mitigation opportunities were considered and
offered as applicable.
■ ■ Lack of clear loss mitigation underwriting
standards. For example, payment reductions
could be accomplished through a rate reduction or term extension. Banks should have
clear guidelines that define when each option
will be used. Procedure could dictate that term
extension would first be considered to achieve
the desired payment reduction. If the necessary
reduction could not be achieved, rate reduction
would be considered. Failure to adhere to a specific procedure can result in inconsistent rates
for similarly situated applicants and, in turn,
fair lending criticism.
■ ■ Lack of assurance of vendor compliance.
Any third-party vendor that has contact with
customers during the debt collection process
should be considered a high-risk vendor. Due diligence procedures should be sufficient to provide
the bank with reasonable assurance that the vendor is operating in compliance with the law and
in a manner consistent with bank expectations.
■ ■ Lack of clear disclosure regarding the loss
mitigation process and implications. Financial
institutions should provide consumers with
disclosures offering them, as appropriate, the
opportunity to apply for loss mitigation options
and describing the process for submitting a
loss mitigation application. Disclosures should
also describe the implications of different loss
mitigation options. In the case of short sales
or other programs that provide for loan balance reductions, the disclosures would describe
whether the consumer would be held liable for
the shortfall; the terms of repayment, if any; and
possible tax implications or the impact on the
consumer’s credit rating.
■ ■ Lack of employee monitoring. Financial
institutions should have supervisors conduct regular monitoring of collection calls and even consider recording calls for quality control processes.
Once gaps and remedies are identified, the
bank must create a prioritized timeline for implementing remedies, taking available resources
and timing requirements into account. A relatively minor issue, such as a misspelling in a
required document, obviously warrants a lower
priority than a lack of required disclosures.
going deeper:
data Analysis and File Review
A financial institution might find that it requires data analysis or file review to provide
an even deeper assessment of its risks. It could
conduct data analysis to identify potential
discriminatory trends if the risk assessment
uncovered process weaknesses. The risk assessment might reveal the lack of clear standards
for the bank’s extended payment program, so
the terms offered vary depending on the collector, the area, or some other factor. Even if unintentional, this could result in borrowers being
treated differently on a prohibited basis.
Various reports could be generated that
would compare key outcomes to identify potential fair lending issues. For example, reports
might provide information on:
■ ■ Rates and terms of loss mitigation programs
■ ■ Borrowers who were not approved for loss
mitigation programs
■ ■ Borrowers who were not offered loss mitigation programs
■ ■ Borrowers who were provided with balance
reductions
■ ■ Foreclosures
■ ■ Repossessions
To the extent the data is available, individual
reports might include information on govern-
ment monitoring and other key variables, such
as debt-to-income and loan-to-value ratios.
Separate reports by product type might be
necessary because certain programs, particularly for mortgage loans sold on the secondary
market, might have defined loss mitigation
programs that could differ from those offered
for portfolio loans.
These reports could be analyzed to determine
whether there were any potential patterns that
could be evidence of illegal discrimination. Similar to traditional fair lending data analysis, the
analysis would assess consistency in credit decisions and the terms of the credit offered, as well
as decisions to proceed with collection action.
If the data review identified potential disparate
treatment based on a prohibited basis, the institution should perform more in-depth reviews
of individual borrowers’ specific information
to determine if a valid explanation exists for the
different treatment. File reviews might include
examining borrowers’ applications, credit reports,
collateral values, and similar information.
Act now
Financial institutions need well-defined
processes and procedures to manage their
compliance risk from loss mitigation and
loan collection. The new CFPB regulations
for mortgage servicing (which provide a good
indication of regulatory expectations for other
types of loans, as well) outline the minimum
standards and procedures that a bank should
have in place for loss mitigation and loan collection if it wishes to avoid civil monetary
penalties, litigation, and regulatory criticism.
Proactive management that exceeds these
minimums will go a long way toward helping
to mitigate the related compliance risk. ■
ABOUT THE AUTHORS
ERIC DURHAM is a director with Crowe Horwath
LLP in the Grand Rapids, Mich., office. Reach him at
(630) 450-5514 or eric.durham@crowehorwath.com.
PAUL OSBORNE is a partner with Crowe Horwath
LLP in the Indianapolis office. Reach him at (317)
To the extent the data
is available, individual
reports might include
information on
government monitoring
and other key variables,
such as debt-to-income
and loan-to-value ratios.
Separate reports by
product type might be
necessary because certain
programs, particularly for
mortgage loans sold on
the secondary market,
might have defined loss
mitigation programs that
could differ from those
offered for portfolio loans.
