Fair Lending Guidelines Hinder Loan Modifications

The federal government passed the Fair Housing Act in 1968 and in response to discrimination is the housing industry.  The Equal Credit Opportunity Act (ECOA) of 1974 began to address inequalities in the extension of credit. 

These statutes apply to standard home loan refinance applications, where the borrower’s credit is reviewed and factored into the lending decision.  Applications or inquiries for home loan modifications may not fall under ECOA guidelines for a number of reasons. 

A request for a home loan modification in many cases does not factor credit quality into the decision-making process.  The ECOA excludes home loan modification requests from its requirements when the applicant is delinquent or in default.  Not all homeowners are delinquent when they apply for a loan modification. 

 The government backed Making Home Affordable (MHA) program may notify borrowers they could be eligible for an MHA loan mod based on the fact they have a loan backed by Fannie Mae.  Many homeowners have mistakenly applied for a loan mod thinking it was also a refinance program and been declined for having too much cash on hand or a debt to income ratio under the program guideline of 31%.  This borrower if current on their mortgage at the time they applied for the loan mod must receive an adverse action notice (decline letter) from the loan servicer. 

A loan application is a request for an extension of credit.  A loan modification that is requesting a waiver of past due interest or a reduction in the principal balance is not asking for credit but debt forgiveness and would not fall under auspices of the ECOA. 

A loan modification may not be governed by the ECOA or other fair lending laws but the procedures for processing them is informed by the standard home loan refinance.  The procedures for taking loan applications whether verbal or written have been shaped over the years by the ECOA.   If someone insists on submitting a loan application, it must be taken or the lender risks violating fair lending laws.

Many borrowers initiate their loan mod applications by phone.  The initial screening is based on criteria established by the United States Department of the Treasury for the MHA and HAMP loan mod programs.  If the borrower passes the pre-screen, their loan is processed for a MHA/HAMP loan mod program.  No problem right, guess again?

The MHA/HAMP program is designed for loans backed by Fannie Mae and Freddie Mac.  What happens if your loan is backed by a private investor and it does not participate in the government backed program?  Your loan will go through the MHA/HAMP pre-qualification process.  You may even be approved for trial modification payments only to find out 60 days late you do not qualify.  All too often, your loan is processed for a government backed loan modification, even if there is no way it will qualify. 

If you are a homeowner who has defaulted on your mortgage payments, you are looking for a solution ASAP.  Why than does your loan servicer consider you for a government back loan mod even though a private investor who does not participate in the MHA/HAMP loan mod program backs your loan?  Initial processing of the MHA loan mod may take 30 – 90 days depending on numerous variables before a decision is made informing you your loans investor does not participate in the government backed program.  The whole premise of putting the borrower through the MHA program first is out of a sense of fairness stemming from the ECOA and there may be financial incentives to the borrower and lending alike.

You have just wasted up to 90 days unnecessarily because your servicer is required to submit your application for the MHA/HAMP program first.  In some cases, 90 days may result in a foreclosure that may not have happened if the borrower was enrolled in the correct program from the beginning.  This is not to say any given borrower is guaranteed an approval for some mod program.  They are not. 

The borrower may call up stating, I want that loan mod Obama is talking about on the TV.  The loan modification negotiator who usually specialized in a particular program will process the application knowing that it will not qualify for the government program, but is required to do so.  The banks have become so conditioned by the ECOA and other fair lending laws that they may not be organizationally aware that their process for loan modifications is hurting some of their borrowers by putting them in the wrong loan mod plan.  The servicer is also hurt when extended processing time results in a foreclosure that may not have happened if the borrower had been put into the right loan mod the first time. 

This problem can be easily remedied.  Require all associates who process loan modifications to know which investors do not participate in the government-backed program.  Council the borrower, advising the ones who insist on the government backed MHA/HAMP that their loan’s investor will not approve them for a loan modification.  You may still need to be required to put the initial application through the MHA program if the borrower insists, but the borrower will be making an informed decision, even if it is not in their best interest.  Mr. and Mrs. Customer, you loan’s investor has not participated in the MHA/HAMP program in the past and we recommend you apply for this program. 

The average amount of time to process a loan mod application will be reduced.  The mortgage servicers that commit to getting its loan mod customers into the right program the first time will benefit in numbers ways.

The number of customers who lose their home to foreclosure will drop if they are directed to the best loan mod program sooner.  The efficiencies created up front will eliminate unnecessary redundancies in the loan mod process.  The boost to public relations will be immeasurable.  Customers resent having to not knowing what program they are in, having to provide updated financial documents every 30 to 60 days and getting the run around because it wasn’t done right the first time. 

If you are a borrower considering applying for a loan modification, ask the loss mitigation specialist not to submit your application in a program that your loan’s investor will never approve.  If the first person you speak to is not knowledgeable, ask for someone who is and insist that you are considered for the appropriate program.

The inefficiencies associated with the loan modification process stems in part from banks following application guidelines set by the ECOA that are designed for standard refinance loans.  Applying these guidelines to loan modifications will delay borrowers from getting the help they need if the lender automatically put the loan mod in for a government-backed program. 

Ditching standard processing guidelines for loan modifications that are designed for refinance loans and replacing them with common sense program placement benefits all. The borrower is in the right loan mod the first time. The lender improves efficiencies, may prevent some foreclosures and improves public relations immeasurably.  A win-win.