After months of negotiation, the details on the $25 billion relief settlement are still not fully understood and will likely take weeks to gain clarity. To put it in perspective, this 49-state agreement is the biggest multi-state settlement since the Tobacco Master Settlement Agreement in 1998. According to the government’s posting, “The agreement settles state and federal investigations finding that the country’s five largest loan servicers routinely signed foreclosure-related documents outside the presence of a notary public and without really knowing whether the facts they contained were correct. Both of these practices violate the law. The settlement provides benefits to borrowers whose loans are owned by the settling banks as well as to many of the borrowers whose loans they service.”
According to the Wall Street Journal, the settlement includes three primary components:
• Servicing Standards – New requirements to be used in foreclosure and bankruptcy proceedings.
• Borrower Relief – How banks must help homeowners.
• Bank Credits for Relief – Complex formulas provide credits to banks regarding the credit they receive for extending borrower aid.
So what does all this mean? The settlement reminds us that fair lending includes fair servicing. The two primary laws governing fair lending (Fair Housing Act and the Equal Credit Opportunity Act) do include loan servicing elements. For example, the ECOA covers every aspect of an existing “credit transaction,” including information requirements, insurance, re-appraisal of collateral, alteration of credit, and collection procedures.
Therefore, a bank’s fair lending review should include the financial institution’s loan administration. Policies and procedures for dealing with education, collections, loss mitigations and foreclosure should be reviewed along with actual practices to ensure you are not servicing credit differently, on a prohibited basis. Pay specific attention to areas where there may be discretion, because the higher the level of discretion, the greater the potential for disparities in outcome.
You can get a head start on your fair lending review by clicking here to download four free reports containing data specific to your financial institution.