Consumer groups are urging the monitor of the national mortgage settlement to add data on race, ethnicity and geography to determine whether the five largest servicers are offering relief to communities hit hardest by foreclosures. But language in the settlement agreement may prevent Joseph A. Smith, the independent monitor, from doing so.
Members of the Foreclosure Working Group of Americans for Financial Reform sent a letter to Smith last week asking that he add a new metric to the settlement that would measure fair lending compliance.
Smith says he has had “helpful discussions” with consumer advocates about using Home Mortgage Disclosure Act-type data that could test for anti-discriminatory policies and procedures. But he does not have the authority to create a so-called “outcomes-based metric” regarding discrimination, which would involve sampling of loan level data against a proposed benchmark.
The foreclosure working group has proposed a fair lending metric that is “process-based,” and would allow Smith to comply with the settlement’s language. The metric would require providing principal reductions to communities with high foreclosure rates. Servicers would be asked test questions about whether they have policies that provide outreach to borrowers who speak languages other than English and if the policies include maintaining and reviewing data regarding race, gender, nationality and Zip code to ensure relief is reaching a representative pool of borrowers.
“This important issue is on the table,” Smith said in an email Tuesday. “As I review my options for the creation of additional metrics, I will continue to look at it and other issues as I examine the banks’ compliance with the servicing standards.”
Under the settlement, Smith must apply a series of 29 metrics to measure how well the top five mortgage servicers — Bank of America (BAC), Citigroup (NYSE:C), JPMorgan Chase (JPM), Wells Fargo (WFC) and Ally Financial — are following new servicing standards. The metrics relate to specific issues such as whether a foreclosure sale was in error, a borrower was denied a loan modification or was charged excessive fees.
Smith, the former North Carolina banking commissioner, has the power to create up to three new metrics at his own discretion. He can create more if he sees that banks are violating servicing standards that fall outside the scope of the existing metrics.
Mark Ladov, a lawyer at the Brennan Center for Justice at New York University’s School of Law, says banks should provide detailed geographic and demographic data on the households being helped under the settlement and the monitor should make that data public.
Housing counselors and legal advocates are not seeing any broad-based relief going to hard-hit black and Hispanic communities so far, he says.
“Our hope was that this would transform how banks handle these issues,” Ladov says. “Instead, it’s like a lottery, with the occasional borrower getting a huge write-down, and it’s scattershot, with the hardest-hit communities not getting much.”
Consumer advocates expect plenty of pushback by the five servicers in providing the additional data. But they state in the letter that lenders already report HMDA-like data to the Federal Reserve as part of the Home Affordable Modification Program.
“There is no basis for the banks to decline to report similar information here as well,” the advocacy groups state in the letter. “The terms of the settlement agreement prohibit banks from discriminating against any geographic group or protected class of borrowers. Unfortunately, reports suggest that such discrimination may be taking place.”
Perhaps a more pressing concern is that the servicers are expected to offer the bulk of consumer relief in the first year of the agreement, which is more than halfway over.
“Time is of the essence here because the servicers are going to meet consumer relief obligations fairly soon, so we need the metrics to be in place as soon as possible,” says Kevin Stein, associate director of the California Reinvestment Coalition. “We’re looking for transparency so the public has faith that the benefits flowed fairly.”
Servicers also may be failing to reach all homeowners because letters with settlement offers have primarily been written in English (and some in Spanish), so non-English speakers are at risk of missing out on the consumer relief.
“We would be disturbed if we found that a disproportionate share of principal reductions would be happening in Marin County as opposed to Fresno or Stockton,” says Paul Leonard, the California director at the Center for Responsible Lending. “Data is important to know what is actually happening particularly if only high-income, highest-cost homes were getting principal reductions.”
The intent of the national mortgage settlement was to ensure that the top banks pay for the problems associated with robo-signing and lax foreclosure practices in exchange for receiving waivers of liability on legal claims. The agreement was designed so the banks would invest billions to prevent unnecessary foreclosures and also not pass the costs on to investors.
But one unintended consequence of the agreement is that servicers may end up providing the bulk of relief to higher-income borrowers whose loans they kept in their own portfolios.
Most of the abusive and predatory loans made during the subprime lending boom were packaged into mortgage-backed securities and sold to investors. The settlement allows servicers to receive only 45 cents of credit for every dollar in principal reductions paid for by investors. Banks get $1 of credit for every dollar of principal write downs on mortgages they own, so they have more incentive to resolve those mortgages first.
“Doing modifications on loans in a bank’s portfolio has a disparate impact on communities of color,” Stein says. “Since loans made to neighborhoods of color during the boom years were more likely to be securitized, they are less likely to receive principal reductions.”