Trade groups call for expansion of draft FHA servicing defect taxonomy

The Housing Policy Council and two trade associations like the direction the Federal Housing Administration is heading with its draft servicing-defect taxonomy, but they say it needs more detail.

In a letter sent to meet a Jan. 28 deadline the FHA had extended at the groups’ request, the three organizations said they would like to get more information about which errors could result in enforcement actions, and also engage in a more “iterative” process of drawing up a servicing classification system similar to that previously used for originations.

While the origination taxonomy did lay the groundwork for the servicing equivalent, the three groups noted that the latter needs to be built out further due to differences in the work involved, citing fraud as one example.

“Since loan servicing is less standardized than origination and subject to external factors affecting a borrower’s performance over time, we believe it is rational that the determination of remedies for fraud or misrepresentation account for this changeability with a more comprehensive set of remedies,” the letter from the HPC, the Mortgage Bankers Association and the American Bankers Association said.

A more detailed set of classifications could make a big difference in meeting the project’s aim of giving servicers more certainty about compliance with the FHA’s complex servicing rules, according to the letter.

“A detailed, balanced, and holistic servicing defect taxonomy that presents clear and unambiguous guidance will best achieve FHA’s goals of achieving certainty and clarity for program participants,” the trade groups said in the letter, addressed to Lopa Kolluri, deputy assistant secretary for the Officer of Housing and the administration. “Thus, we urge FHA to consider the development of the servicing defect taxonomy as a long-term project.”

Mortgage servicers specifically want to know what types of defects fit into different categories, the letter writers said.

For example, the FHA’s four risk tiers for servicing, which are split between “unacceptable” and “deficient” errors, lack examples for what would be included in the last two categories.

The writers of the letter also said “remedies identified" for the top two risk tiers "are too limited and are overly reliant on life-of-loan indemnification,” challenging the Department of Housing and Urban Development’s use of the practice in this instance.

“HUD regulations expressly state that failure to comply with servicing requirements … ’shall not be a basis for denial of insurance benefits,’ ” the groups said in their letter, calling indemnification “functionally equivalent to denying insurance benefits in contradiction to this provision.”