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Feature Assessing the Risk of Mortgage Servicing Sure, the industry is rife with risks, but having a fair and responsible lending program in place can help lessen their likelihood. By Loretta Kirkwood, Managing Director, CrossCheck Compliance F air and responsible lending risk management has rapidly become one of the most critical areas of compliance management in today's lending environment. The risks are not new. The concept is not new. Regulatory focus, oversight, and enforcement activity, however, is shifting and evolving with each pronouncement by the Consumer Financial Protection Bureau (CFPB) and quite possibly with each completed regulatory examination. During the course of the past 18 months, lenders have been overwhelmed with new rules to implement, as well as guidance and reinterpretation of existing rules—all with the underlying intent of protecting consumers from financial harm. As expected and predicted, the residential foreclosure and declining market issues in recent years have directed attention to the potential for discrimination in mortgage servicing and loss mitigation. The underlying reasons for this shift in focus may be subject to debate, but the importance of developing a fair and responsible lending risk management program for mortgage servicing is not. The good news is that there is no need to start from scratch. The same risks associated with the loan origination process apply to mortgage servicing and loss mitigation. Mortgage servicing practices specifically identified by the CFPB and prudential regulators as "higher-risk areas" include servicing transfers, payment processing, and loss mitigation. Much of the focus has been centered on "unfair" business practices associated with incomplete or incorrect disclosures, inadequate documentation management, and generally disorganized processes throughout the mortgage servicing life cycle. The continuing theme is that a weak or inadequate compliance management system increases fair and responsible lending risk in all aspects of the lending process, including loan servicing and loss mitigation. The importance of protecting mortgage borrowers, especially those who are delinquent or facing foreclosure, is evident in the CFPB's recent guidance. This combined with increased regulatory oversight, community focus, and tightening credit standards underscores the need to develop an effective fair and responsible lending program for mortgage servicing activities. Fair and Responsible F air lending in general is considered to be a "simple" concept, one whose core principles are to be consistent and fair. From a regulatory standpoint, risk of discrimination exists wherever a lender or servicer has a business practice that permits borrowers to be treated either more favorably or less favorably on a prohibited basis, or if the results of analysis of patterns in lending or servicing "indicate" that a prohibited basis group has been disadvantaged in some way. The simplicity ends when you consider the impact of a borrower's perception of the servicing process. Does the borrower view collection, loss mitigation, and foreclosure practices to be fair? In all things, perception overrides logic and creates risk. The complexity of servicing practices creates significant challenges in developing an effective internal control environment. Consideration has to be given to the borrower's understanding of the process, hir or her particular individual circumstances, and desired outcome. Not all borrowers "want" or "need" to be rescued. Discrimination claims can be generated from indications of disparate treatment or disparate impact and do not necessarily require evidence of harm to the borrower. The mere potential for harm is enough to warrant regulatory action. Responsible lending is another element of fair lending and generally refers to the motive for treatment of the borrower. Does a business practice either in truth or concept have the appearance of being unfair, deceptive, or abusive? The focus is on ensuring that borrower communication and the delivery of credit services are fair, understood, transparent, and appropriate to the needs of the borrower. The M Report | 21

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