Sponsored Content from ACES Quality Management: Prep Your Audit Process for Fair Servicing

Mandy Phillips, ACES Quality Management EVP of Compliance

It is safe to say fair lending practices dominated the news cycle in 2021:

• There is the news-making $9.45 million settlement between Trustmark National Bank and the Department of Justice, the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency, regarding allegations of Trustmark National Bank redlining a majority Black neighborhood in Memphis, Tenn.;
• Multiple press releases from the CFPB announcing initiatives regarding junk fees, how to best implement the Home Mortgage Disclosure Act, and the first redlining case against a nonbank; and
• The recent headlines about the $53 million settlement between Fannie Mae and the National Fair Housing Alliance.

The increase in headline-making cases and settlements related to fair lending points toward the future focus of regulators in the mortgage industry: Governing bodies are putting lenders and servicers alike under a microscope when it comes to compliance management, including auditing and how they ensure equal treatment of protected classes. Moving forward, compliance in this area must not take a “wait and see” approach, but a standard proactive practice in order to best minimize risk.

Three ways to shore up audit processes in mortgage servicing in 2022

1. Servicers should conduct a thorough analysis of their operational processes, including loss mitigation processes and outcomes, to determine if inequities exist.

In addition to examining their policies and procedures through the lens of fair housing, lenders must also ensure that these policies and procedures are being followed throughout the organization. Questions to ask might include:

• Do we have an operational “playbook”?
• What is our communication strategy and frequency with our borrowers?
• Who is monitoring our critical data and metrics?
• Do we have policies and procedures regarding our fair lending practices?
• Are these practices being fully implemented?
• Are we regularly testing them?
• Where are the policies failing and how can we fix them?
• Where are we charging fees? Are they unnecessary, excessive, or discriminatory?
• How do we handle escalations, decisions, and change control?

2. Specifically look for disparities in outcomes for borrowers in protected classes v. non-protected classes.

The COVID-19 pandemic created dramatic shifts throughout the mortgage industry. Specific to servicing, there are COVID-19-specific loss mitigation requirements overlaying an already complicated landscape. An estimated three-quarters of a million borrowers will exit forbearance in the first half 2022, according to recent data released by the Federal Reserve Bank. With this in mind, many mortgage servicers will need to account for the variety of new loss mitigation options available to those impacted by the pandemic.

Questions to consider include:

• How are we assisting borrowers exiting forbearance this year?
• Are loss mitigation options being applied fairly and equitably?
• Do we charge too many “junk fees”?
• Are our fees having an unintended discriminatory impact?

These are just some potential questions to ask internally to determine whether potential discrimination specific to race, religion, sex, disability, familial status, national origin, or disability is unintentionally built into processes. It can be difficult to both audit large populations of loans and then identify potential fair lending/servicing violations using only manual processes. By leveraging technology, servicers can conduct audits as efficiently as possible and report on the resulting data in a way to more readily identify anomalies.

3. Leverage technology to lessen operational burden.

While an internal audit cannot prevent a bad exam outcome, it can go a long way toward mitigating risk. By using a “self-test, self-identify, self-correct” methodology, servicers can prove to their regulator(s) that they have a mature compliance management system, including the processes in place to identify and correct failures in the compliance program.

Auditing thousands of loans for disparities manually is a complicated and overwhelming task, even for a sizable internal compliance team.

By utilizing the mortgage industry’s leading audit software provider, ACES Quality Management, servicers can leverage the inherent customization capabilities and audit functionality of the ACES Quality Management & Control® software to conduct these assessments, uncover areas of improvement and implement corrective actions before these disparities are brought to their attention by a regulator. The ACES technology gives teams a better understanding of loan risk while offering the ability to create specific reports based on business needs.

The technology works by providing users with a set of managed questionnaires to guide auditors in what they should be looking for within their data. The ability to customize questionnaires on the fly ensures audits are being conducted with the most up-to-date information as servicing regulations change throughout the year.

Once questionnaires are created, transaction-level reports enable an internal audit group to identify trends, remediate issues, and pinpoint focus areas for further analysis and improvement.

COVID-19 socioeconomic implications disproportionately impact minorities. What is your organization going to do about it?

Racial inequities in mortgage servicing/origination have already been under a microscope since the Mortgage Servicing Act passed in 2013, but newer COVID-19-related financial hardships have exposed even more disparities between different demographics, particularly as it relates to lending. In a national poll conducted in 2020 by NPR, the number of Latino and African-American households experiencing financial distress related to the pandemic nearly doubled the number reported by White households. The number of Latino and African-American households having trouble paying their rent and mortgage also doubled the number reported by White households.

With fair lending compliance reaching a boiling point within the industry, it is more important than ever to ensure your policies and procedures are tight. As a business, you could risk an audit and potential lawsuit, but can your organization afford a multimillion-dollar penalty and bad publicity? Your organization is likely already operating under strict guidelines. But now is the perfect time for servicers to re-examine the way they do business in order to ensure they’re minimizing risk, as well as guarantee they’re doing their best by the borrowers they serve.

Check out the on-demand webinar “2022 Mortgage Compliance Outlook” presented by ACES Quality Management’s EVP of Compliance, Amanda Phillips, and Ballard Spahr’s Partner, Richard J. Andreano, Jr. to learn more about these regulatory changes and what to look out for in 2022.

(Sponsored content includes material submitted independently of the Mortgage Bankers Association and MBA NewsLink and does not connote an MBA endorsement of a specific company, product or service. For more information about sponsored content opportunities, contact Bill Farmakis at bill@jlfarmakis.com or 203/834-8832.)