Regulators Eyeing Fair Lending and Mortgage Servicing

Within a one-week period in January 2023, the Office of the Comptroller of the Currency (OCC) and the Consumer Financial Protection Bureau (CFPB) updated examination manuals on fair lending and mortgage servicing, respectively, signaling increased regulatory attention on risk management in these two important lending areas. These updates provide risk officers with the opportunity to reassess their risk management practices in these areas.

OCC – Fair Lending

On January 12, 2023, the OCC revised the “Fair Lending” booklet in the Comptroller’s Handbook for the first time in over a decade. Revisions discuss current topics in fair lending, including:

• Models and alternative data
• Automation
• Assessing risk in new products/services
• Assessing fair lending risk and evaluating compliance
• Clarification regarding supervisory guidance, sound risk management practices, and applicable legal standards

Risk and compliance practitioners should review their institution’s fair lending program for:

• Lack of clarity in underwriting processes and procedures
• Secondary review processes over credit decisions
• Third-party relationships that involve marketing
• Fair lending risk assessment process documentation
• Second-line-of-defense monitoring of fair lending risks

CFPB – Mortgage Servicing

On January 17, 2023, the CFPB updated its mortgage servicing examination procedures, last revised in 2016.

The updates mainly address tools, such as streamlined loss mitigation options, available to mortgage servicers during the COVID-19 national emergency, and the continued use of some of the tools to help borrowers experiencing non-COVID hardship remain in their homes. The CFPB is referring to these options as “temporary flexibilities.”

The updates also discuss areas of mortgage servicing that have been addressed in the CFPB’s “Supervisory Highlights” publication, which include:

• Communication with borrowers about loss mitigation options, including recommending the use of HUD-approved counselors
• Fees charged to borrowers, especially when taking a phone payment
• Any misrepresentations made to borrowers regarding foreclosure

Risk officers should review their institution’s mortgage servicing risk assessment process to ensure that it addresses the impact and likelihood of borrower harm. Risk officers should also review prior issues of CFPB “Supervisory Highlights” and meet with first-line-of-defense managers to identify how they utilize the guidance to assess their mortgage servicing program. Additionally, risk management teams should review the institution’s second-line-of-defense monitoring of servicing risks, including the following areas featured in recent issues of “Supervisory Highlights”:

• Call center communications
• Written scripts used in the collection process
• Procedures regarding early intervention and continuity of contact with borrowers
• Credit reporting to credit bureaus

The release of updated supervisory guidance is an opportunity for financial institutions to reassess their risk management programs in the areas of supervisory focus.

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