HPC calls to extend FHA’s servicing defect taxonomy comment period

An industry group in conjunction with consumer advocates is urging policymakers to extend discussions about a proposal aimed at better defining certain compliance standards for mortgage servicers.

In a new letter, the Housing Policy Council and four consumer advocacy-group signatories pressed for federal officials to respond to earlier pleas calling for a longer-term comment period and more dialog on a draft servicing taxonomy for government loans. That comment period is currently due to end on Dec. 27.

The draft taxonomy divides Federal Housing Administration-insured loan defects into four risk tiers. It also puts them into six categories: operations, account management, delinquent and default servicing, loss mitigation processing, home retention and disposition. The proposal additionally cross-references the rules in its handbook that belong in each of the six different categories and outlines some financial and compliance remedies for errors.

For Tier 1 errors such as fraud a servicer “knew or should have known” about due to the involvement of an employee, or red flags in the mortgage file, for instance, the FHA calls for life-of-loan indemnification. This remedy also may generally be applied to Tier 2 violations, which involve missing records and other procedural concerns. Tier 2 infractions also may alternately be remedied through “mitigating documentation” or repayments to borrowers or the FHA. No remedies are listed for things like other procedural violations (Tier 3), and fraud or misrepresentation the lender did or could not have known about (Tier 4).

With nearly 600,000 Federal Housing Administration mortgages seriously delinquent, pandemic-related payment suspensions expiring, other servicing rules changing, and a new FHA appointee pending, HPC wants a 120-day extension to consider the draft classification system closely. In that time, it would ideally consult with the FHA to get more details; and potentially reach a consensus with its members related to suggestions for how the taxonomy ideally could be more fully built out before it is applied. (The taxonomy is patterned after one used in FHA lending, which defines several infractions and correlates them with specific financial and compliance remedies more detailed than those found in the FHA servicing draft.)

“This does have the start of something useful, such as in this severity Tier 1, where they do say for clear fraud or misrepresentation, the remedy would be life-of-loan indemnification. Information like that is helpful even if we don’t necessarily think that’s the right fit,” HPC Vice President Matt Douglas said in an interview. “Where it fell short was with the three other tiers beyond fraud. What are the mistakes that are important? How important are various, specific mistakes, and what is the appropriate remedy for these mistakes? We think that there's just not enough clarity provided by this taxonomy on that.”

The HPC sent its latest request for an extension to Lopa Kolluri, principal deputy assistant secretary for housing, on Nov. 19. It previously co-signed a letter with the Mortgage Bankers Association requesting a 60-day extension a little over a week after the draft taxonomy was released in late October. Both parties were concerned that moving forward on the taxonomy too quickly could be more a hindrance than a help given the hefty processing workloads that servicers currently face.

“This is one of the busiest times in the history of servicing, with mortgage companies trying to get a lot of people out of forbearance and into loss mitigation,” said Douglas. “There will always be the need for more clarity, but right now priority one should be helping borrowers with that transition.”