Avoiding discriminatory behavior when working out and modifying troubled home loans, or in foreclosures, hinges on careful planning and strict attention to what goes on at the front line
Posted on July 15, 2009
By Steve Cocheo, executive editor
Calvin Hagins, director for compliance policy at the Comptroller’s Office, strikes the listener as a realist. A veteran regulator, he calls them as he sees them.
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“Why isn’t there a 12-step plan for people having credit problems?” he asked, rhetorically, during a session at the ABA Regulatory Compliance Conference called “Avoiding Discrimination in Foreclosures and Workouts.” He acknowledged that credit can be as addicting as alcohol, and that what is really a social problem—overspending in reaction to media bombardment about the good life—often manifests itself as a credit problem.
Hagins said he watches all the commercials on TV hyping the good things that will happen if one just buys this, or buys that—generally requiring credit—and he sees little distinction from alcohol advertising. “It’s no different from, ‘Drink this beer, you’ll look great’,” said Hagins.
What the country is left with, now that the credit binge is over, is the hangover. The cleanup progresses on multiple fronts. But Hagins and fellow panelist Linda Gallagher, national leader in the Financial Services Regulatory Practice at KPMG LLP, were there to help participants’ banks avoid discriminatory actions in the course of their banks’ share of the cleanup.
Seeing the risks and avoiding them
Hagins outlined areas where discrimination can arise, and which require bank attention and control so that this doesn’t happen.
1. Outcome disparities. When the bank decides to foreclose, said Hagins, is the bank clearly doing so following a procedure that ensures that it is not offering options to one group and not to others? Only offering choices to some groups? Providing information to all groups on a timely basis?
2. Transaction completion times. Are some foreclosures rushed through? Does this give the appearance, or reality, of discriminatory behavior?
3. Exceptions and fee waivers. “I’m certain exceptions occur all the time,” as banks work things out, said Hagins. The important issue is, are they made fairly, so there is no uneven impact on a prohibited basis?
4. Disclosures and costs. Are these presented evenly and fairly?
5. Volume of exceptions. Have exceptions been granted consistently, such that the rate of exceptions jibes, among all groups, according to fair-lending principles?
6. Consumer’s repayment ability decisions. When determining whether to try to rescue a loan, or go to foreclosure, banks must look at ability to pay. This is likely hinged on employment. Are workout officers making their judgments consistently, in this regard?
7. Lending market deterioration determinations. Are these being made in a nondiscriminatory way, such that they are fair and not some form of redlining?
8. Appraisal methodologies. Are these being applied on a consistent, nondiscriminatory basis?
9. HELOC issues. Hagins noted that determinations about value drops on home equity line of credit collateral are subject to contract, and can’t be done arbitrarily. Further, there can’t be any type of disparities in the granting of modifications.
Significantly, Hagins made it clear that it was not OCC’s intent to impose its views on banks regarding whether foreclosure, modification, or other approaches to troubled home borrowing were appropriate.
Instead, he said, the agency’s goal is fair treatment. “If your lending policy says you are going to do this, and your modification policy says you are going to do that, as long as it’s not discriminatory,” it’s up to the bank.
Stand by for trouble
Consultant Gallagher warned compliance officers that there was increasing intensity in all examinations connected to fair-lending in the wake of the mortgage crunch. Likewise, her firm has picked up increased levels of referrals to the Justice Department, by the regulators, or threats of such referrals. In some cases, she said, specific fair-lending-based loss mitigation and servicing exams have been conducted. And examiners are beginning to ask for enterprise-wide fair-lending risk assessments, while expanding their purview to loans beyond mortgages, including student loans and even overdraft protection.
Having issued her warning, Gallagher discussed practices that banks could consider adopting to help avoid discriminatory action.
1. Borrower outreach and options. One key shift she suggested was morphing from a “collections mentality” to an “origination and servicing-mentality.” One example of that shift is revisions being made of the language in customer letters and disclosures in relation to troubled loans and efforts to address them. She spoke positively of some larger banks’ efforts to make pro-consumer announcements, concerning development of mass modifications and related efforts.
2. Policies and procedures. Gallagher recommended introducing loss mitigation measures earlier in the individual borrower’s loan cycle. She also suggested that banks reexamine, and consider rewriting, policies, to heighten staff awareness of fair-lending issues.
3. Risk assessments and reviews. The bank has to take a hard, detailed look at what all mortgage servicing areas are doing to see where weak spots are, and to see which pose significant fair-lending risk. The factors built into automated processing models should be reviewed, in a fair-lending sense—“Just because it’s automated doesn’t mean you shouldn’t think about it.” And complaints made about mortgage servicing should be reviewed, to determine if there are red flags to be seen about fair-lending trouble.
“If you can’t do a really robust risk assessment,” it still pays to make what effort the bank can, said Gallagher. “It doesn’t have to be exhaustive to please the regulators.”
4. Training and audit. Employees should receive training in being aware of fair-lending issues, as well as in the nuts and bolts of it. Loss mitigation and collection staff should receive special training. Gallagher recommended building the findings of the risk assessment into the training.
5. Monitoring and test. “This is the area where I am seeing the greatest degree of flux,” said Gallagher. Mortgage providers are at many different stages of progress on this front. Overall, she said banks should be trying side-by-side transactional reviews and should be reviewing proposed foreclosures on higher-rate loans. Reviews of transactions for consistency was also recommended, as was application of statistical analytical methods of looking at trends in the bank. She also said that foreclosures should be monitored to watch for significant differences in outcome for protected groups.
Gallagher’s recommendations tied in with an overall prescription from OCC’s Hagins: “Prove your innocence at the beginning of the exam.” He said that by taking steps such as Gallagher’s would help by establishing the bank’s efforts up front, versus hoping to defend the bank after the fact when examiners uncover a problem. BJ
[This article was posted on July 15, 2009 on the website of ABA
Banking Journal, www.ababj.com, and is copyright 2009 by the American
Bankers Association.]
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