The sudden financial impact of the COVID-19 pandemic on consumers has led to calls for loan servicers and other interested parties to provide temporary or permanent relief for borrowers who are unable to continue making loan payments. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), guidance in the mortgage world from Government Sponsored Entities (GSEs), and emergency regulations issued by the federal government and by state governments have mandated certain forms of relief to impacted consumers. These actors, in turn, have provided some flexibility to facilitate that relief. Many lenders and servicers have answered the call by implementing mandated options and often voluntarily creating programs for borrower relief. But the volume of consumer demand for hardship relief and the speed with which these programs have been implemented may give rise to concerns about fair lending compliance, and whether the monitoring necessary for such compliance can be implemented in a timely and effective manner.
This is the second article of a series of client alerts highlighting fair lending issues that may arise in this rapidly changing business and compliance environment. This alert focuses on fair lending issues that may arise in connection with consumer loan and asset servicing during the pandemic, and provides practical advice on things to consider in mitigating those risks in real time.
GOVERNMENT AND GSE RESPONSE: A REFRESHER
Congress, federal regulators, and GSEs have provided temporary relief measures for a considerable number of borrowers. The CARES Act requires mortgage servicers and other interested parties to provide temporary forbearance for all loans that are federally insured, federally guaranteed, or purchased or securitized by Fannie Mae and Freddie Mac. GSEs, including Fannie Mae and Freddie Mac, have issued a variety of mortgage servicing guidelines for processing requests arising from a COVID-19-caused hardship for loans they have purchased or securitized. More generally, the Federal Reserve, FDIC, NCUA, OCC, and CFPB issued guidance (Federal Inter-Agency Guidance) urging lenders, servicers, and others “to consider prudent arrangements that can help ease cash flow pressures on affected borrowers, improve their capacity to service debt, [and] increase the potential for financially stressed borrowers to keep their homes.”
Many states have also implemented temporary measures to protect consumers affected by the pandemic. Early measures included moratoriums on mortgage foreclosures and residential evictions; and temporary limitations on bank account and wage garnishment, debt collection, and communication with delinquent borrowers. Although many of these measures are temporarily effective only for the duration of the respective states of emergency, some regulators, such as the New York Attorney General have already begun looking beyond the horizon and have called on mortgage lenders to consider longer-term solutions.
Some servicers and other interested parties have voluntarily offered discretionary programs for hardship relief, such as fee waivers and loan modifications, and have even applied CARES Act standards to mortgage loans not covered by the law. The situation is fluid, as market participants respond, and consumer needs and desires become clearer.
FAIR SERVICING RISKS OF PROVIDING COVID-19 RELIEF AND STRATEGIES FOR MITIGATION
The unprecedented and unexpected demand for relief, and the speed with which lenders and servicers are required to or choose to implement new regulatory requirements and deliver relief, challenge many participants in their ability to implement a comprehensive protocol of controls and processes that ensure and document compliance with existing legal requirements, internal policies and processes, regulator expectations, and best practices. One of many compliance issues that may be implicated are fair lending rules and standards. Fair lending risk is perhaps compounded by the Federal Inter-Agency Guidance’s warning that, while regulators will not criticize lenders, servicers, and others for deviations from pre-pandemic standards in the course of prudently delivering borrower relief, such leeway may result in discretionary and differential treatment of borrowers. Despite expressing some degree of understanding and lenience for the “unique circumstances” posed by the COVID-19 crisis, the Federal Inter-Agency Guidance states that, in providing consumer relief, lenders and servicers are expected to “adhere to consumer protection requirements, including fair lending laws.” Similarly, in a recent blog post, the CFPB indicated that it would “not hesitate to take public enforcement action” for fair lending issues that arise from the ongoing pandemic.
The magnitude of fair lending risks posed by aspects of crisis consumer relief are far from clear. The law is itself unsettled as to whether, and how, fair lending legal requirements might even apply to primarily loan servicing activities. This is true even in the business of home mortgage loan servicing, for which so-called “fair servicing” has been a topic of servicer and regulatory scrutiny. Aspects of loan servicing that redefine the debt relationship, such as loan modifications, might be considered as either extensions of credit or an aspect of a credit transaction that may be subject to the Fair Housing Act (FHA), the Equal Credit Opportunity Act (ECOA), and Regulation B, as well as equivalent state and municipal anti-discrimination laws. While there is legitimate debate over whether the FHA applies to loan servicing — since the statute applies only to the “sale or rental of a dwelling” or lending in connection therewith1 — the CFPB has taken the view that ECOA extends fair lending obligations to fair servicing (as made apparent in the ECOA and mortgage servicing provisions of the Examination Manual). The application of ECOA to mere forbearances, especially those that are involuntary from the standpoint of the servicer, is yet to be resolved, as is the application of ECOA to other forms of consumer debt and crisis relief that is not granted by an ECOA-covered “creditor.”
Whatever the legal reach of fair lending requirements, there are considerations that may counsel lenders, servicers, and others to be mindful of ensuring that similarly situated consumers are treated equally, that decisions to grant relief are based on legitimate business considerations, and that fair lending-type concerns are evaluated as part of a larger program and response. If nothing else, the language of the Federal Inter-Agency Guidance and the CFPB blog post suggests that regulators (and those that follow their lead) likely will be looking at ”fair servicing.”
If your institution decides to engage in fair servicing analyses for crisis-era relief programs, the following strategies for mitigating risk are worthy of close consideration:
1. DEVELOP UNIFORM RELIEF PROGRAMS
Emergency orders, regulations, and guidance issued in response to the COVID-19 pandemic mandate specific relief for certain types of loans, such as federally backed mortgages and student loans, but allow some discretion in providing borrower relief. The exercise of employee discretion and the assistance of consumers on a case-by-case basis are often appropriate but, because the relief would be selectively offered or tailored, inadvertently disparate results for similarly situated consumers can occur. As a result, it is prudent as a general matter to assist consumers by developing and implementing standardized relief options that can be offered uniformly, and at scale, to meet the large demand for relief. The program features and their eligibility criteria should be clear and consistently applied. Limit the ability of employees to exercise discretion in making decisions to grant hardship relief. If discretion to deviate from uniform standards is necessary for certain cases, those exceptions (and the reasons for the exceptions) should be well documented.
2. TAILOR COMMUNICATIONS PRACTICES
Consistent with being objective and even handed, it can be useful to proactively communicate with consumers to ensure that each of them have access to the same information about the availability of relief. Information about relief programs (or directions for requesting relief) should be publicly posted on the lender or servicer’s website, or communicated to all potentially eligible consumers. (However, in doing so, be mindful of existing law, as well as emergency orders and regulations adopted by some states and municipalities, which limit the servicer’s ability to communicate with consumers who are more than 30 days delinquent, or in bankruptcy, or who have asked to have no communication with the servicer.) Early communication with consumers is crucial to ensuring that they have the information necessary to seek relief before they are seriously delinquent.
3. CAREFULLY DRAFT APPLICATION QUESTIONS
Some relief programs offered to borrowers during the COVID-19 pandemic are available only if the consumer can demonstrate financial hardship as a result of the pandemic. The process of demonstrating a pandemic-related hardship may reveal information bearing on a prohibited basis, such as the fact that the borrower is caring for a sick spouse, has medical debt from seeking hospitalization for COVID-19, or is receiving public assistance. ECOA prohibits the request of information about a borrower’s membership in a prohibited basis group, and the use of such information in making a credit decision, except in very limited circumstances.2 Lenders and servicers should develop a standard application or telephone script used to collect information from consumers seeking relief to ensure that their employees do not ask for prohibited basis information unless required. If such information is nonetheless volunteered by the consumer, such information cannot be considered in the credit decision, except as expressly permitted by law.
4. SENSITIVELY HANDLE MEDICAL INFORMATION
Due to the fact that COVID-19 is a medical crisis, the process of servicing loans and evaluating borrower requests for loan modifications and other relief may inadvertently reveal sensitive medical information about the consumer. The Fair Credit Reporting Act (FCRA) and Regulation V prohibit creditors and servicers from requesting, obtaining, or using medical information in a credit decision or an evaluation of the borrower’s continued eligibility for credit.3 But a credit report or the consumer’s statement of hardship may inadvertently reveal medical information, such as the existence of overdue medical debt incurred in connection with a hospitalization for COVID-19, or the mere fact that a forbearance of debt payments has been granted. Use of unsolicited medical information in making a credit decision is permissible only if: (a) the information is the type of information routinely used in making credit eligibility determinations (such as a delinquency); (b) the creditor uses the medical information in a manner and to an extent that is no less favorable than it would use comparable information that is not medical information in a credit transaction (e.g. delinquent medical debt is treated the same as other delinquencies); and (c) the creditor does not take the consumer’s physical, mental, or behavioral health, condition or history, type of treatment, or prognosis into account as part of any such determination.4 FCRA also requires lenders and servicers that obtain a credit report containing medical information to keep that information confidential.
5. CONSIDER THE EFFECT OF SOCIAL DISTANCING ON REPAYMENT OPTIONS
Consider whether stay-at-home orders and social distancing may disadvantage persons who happen to be in a protected class from making payments. For example, a lender or servicer may reduce its physical footprint by closing down retail branches or other locations where payments are accepted. If elderly or minority consumers are more likely to make payments at a physical location, servicers should consider how best to serve those populations to prevent a disparate impact. For example, communicating location closures, providing multiple payment options, waiving fees for live customer service, or allowing a one-time late fee waiver for consumers who make payments at physical locations, may mitigate the risk of disparately impacting members of certain communities.
6. TRAINING AND VENDOR MANAGEMENT IS PARAMOUNT
The most well-laid plans still have a risk of leaving a considerable impact on a prohibited basis group if the employees and vendors implementing those plans are not well-prepared. Employees and vendors should be trained on new programs, and be given clear and consistent instructions, telephone scripts, and job aids to ensure that the plans are implemented consistently across the board. This is obviously challenging in the current remote working environment. Companies should consider how they will evaluate performance and adherence to such policies and procedures in this environment, and provide and document feedback or corrective action when necessary.
7. DOCUMENT DECISIONS AND DEVIATION FROM STANDARD PRACTICE
Although the Federal Inter-Agency Guidance provides some leniency to facilitate good-faith efforts to assist borrowers, that leniency does not extend to violations of fair lending laws. The industry should prepare for regulators to examine compliance and fair lending issues that arose during the pandemic. In particular, regulators are expected to focus on whether the process used by a lender or servicer to provide consumer relief (or deviate from standard practice and underwriting criteria) was fair and consistent. Any exceptions should be commensurate with the circumstances presented, and documented in a way that enables the regulators to understand that the response was fair, reasonable, and in the best interest of consumers in the larger context of business requirements.
1 42 U.S.C. §§ 3604(b), 3605
2 12 C.F.R. §§ 1002.5, 1002.6
3 15 U.S.C. § 1681b(g); 12 C.F.R. tit. 12, ch. X, pt. 1022.
4 12 C.F.R. § 1022.30.