An industry group, working with consumer advocates, is calling on policymakers to widen discussions on a proposal that aims to better define certain compliance standards for mortgage service providers.
In a new letter, the Housing Policy Council and four consumer protection group signatories urged federal officials to respond to earlier pleadings calling for longer-term comments and more dialogue on a draft tax taxonomy for government loans. This comment period is currently set to end on December 27th.
The draft taxonomy divides the credit defects insured by the Federal Housing Administration into four levels of risk. They are also divided into six categories: operation, account management, handling of late payments and default, processing of loss reductions, retention of your own home and disposition. The proposal also cross-references the rules in its manual that belong to each of the six different categories and outlines some financial and compliance remedies in the event of errors.
For example, in the case of tier 1 errors such as fraud that a servicer “knew or should have known” due to the involvement of an employee, or warnings in the mortgage file, the FHA demands lifelong compensation. This remedy can generally also be used for level 2 violations involving lack of records and other procedural concerns. Tier 2 violations can alternatively also be remedied through "mitigating documentation" or repayments to borrowers or the FHA. No remedies are listed for things like other procedural violations (level 3) and fraud or misrepresentation that the lender knew or could not have known (level 4).
With nearly 600,000 Federal Housing Administration mortgages seriously defaulting, pandemic suspensions expiring, other servicing rules changing, and a new FHA officer pending, HPC wants a 120-day extension to review its draft classification system. During this time, she would ideally consult with the FHA for more details; and potentially reaching consensus with its members on suggestions on how, ideally, the taxonomy could be built more fully before it is applied. (The taxonomy is based on one used in FHA lending that defines multiple violations and correlates them to specific financial and compliance remedies that are more detailed than those included in the FHA service draft.)
“This starts something useful, like this Level 1 Severity, which says that if there is definite fraud or misrepresentation, the remedy would be lifelong compensation for the loan. Such information is helpful, even if we think it is not necessarily the right thing to do, ”HPC Vice President Matt Douglas said in an interview. “The other three levels were beyond fraud. Which mistakes are important? How important are various, specific errors and what is the appropriate remedy for these errors? We think that this taxonomy just doesn't provide enough clarity on this. "
The HPC sent its final application for renewal to Lopa Kolluri, Assistant Assistant Secretary for Housing, on November 19. The draft taxonomy was published in late October. Both parties feared that advancing the taxonomy too quickly, given the heavy processing loads servicers are currently facing, could be more of a hindrance than a help.
"This is one of the busiest times in servicing history, mortgage lenders trying to get many people out of indulgence and loss control," said Douglas. "More clarity will always be needed, but for now the priority should be to help borrowers make this transition."