and CARES Act Supervision Predictions 2022: Key Regulations and Anticipated Emphasis

Introduction

Fair servicing has been a core financial services compliance concept since the 1974 enactment of the Equal Credit Opportunity Act (ECOA). The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and Regulation X updates present more recent fair servicing considerations. As financial institutions respond to present uncertain social and economic conditions, regulators have signaled their intent to scrutinize fair servicing compliance in 2022.

In its April 2021 “Fair Lending Report 2020,” the Consumer Financial Protection Bureau (CFPB) stated it will “vigorously [pursue] racial and economic justice,” including “robust enforcement of fair lending laws.”

Similarly, in October 2021, the United States Department of Justice (DOJ) promised “far more robust use of [its] fair lending authorities,” with Attorney General Merrick Garland stating the DOJ “will spare no resource to ensure that federal fair lending laws are vigorously enforced.”

With fair servicing scrutiny coming in 2022, industry participants should be familiar with key regulations and note expressly announced areas of forthcoming regulatory emphasis.

Key Regulations

Equal Credit Opportunity Act (ECOA)/Regulation B

Administered and enforced by the CFPB, ECOA prohibits discrimination against borrowers in credit transactions including origination and servicing and applies to parties making credit extension decisions (including loan modifications). Protected bases under ECOA include: race, color, national origin, age, sex, marital status, religion, receipt of public assistance, or exercise of Consumer Credit Protection Act rights.

Fair Housing Act (FHA)

Administered and enforced by the DOJ (among other regulators), the FHA prohibits discrimination against borrowers applying for mortgage loans, modifications, or repayment plans. Protected bases under the FHA include race, color, national origin, religion, sex, familial status, and disability.

Dodd Frank Wall Street Reform Act/Unfair Deceptive or Abusive Acts and Practices (UDAAP)

Enforced by the CFPB, the Dodd-Frank Wall Street Reform Act prohibits unfair, deceptive, or abusive acts or practices (UDAAP) related to consumer financial products and services. UDAAP includes: acts likely to cause unavoidable injury not outweighed by benefit; representations, omissions, or acts likely to materially mislead based on reasonable interpretation; and actions which materially interfere with consumer ability to understand the conditions of financial products or services or which take advantage of reliance on covered parties acting in consumers’ best interest.

Coronavirus Aid, Relief, and Economic Security Act (CARES Act)

The CARES Act is a relief program passed in response to economic conditions created by the pandemic. The CARES Act generally requires temporary forbearance for federally-backed mortgages.

Key Announced Areas of Forthcoming Fair Servicing Regulatory Focus

1. Loss Mitigation Review Standards

Regarding expiration of CARES forbearances, the CFPB stated that entities “unable to adequately manage loss mitigation can expect the Bureau to take enforcement or supervisory action.” The CFPB intends to emphasize: (1) clarity of payment assistance information, (2) compliance with Regulation X outreach and timeliness standards, (3) evaluation of public assistance income pursuant to ECOA, and (4) outreach diligence during forbearances.

Industry participants may consider including Regulation X loss mitigation obligations in policies and procedures, training staff regarding appropriate income types, and utilizing QA or compliance testing to monitor loss mitigation decisioning functions.

2. Communication Standards

The CFPB indicated it will emphasize consumer communication in monitoring ECOA compliance. This includes: (1) “managing communications with limited English proficiency (LEP) borrowers,” and (2) “promptly [handling] loss mitigation inquiries and [avoiding] unreasonably long hold times on phone lines.”

An August 2021 CFPB report stated “nearly half of servicers … stated that they did not collect or maintain information about borrowers’ LEP status … Some [servicers] also reported not maintaining data on borrowers’ race, which may raise the risk of fair servicing violations.” Companies may need to consider how to identify LEP consumers to ensure such consumers are not excluded from necessary communications.

The CFPB also indicated “many servicers … handle high call volume with an average hold time below 3 minutes, while others [take] as long as 26 minutes.” These disparities can be taken into account to determine if call metric improvements are necessary.

General Best Practices

Though the CFPB predicts “particular” emphasis on loss mitigation review and borrower communication, fair servicing risks can exist in numerous other decision points and operational processes, including implementation of payment plans, rate adjustments, fee waivers, documentation gathering, and correspondence.

Knowing the relevant statutes and upcoming emphasis areas can help mitigate fair servicing risks. Strategies may include risk assessments to determine deficiencies, including preventive and detective controls in compliance management systems, and leveraging the three lines of defense to prevent and remediate any issues.