Deregulation Doesn't Mean Lower Risk

QUESTION 

My main concern is that AI is about to take over my human responsibilities. It may come as a surprise, but I am a lawyer who serves as internal counsel for a lender in 35 states. You might think that a lawyer should have nothing to worry about when it comes to AI. I started here two years ago. The company continues to grow. There were four lawyers in our legal department. Yet, now there are three. One of them was fired, and in her place is an AI tool. I have a feeling that I am next to go! 

What are we doing to ourselves? Why are we allowing AI to put us out of work and take our livelihoods from us? These are not humans, yet they can take our human knowledge, pose as humans, and replace us. I see the downsizing of AI replacing humans. 

We are using your AI Policy Program to help us navigate AI’s compliance risks. It looks like AI is here to stay. AI regulations should protect consumers, and AI should not threaten our jobs! 

I see slow-to-no AI regulations and very little understanding of how it will adversely affect humans.   

What is being done to regulate artificial intelligence? 

OUR COMPLIANCE SOLUTION

AI POLICY PROGRAM FOR MORTGAGE BANKING™    

Our AI Policy Program aligns with Freddie Mac's and Fannie Mae’s requirements.   

Our AI Policy Program consists of the following policies:  

1.       AI Governance Policy 

2.       AI Use Policy  

3.       AI Workplace Policy  

4.       AI Credit Underwriting Policy  

5.       AI Do & Do Not Policy  

6.       AI Ethics Policy  

7.       AI Vendor Management Policy 

8.       AI Mortgage Fraud Policy 

9.       AI Anti-Money Laundering Policy

Contact us for Information! 

RESPONSE 

You say AI is not human, and it certainly isn't. Indeed, the Internet and its derivatives, such as social media, are not human. The Internet, social media, and AI are all inanimate, lifeless, insentient, spiritless, uninhabited, inorganic, labyrinthine, concatenating chains that are composed of winding strands of human meaning. 

These chains have no significance other than the understanding we invent for them. They are not our essence. We follow those chains, each of them like endless sands on a vast beach. The sands are unlimited, but the ones in our hourglass are finite. 

We are Hansel and Gretel, following breadcrumbs that lead to the cannibalistic witch. Inevitably, these brute, cold, insensate vessels into which we pour our being do not know we are there. They are numb, dumb, and oblivious, soullessly mimicking us, like an alien intelligence whose center is everywhere. 

Attempts to regulate AI technologies have not shown much foresight. Some of this negligence is by design and stems from an inability to recognize its implications. The mad dash into a new, unregulated, or semi-regulated technology is hubris borne of money, politics, and ego. AI technologies are expanding at a rate that outpaces the development of regulatory frameworks to mitigate their risks. 

The alien intelligence is ready for us. Are we ready for it? 

Over the past year, federal regulators have sharply pulled back on AI-related enforcement, including fair lending. The CFPB has scaled back liability for disparate impact under ECOA. Bank examiners are conducting fewer fair lending risk assessments. The administration has made deregulation its explicit policy goal. It would be easy to read this as a green light. It isn't. 

"Deregulation" Doesn't Mean Lower Risk 

What's actually happening is a shift in venue, not a reduction in exposure. Enforcement is moving from Washington to state attorneys general, private litigation, and a separate federal statute that nobody has rolled back. For mortgage originators and servicers using AI in underwriting, pricing, marketing, or servicing, the practical compliance burden hasn't gone away. It is just coming from different directions, and those directions are harder to predict than a single federal rulebook ever was.

Will AI Reduce Fair Lending Violations?

YOUR COMPLIANCE QUESTION 

Our company is building an AI engine to monitor for fair lending violations. The AI system is extensive and includes chatbots. It will be integrated into our LOS and several other systems. We are a large mortgage originator and servicer. We use one of the most well-known platforms for loan originating and servicing. The system offers several new AI features. But we ran our own test against the LOS and found that our AI engine is identifying more fair lending issues than the one embedded in the LOS. 

As the company's General Counsel and Chief Risk Officer, I was shocked that building our own AI system could produce better results than a highly rated, well-established LOS. Granted, our AI system is proprietary and reflects our unique compliance needs. Full disclosure: We have been a client of yours for over 15 years, and we have discussed these and other AI findings with your team in order to mitigate compliance risk. 

I wonder if a one-size-fits-all AI integration in the LOS can really be effective, given that fair lending involves many state and federal regulations. We are testing and monitoring our AI integration, but many companies lack the resources we have and will rely on their LOS provider's results. 

Do you think a generic AI system can reduce fair lending violations? 

Signed, 

Risk Averse 

OUR COMPLIANCE SOLUTION 

AI POLICY PROGRAM FOR MORTGAGE BANKING™ 

Our AI Policy Program aligns with Freddie Mac's AI governance requirements for Freddie Mac Sellers/Servicers. Responsible AI practices can help align AI system design, development, and use with applicable legal and regulatory guidelines. 

Our AI Policy Program consists of the following policies: 

1.      Artificial Intelligence Governance Policy

2.      Artificial Intelligence Use Policy

3.      Artificial Intelligence Workplace Policy

4.      Artificial Intelligence Credit Underwriting Policy

5.      Artificial Intelligence Do & Do Not Policy

6.      Artificial Intelligence Ethics Policy

7.      Artificial Intelligence Vendor Management Policy 

Contact us for the presentation and pricing.  

RESPONSE TO YOUR QUESTION 

Let me begin with my conclusion: there is currently no one-size-fits-all, generic AI system that can be thoroughly relied on to reduce fair lending violations. 

Most companies will rely on originating and servicing platforms that integrate AI into fair lending analytics. Unfortunately, companies are generally liable for AI errors, particularly when AI causes financial losses, safety issues, or provides consumers with false information. Legal responsibility typically falls on the business deploying the technology, even if it properly monitors, tests, or ensures that the AI is fit for fair lending detection. 

Legal and Regulatory Risk 

Put another way, your business is responsible for any misinformation provided by your AI chatbots. As you likely know, there are certain aspects of tort law, like duty of care, that require individuals and entities to act with reasonable care to avoid causing foreseeable harm to others. It forms the basis of negligence claims; if this duty is breached and causes injury, the responsible party may be held liable. 

I have repeatedly said that companies must ensure AI systems are properly trained and monitored to avoid liability for errors caused by biased AI. Although developers may be liable for inherent defects, the business deploying the AI is often responsible for how the system is used. 

If you are going to use AI to detect fair lending, you must be able to identify disparate impact patterns across demographic groups, monitor for "redlining" analogs in digital lending, flag outlier decisions that deviate from modeled norms, and generate audit trails for regulatory review. 

AI is rapidly transforming the mortgage industry, promising increased efficiency, faster decision-making, and improved risk assessment. Still, its integration poses significant challenges related to fair lending compliance, data bias, and transparency. While AI can expand credit access by utilizing alternative data, it risks perpetuating historical biases if models are trained on biased data or utilize "black box" algorithms that make decisions hard to explain.

Digital Advertising Disclosures

QUESTION 

We are going to start digital advertising soon. This is not an area that we understand well. We brought in an outside consultant for some guidance. They are good with marketing but have no experience in compliance. 

I drafted the advertising policy and kept it updated. However, the section on digital marketing has to be completely revised. I need some rudimentary definitions of digital advertising and a few guidelines for disclosures. 

What is digital advertising? 

What are some guidelines for digital advertising disclosures? 

ANSWERS 

For regulatory compliance purposes, I define digital advertising as a form of marketing through online channels, such as websites, streaming content, and more. My views throughout this article are meant to apply to regulatory compliance concerning mortgage banking. 

Advertising compliance is tricky and highly technical, legally speaking, and it is highly regulated. To support our clients, we offer Advertising Reviews and Marketing Compliance Reviews. 

Contact us here for information about these and other compliance services. 

Digital ads span media formats, including text, image, audio, and video. These ads are also used for brand awareness, customer engagement, launching new products, and driving repeat sales. 

Terms and Definitions 

According to Regulation Z, an advertisement is "a commercial message in any medium that promotes, directly or indirectly, a credit transaction." 

And "triggering terms" are specific terms used in various advertising media that "trigger" additional disclosures. 

Generally, the term "advertisement" does not include promotional material containing fifteen words or less that does not contain references to specific rates, points, discounts, fees, material loan factors, or "triggering terms," for instance, such as imprinted pencils, pens, or balloons. 

Traditional Advertising 

There's a considerable difference between traditional advertising, such as magazines, billboards, and direct mail, and digital advertising. Here's a non-comprehensive list of traditional advertisements: 

·      Newspapers, magazines, or catalog advertisements; 

·      Brochures, direct mail literature, messages on customer statements, or other printed materials, including applications; 

·      Electronic media, including Internet home pages and electronic billboards; 

·      Signs, either interior or exterior, and displays, and billboards; 

·      Radio, television, or public address system broadcasts; 

·      Oral communications between financial institution employees and actual or potential customers, including telephonic and face-to-face solicitations or responses to inquiries; and 

·      Communications made through Facebook, LinkedIn, text messaging, and other social media avenues. 

A host of federal and state regulations are involved in advertising compliance. For instance, an assortment of Acts, statutes, rules, regulations, guidelines, and practices apply at the federal level. Here are just a few of them: 

·     Fair Housing Act

·     Equal Credit Opportunity Act

·     Truth in Lending Act

·     Federal Trade Commission Mortgage Advertising Rules

·     The Federal Trade Commission (FTC) implemented the Mortgage Acts and Practices – Advertising (MAP) rules. MAP rules are designed to prohibit misrepresentations regarding mortgage products.

·     FHA/HUD Regulations

·     Real Estate Settlement Procedures Act

·     Unfair, Deceptive, or Abusive Acts or Practices 

We have found two key differences between traditional and digital advertising in our advertising compliance reviews. These differences are resilience and precision. 

Resilience 

An example of resilience is how quickly digital ads can go live. Printing and distributing ads through traditional channels – such as sending out newspapers or painting a billboard – can take significant time. However, digital advertising has a much shorter lead time, appearing on a website almost immediately after publishing the ad. If the digital ad is based on a template, the process may take only a few minutes. 

Another feature of resilience is, unlike print advertising, where an ad can't be changed once it has been published, digital ads are resilient even after the campaign goes live. Depending on the specific channel, it may be possible to adjust the creative content, timing and frequency, targeting, and more. Professional marketers call this "in-flight optimization," where you can make adjustments to ad campaigns based on how they are performing. 

Digital advertising also allows for budget adjustments in real-time. Complex and high-profile digital advertising campaigns may be just as expensive as traditional advertising (or more). Still, digital ads are also accessible to many financial institutions without significant budgets and may scale up or down to match the financial investment. 

Precision 

We have found that digital advertising provides another key difference between itself and traditional advertising. Traditional ads in magazines, on TV, or billboards reach anyone who sees them. In contrast, digital advertising lets the financial institution use different targeting methods to be more precise and reach audiences more likely to be interested in its products and services. 

Depending on the format, a company may limit its digital ad to certain times of day or exclude audiences who have already viewed the ad from seeing it again. With digital ads, an institution can reach audiences browsing online for loan products. Or the digital ad might reach the target audience when they're streaming a TV show, visiting a favorite website, or using social media. Even if they don't choose to contact the advertiser at that moment, reaching them in these different contexts can help them remember the institution's brand. 

Here's a non-comprehensive list of digital advertisements: 

·      Display advertising. These ads use text and visual elements, such as images or animation, and can appear on websites, apps, and devices. They appear in or alongside the content of a website. 

·      Online video advertising. These are video ads that use a video format. Video ads appear in places similar to display ads: on websites, apps, and devices. In-stream video ads appear before, during, or after video content. 

·      Search advertising. Also called search engine marketing (SEM), these ads appear in search engine results pages (SERPs). They are typically text ads that appear above or alongside search results. 

·      Audio advertising. These ads play before, during, or after online audio content, such as streaming music or podcasts. 

·      Social media advertising. Ads that appear on social media platforms like Facebook or LinkedIn. 

·      Streaming media advertising. These video ads appear in streaming media content delivered over the Internet without satellite or cable. 

ECOA Self-Tests

QUESTION

Our regulator suggested that we do a self-test of our ECOA Regulation B compliance. 

We originate loans in 24 states. Also, we have a multi-billion dollar servicing portfolio. 

As the Compliance Officer and General Counsel, I believe there are legal privileges relating to the work product derived from a self-test. However, I can’t find much information about such privilege or whether it also applies to self-correction too. 

We are voluntarily conducting the ECOA self-test to ensure compliance with fair lending requirements, among other things. We have done fair lending reviews previously; however, we believe that conducting ECOA self-test and self-correction reviews would provide additional legal protection. 

What is the legal privilege provided by conducting ECOA self-tests? 

ANSWER

In 1996, amendments were made to the ECOA and the Fair Housing Act (FHA) as part of the Economic Growth and Regulatory Paperwork Reduction Act of 1996. These provisions create a legal privilege for information developed by creditors through voluntary self-tests conducted to determine the level or effectiveness of their compliance with the ECOA and the FHA, provided that appropriate corrective action is taken to address any possible violations discovered. 

To elucidate further, a government agency may not obtain privileged information for use in an examination or investigation relating to compliance with the ECOA or the FHA, or by a government agency or credit applicant in any proceeding in which a violation of the ECOA or the FHA is alleged. The 1996 act also provides a challenge to a creditor’s claim of privilege may be filed in any court or administrative law proceeding with appropriate jurisdiction. 

The privilege, therefore, serves as an incentive by assuring that evidence of discrimination voluntarily produced by a self-test will not be used against a creditor, provided the creditor takes appropriate corrective actions for any discrimination that is found. 

Consider using our ECOA Tune-up as a tool to review your Regulation B compliance. It will help you gain an overall readout of your ECOA implementation. 

Regulations implementing the self-test privilege were adopted under the ECOA as section 1002.15 of Regulation B,[i] and the same was done for the FHA provisions. The rules are virtually the same for both, with the primary difference being the scope of the two laws. 

Under the rules, a self-test is defined as 

any program, practice, or study designed and specifically used to determine the extent or effectiveness of a creditor’s compliance with the ECOA or the FHA, if that program, practice, or study creates data or factual information that cannot be derived from loan or application files or other records related to credit transactions. 

This definition of self-test includes, but is not limited to, the practice of using fictitious applicants for credit (i.e., testers). 

A creditor also may develop and use other methods of generating information that is not available in loan and application files, for example, by surveying mortgage loan applicants to assess whether applications were processed appropriately. 

However, there is a fundamental distinction: the definition does not include creditor reviews and evaluations of loan and application files, either with or without statistical analysis. Therefore, the self-test privilege does not protect any analysis or review of loan and application files. 

Appropriate corrective action is required for the privilege to apply when the self-test shows that it is more likely than not that a violation occurred – even though no violation has been formally adjudicated. That said, taking corrective action is not an admission that a violation occurred. 

The lender must take corrective action that is reasonably likely to remedy the cause and effect of a likely violation by:

·       Identifying the policies or practices that are the likely cause of the violation; and 

·       Assessing the extent and scope of any violation. 

Appropriate corrective action may include both prospective and remedial relief, except that to establish a privilege, the lender: 

·       Is not required to provide remedial relief to a tester used in a self-test;

·       Is only required to provide remedial relief to an applicant identified by the self-test as to one whose rights were more likely than not violated; and

·       Is not required to provide remedial relief to a particular applicant if the statute of limitations applicable to the violation expired before the creditor obtained the self-test results or the applicant is otherwise ineligible for such relief. 

The report or results of a self-test are not privileged if the lender or a person with lawful access to the report or results: 

·        Voluntarily discloses any part of the report or results, or any other information privileged under this section, to an applicant, government agency, or the public;

·        Discloses any part of the report or results, or any other information privileged under the self-test rules, as a defense to charges that the creditor has violated the act or regulation; or

·        Fails or is unable to produce written or recorded information about the self-test that must be retained under the rules when the information is needed to determine whether the privilege applies. (In general, self-tests and results must be retained for 25 months after completion.)

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director 

Lenders Compliance Group

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[i] 12 CFR 1002.15, § 6.14 Incentives for Self-Testing and Self-Correction

Social Media Influencers

QUESTION
Our marketing department has hooked up with a social media influencer. 

We are a mortgage lender, and I am the Compliance Manager. I am concerned about social media in particular, let alone getting involved with an influencer. My CEO seems all gung-ho about it, but I’m trying to get some guardrails into place. Hey, we’re not promoting cakes and cooking tips on Tik Tok around here! 

This situation touches on several regulations, as you know. I think I’ve adequately addressed the regulatory issues. But what about all the rest? 

I need strong, practical, actionable guardrails beyond the regulations. 

What guardrails can I require of social media influencers? 

ANSWER
You are correct: a social media influencer relationship is going to cause a host of regulatory concerns. Don’t for a minute think that the regulators are not watching for such social media arrangements. The plethora of potential regulatory violations is mind-blowing. I realize that you have the regulations covered, but I am going to offer some suggestions that will help you with the regulatory risks. 

I will answer your question from the angle of the Federal Trade Commission (FTC), whose input and guidance you might not have considered. The FTC has provided a set of guidelines[i] (or, to use your expression, “guardrails”) for arrangements with social media influencers. However, I will broaden the guidance to ensure you focus on specific aspects of this relationship. 

First, I like to begin with a definition. For the purposes of explication in this article, I define a social media influencer as persons and entities (“influencer”) that use social media to suggest,  recommend, promote, or endorse products and services offered by another person or entity. 

Let me be clear, several federal and state laws affect advertising by mortgage lenders and brokers. The most important are the Truth-in-Lending Act (TILA), the Equal Credit Opportunity Act (ECOA), the Fair Housing Act (FHA), the Telemarketing and Consumer Fraud and Abuse Prevention Act, the Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) and similar unfair and deceptive trade practice statutes adopted by the various states. But there are other applicable statutes. Also to be considered are the Mortgage Advertising Practices (MAP) regulations originally published by the FTC, then republished in December 2011 by the CFPB. 

Secondly, I will define the term “advertising.”  For purposes of this article, advertising includes any appeal or solicitation a mortgage lender or broker makes to existing or potential customers, whether consumers, real estate firms, brokers, builders, or developers.[ii] It includes, but is not limited to: 

- Newspaper and magazine advertisements,

- Television and radio spots,

- Social media advertising and promotions (i.e., endorsements),

- Telemarketing scripts,

- Brochures,

- Direct mail letters,

- Messages printed on monthly statements,

- Leaflets, and

- Handouts distributed at training sessions, meetings, and conventions.

Generally, “advertising” does not include customized letters tailored to customers who already have applied for or selected the product or service being promoted in the letter, such as commitment letters, decline or turndown letters, counteroffers, notices of incomplete application, and responses to inquiries or complaints.[iii] 

Pens, cups, hats, key chains, and similar promotional items also need not be considered “advertising” if they merely contain the company name or logo and it is impractical to apply standard rules and policies to them.[iv] 

As I’ve counseled many times, lenders should adopt strict policies and controls over advertising materials prepared in their name or by their employees or agents to ensure that advertising complies with the sometimes complicated rules contained in the statutes and regulations. Financial institutions should require all advertising material and marketing campaigns to be reviewed and approved by a compliance professional before publication. 

Our firm has a robust practice in advertising compliance. Click Here for more information if you want to consider our support for advertising compliance. 

Just a historical note: according to the CFPB, examiners in 2014 and 2015 found that social media advertising at several lenders had escaped monitoring or compliance review, resulting in loan originators creating their own content advertising the length of payment, amount of payments, number of payments, and finance charges, without providing required disclosures in violation of Regulation Z (Truth-in-Lending). The institutions agreed to appropriate corrective actions. Now, there is a binge on social media influencers to contend with. Be careful! 

With the foregoing in mind, the following set of bullets should be included in your policy and procedures for social media influencer relationships. By "policy and procedures," I mean that appropriate due diligence requirements should include social media, advertising, and marketing.

- The influencer should clearly and conspicuously indicate the relationship between the influencer and the other party, such as an affiliate (viz., “we’re affiliated companies owned by the same parent company”).  

- If the other person or entity gives the influencer a benefit in return for mentioning its products and services, the influencer should mention that benefit (viz., “we receive compensation from [the other firm] in return for mentioning its products and services”). A “benefit” feature, if not properly structured, may well be a violation of RESPA Section 8. Watch out! 

- The influencer should treat tags, likes, pins, and similar ways of showing the influencer likes a product or service as endorsements that require disclosures. 

- The influencer should place each disclosure so it’s hard to miss. A disclosure should appear along with the endorsement message and should not appear only if the viewer must click more to reach it. 

- The influencer should not mix the disclosure with a group of hashtags or links, although the disclosure could include a hashtag such as #ad or #sponsored. 

- If an endorsement appears in a picture on platforms like Snapchat, Instagram Stories, Facebook, Tik Tok, or Twitter, the disclosure should be superimposed over the picture in a way that ensures viewers have time to notice and read it. 

- If the endorsement appears in a video, a disclosure should appear both in audio and video as part of the video and not just in a description uploaded with the video and not only in words superimposed on a video. 

- If the endorsement is made in a live stream, the disclosure should be repeated periodically so viewers who see only part of the stream will get the disclosure. 

- Disclosures should use unambiguous and straightforward language, without vague or confusing terms such as uncommon abbreviations or shorthand. 

- A disclosure should be in the same language as the endorsement. 

- An influencer should not assume that a platform’s disclosure tool is sufficient; instead, it should only consider using that tool in addition to the influencer’s own good disclosure. 

- An endorsement should be honest and truthful. For instance, an influencer should not mention experience with a product the influencer has not tried, say the product is terrific if the influencer thinks it’s terrible, or make up a claim requiring proof the influencer does not have.

- The influencer should ensure its disclosures are properly implemented and not rely on someone else to make them.

Jonathan Foxx, Ph.D., MBA

Chairman & Managing Director

Lenders Compliance Group

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[i] Disclosures 101 for Social Media Influencers (November 2019)

[ii] Federal Reserve Regulation Z, 12 CFR § 1026.2(a)(2) and its staff commentary

[iii] Regulation Z Staff Commentary, 1026.2(a)(2)-1(ii)

[iv] Cf. 12 CFR § 328.3(c)(10)

Fair Housing Act – Advertising Violations

QUESTION
We had a Fair Housing Act examination recently by our state banking department and got hit with a citation for violations. This came as a real shock to us. 

 We have 30 days to fix the issues and also prove that we have done a thorough review of our advertising to look for potential Fair Housing violations. We only have one person in compliance – me! I have done a lot of research for this response. But this seems like an overwhelming task. 

So, I’m turning to you for some guidance. 

Are there some basic things I should be looking for in our advertising?

ANSWER
I recognize this may cause some pressure, but you’ll do fine as long as you undertake the review in a careful and procedural way. You need to produce a report that provides specimens of the advertisements (before and after revisions), the remedial actions taken with respect to those particular advertisements, and the advertising policies and procedures that your financial institution implements. 

My firm does advertising compliance reviews all the time and, if you need assistance, please contact me HERE. I’ll have your advertisements reviewed immediately by competent subject matter experts.

Keep in mind, advertising compliance draws on numerous interlocking regulations, Acts, Best Practices, rules, disclosure mandates, and so forth. A small mistake can get magnified quickly into a litigious class action issue, let alone a federal or state administrative action. So, make it your business to review each advertisement before it is published. Seek appropriate compliance support if there is a scintilla of doubt or uncertainty.

As to a consideration of things to be on the look out for, I would put the following on the list. Though it is not comprehensive, I think it serves to set the tone for further reviews on your part. 

And, as I said, contact me if you need further support. 

My comments are based on Fair Housing Act mandates.

• Advertisements must include the equal housing logo a statement that you are an equal housing lender. In printed advertising, the logo must be no smaller than:
• 1/2 page or larger ad (2 × 2 inches) 
• 1/8 page up to 1/2 page ad (1 × 1 inch)
• 4 column inches to 1/8 page ad (1/2 × 1/2 inch)
• Less than 4 column inches (Need not use the logo, but must use the legend “Equal Housing Lender”) 

• In any advertising other than printed advertising, the logo must be at least as large as any other logo used. If no other logo is used, then the fair housing logo must be clearly visible in boldface type or at least 3 percent of the advertisement should be devoted to a statement of the fair housing policy.

• For oral advertising, you may satisfy the Fair Housing Act advertising requirement by stating that you are an “equal housing lender.”

• When advertising is both verbal and visual, you should use either method (a visual logo or a spoken statement) to meet the requirement.

• Each public office should prominently post an equal housing lender poster.

• Advertising may not contain any words, symbols, models, or other forms of communication suggesting a discriminatory preference or policy of exclusion because of race, color, religion, national origin, sex, handicap, or familial status. When using models in advertising, you should use models from different racial groups.

• You should avoid the following:

• Words descriptive of a dwelling, landlord, or tenants, such as white private home, colored home, Jewish home, Hispanic residence, or adult building.

• Words indicative of a prohibited basis, such as: 

— Race: Negro, Black, Caucasian, Oriental, American Indian.

— Color: White, Black, Colored.

— Religion: Protestant, Christian, Catholic, Jew.

— National Origin: Mexican American, Puerto Rican, Philippine, Polish, Hungarian, Irish, Italian, Chicano, African, Hispanic, Chinese, Indian, Latino.

— Sex: The exclusive use of words in advertisements (such as “he” or “she”), stating or tending to imply that the loans being advertised are available to persons of only one sex and not the other.

— Age: Senior citizens.

— Handicap: Crippled, blind, deaf, mentally ill, retarded, impaired, handicapped, physically fit.

— Familial Status: Adults, children, singles, mature persons.

• Words and phrases used in a discriminatory context, such as “restricted.”

• “Red light” words. Examples of “red light” words include “sports enthusiasts,” which could discourage the handicapped, and “quiet neighborhood,” which could be a code word for “no children.” 

• Symbols or logotypes that imply or suggest race, color, religion, sex, handicap, familial status, or national origin.

• Colloquialisms used regionally or locally that suggest race, color, religion, sex, handicap, familial status, or national origin.

• You should avoid the selective use of advertising media or content, such as:

• The use of the English language alone or the exclusive use of media catering to the majority population in an area, when non-English language or other minority media also are available.

• The strategic placement of billboards, brochures distributed within a limited geographic area, or displays or announcements only available in selected branches.

• The use of human models primarily in media that cater to one racial or national origin segment of the population without a complementary advertising campaign directed at other groups.

Be sensitive to the potential discriminatory effects of your marketing practices! For example, if you often focus on contacts with real estate agents and mortgage brokers as a primary marketing strategy to generate loan applications, you should be careful to include contact with minority real estate agents and loan brokers and other real estate agents and loan brokers serving predominantly minority areas.

Like the Equal Credit Opportunity Act, creditors under the Fair Housing Act may affirmatively solicit or encourage members of traditionally disadvantaged groups to apply for credit.

Jonathan Foxx, Ph.D., MBA

Chairman & Managing Director

Lenders Compliance Group

Navigating the COVID-19 Loss Mitigation Options

QUESTION

We originate and service a lot of FHA loans, both refinance and purchase money. Recently, FHA put out a Mortgagee Letter that involves loss mitigation options during the COVID-19 pandemic.

Our compliance department is just two people, and we are getting bombarded with loss mitigation issues on our FHA loans. The Mortgagee Letter is so filled with legalese that we can’t make sense of some of the requirements.

Hopefully, you can enlighten us without the legalistic mumbo-jumbo.

So, in normal lingo, what are some of the main features of these COVID-19 loss mitigation requirements?

ANSWER

I know how you feel. Some issuances from federal agencies are so overly-lawyered that only the lawyers seem to be able to interpret them. Maybe it's their way of keeping job security!

But, to keep it real, the financial services industry is highly litigious, which is a reflection of its many accrued regulations as well as the mandates to implement federal and state banking laws. It is often not that we have too many rules and laws. Most existing laws simply need to be enforced. Lack of enforcement is a much bigger problem than too many laws. So, sometimes we just need to be patient with the legalese. After all, a day may come when you need a good lawyer to defend actions you have taken in good faith. And I am more than happy to provide the straight-out plain talk, and hopefully, a better understanding to be able to subdue some of your bewilderment.

The HUD issuance you are referring to is Mortgagee Letter 2020-22, which is dated July 8, 2020. It pivots from the previous Mortgagee Letter 2020-06 of April 1, 2020. The earlier ML was issued as a response to the Coronavirus Aid, Relief, and Economic Stimulus (CARES) Act, which was signed into law on March 27, 2020. ML 2020-06 provided guidance in establishing (1) the Forbearance for Borrowers Affected by the COVID-19 National Emergency (COVID-19 Forbearance), (2) the COVID-19 National Emergency Standalone Partial Claim (COVID-19 Standalone Partial Claim), and (3) the extension period for Home Equity Conversion Mortgages (HECM) affected by COVID-19.

We discuss these guidelines to some extent in our free Checklist and Workbook on the Business Continuity plan and Pandemic Response (which, by the way, will soon be published in Update # 8.) Download it HERE.

ML 2020-22 deals with additional Loss Mitigation Home Retention Options due to the COVID-19 National Emergency. The ML pertains to forward mortgages. Note the word “options.” The options are available to borrowers affected by the COVID-19 national emergency who were current or less than 30 days past due as of March 1, 2020. With respect to mortgage servicing, the servicers must offer eligible borrowers the COVID-19 Loss Mitigation Options no later than 90 days from the date of the ML (viz., July 8^th), but servicers may begin offering the new options immediately.

So, the ML 2020-22 updates the guidance in ML 2020-06, and the requirements are going to be incorporated into HUD Handbook 4000.1. ML  2020-06 dealt with the COVID-19 forbearance based on the CARES Act and the COVID-19 Standalone Partial Claim. Now, HUD is issuing the ML 2020-22 to fortify on such measures by establishing the following six COVID-19 Home Retention and Disposition Options:

1. COVID-19 Owner-Occupant Loan Modification
2. COVID-19 Combination Partial Claim and Loan Modification
3. COVID-19 FHA-Home Affordable Mortgage Program (FHA-HAMP) Combination Loan Modification and Partial Claim with Reduced Documentation (which may include principal deferment and requires income documentation)
4. COVID-19 Non-Occupant Loan Modification
5. COVID-19 Pre-Foreclosure Sale (PFS)
6. COVID-19 Deed-in-Lieu (DIL) of Foreclosure

I’m going to explain these options in cursory detail. The options require systemic implementation. Make sure you discuss these options with a compliance professional. If you need assistance, we’re here to help. Let me know. Click HERE.

The options are meant to provide methods to reinstate a mortgage after the expiration of the COVID-19 forbearance period. The COVID-19 Standalone Partial Claim – indeed, the first three options listed above – are available for eligible owner-occupant borrowers who are able to resume their monthly mortgage payment (or, if applicable, a modified payment).

The COVID-19 Non-Occupant Loan Modification is available for eligible non-occupant borrowers who are able to resume the monthly mortgage payment (or, if applicable, a modified payment).

The use of a COVID-19 Home Retention Option does not count against a borrower’s limit of one FHA-HAMP agreement within 24 months. The last two options – specifically, the Home Disposition Options – are available for eligible owner-occupant and non-occupant borrowers who are unable to reinstate the mortgage.

For eligible borrowers, servicers must complete a Loss Mitigation Option no later than 90 days from the earlier of the completion or expiration of the COVID-19 forbearance. For the Home Disposition Options, a signed Agreement to Participate (ATP) Agreement or signed DIL Agreement will meet this requirement.

For borrowers who are participating in a COVID-19 forbearance, servicers are granted an automatic 90-day extension of the first legal deadline date, from the earlier of the completion or expiration of the COVID-19 forbearance, to complete a Loss Mitigation Option or to commence or re-commence foreclosure.

By the way, a trial payment plan is not required for a borrower to be eligible for a COVID-19 Loss Mitigation Option.

Now I am going to get into some detail, but I hope to keep it measured, succinct, and brief. Where possible, I will provide a bulleted outline. I will discuss the -

• COVID-19 Standalone Partial Claim,
• COVID-19 Owner-Occupant Loan Modification,
• COVID-19 Combination Partial Claim and Loan Modification,
• COVID-19 FHA-HAMP Combination Loan Modification and Partial Claim with Reduced Documentation, and 
• COVID-19 Non-Occupant Loan Modification.

COVID-19 Standalone Partial Claim

The borrowers who receive a COVID-19 forbearance must be evaluated for the COVID-19 Standalone Partial Claim no later than the end of the forbearance period.

There are three criteria that the servicer must confirm, to wit, that -

(1) the borrower was current or less than 30 days past due as of March 1, 2020,
(2) the borrower indicates an ability to resume making on-time mortgage payments, and
(3) the property is owner-occupied.

The terms of the COVID-19 Standalone Partial Claim are the following: 

• The borrower’s accumulated late charges, fees and penalties are waived;
• The COVID-19 Standalone Partial Claim amount includes only arrearages that consist of principal, interest, taxes and insurance;
• The COVID-19 Standalone Partial Claim does not exceed the 30% maximum statutory value of all partial claims for an FHA insured mortgage; and
• The borrower may receive only one permanent COVID-19 Home Retention Option.

COVID-19 Owner-Occupant Loan Modification

For borrowers who do not qualify for a COVID-19 Standalone Partial Claim, the servicer must review the borrower for a COVID-19 Owner-Occupant Loan Modification, which modifies the rate and term of the mortgage at the end of a COVID-19 forbearance period.

The servicer must confirm three criteria, to wit, that -

(1) the borrower was current or less than 30 days past due as of March 1, 2020,
(2) the borrower indicates an ability to make the modified mortgage payment, and
(3) the property is owner-occupied.