Originally published in ABA Risk and Compliance, March/April 2025
A review of recent CFPB enforcement action and Supervisory Highlights reveals numerous mentions of servicing practices across various financial products. State agencies have also taken action in response to servicing errors. Fair servicing is garnering significant interest. Although scrutiny has increased, regulatory interest in fairness in servicing is not new. The Equal Credit Opportunity Act[i] prohibits discrimination on a prohibited basis in any aspect of a credit transaction, which would include loan servicing. Additionally, the Fair Housing Act prohibits discrimination in servicing of residential real estate loans. The 1994 Interagency Fair Lending Examination Procedures[ii] note, “A lender may not, because of a prohibited factor . . .fail to provide information or services or provide different information or services regarding any aspect of the lending process [or] treat a borrower differently in servicing a loan or invoking default remedies [or] use different standards for pooling or packaging a loan in the secondary market.” Since the Federal Reserve’s issuance of publication of Consumer Affairs Letter 09-13[iii] in 2009, banking regulators have opined that requests for loan modifications are subject to Regulation B’s adverse action notice requirements unless the borrower is currently delinquent or in default.
What is fair servicing?
But what exactly is fair servicing? Fannie Mae’s Fair Servicing Best Practices[iv] states, “Fair servicing includes an expectation that all borrowers are treated consistently and fairly throughout the loan servicing process. It includes compliance with fair lending and housing laws and other applicable consumer protection laws. A fair servicing framework should be built into all aspects of a servicing organization using data driven insights to identify disparities and mitigate risks through thoughtful and meaningful actions.” Although Fannie Mae’s definition is limited to mortgage loans, the underlying principles are a sound basis for considering fairness in servicing. Servicers should treat borrowers fairly, consistently, and in a compliant fashion when servicing both current and distressed customers. Some of the laws and regulations with fair servicing implications include:
- Equal Credit Opportunity Act[v] (ECOA) and Regulation B[vi] ban discrimination on a prohibited basis in any aspect of a credit transaction;
- Title VI of the Civil Rights Act of 1964[vii] forbids discrimination on a prohibited basis in programs and activities receiving federal financial assistance;
- Fair Housing Act (FHA),[viii] also known as Title VIII of the Civil Rights Act of 1968, prohibits discrimination in the sale, rental, and financing of dwellings and in other housing-related transactions;
- The National Housing Act[ix] forbids discrimination on the basis of sex in the extension of mortgage assistance and requires mortgagees to abide by ECOA and FHA requirements;
- Section 5 of the Federal Trade Commission Act[x] (FTCA) proscribes “unfair or deceptive acts or practices in or affecting commerce;”
- The Dodd-Frank Act[xi] prohibits “unfair, deceptive, or abusive acts or practices;”
- The Fair Debt Collection Practices Act[xii] (FDCPA) and Regulation F[xiii] establish requirements for third-party debt collection;
- The Electronic Fund Transfer Act[xiv] (EFTA) and Regulation E[xv] govern funds transfers through ACH, ATMs, and debit cards; and
- State and local laws and regulations covering comparable topics.
Components of a robust fair servicing program
So, what does a robust fair servicing program include? It means that performing, distressed, and delinquent borrowers are treated fairly and consistently throughout the life of the loan. Fair servicing encompasses communicating with borrowers, processing payments and refunds, assessing or waiving fees, and reporting to credit bureaus. For secured loans, fair servicing also includes processes related to collateral release and repossession or foreclosure. Servicers of ancillary products should incorporate those in their fair servicing routines. Finally, fair lending considerations are an essential part of fair servicing.
First, consider inbound consumer contact methods and practices to ensure borrowers can readily reach the servicer with questions or requests for assistance. Servicers should monitor average telephone hold times, assess interactive voice response (IVR) functionality, and test borrowers’ ability to manage their accounts successfully via online portals or mobile applications. Excessive telephone hold times, difficulty reaching staff members, and an inability to manage accounts online can hinder borrowers from receiving assistance.[xvi] Complaints can give crucial insights into borrower pain points related to account management.
Do not forget outbound communications. Ensure you have robust practices related to payment reminders, debt collection, and other outbound borrower communication. Pay special attention to communications required by law or regulation. For mortgage servicers, such communications would include responses to borrower requests for payoff amounts, notices of errors, and requests for information, as well as notices concerning force-placed insurance, servicing transfers, and other communications required under the CFPB mortgage servicing rules.[xvii] Lenders also should review periodic statements for accuracy and compliance with regulatory requirements. Debt collectors and creditors subject to the FDCPA should carefully scrutinize debt validation notices and other notifications required by Regulation F.[xviii] They also should be certain collection communications do not misstate the statute of limitations for the debt.
In addition, policies and procedures should address consumer notifications related to variations in amounts, timing, or cancellations of preauthorized electronic funds transfers.[xix] Policies and procedures must also address appropriate times and places for borrower contact. In the Summer 2024 Supervisory Highlights[xx], the CFPB cited payment reminders before 8:00 a.m. or after 9:00 p.m. in the consumer’s time zone as inconvenient or unusual times and places. The CFPB stated that continuing collection or servicing calls after the consumer informs the agent that the time or place is inconvenient is inappropriate, as well as failing to honor borrower communication requests, such as using a specific phone number or address or ceasing the use of a particular communication medium. Harassment or verbal abuse of borrowers is never acceptable.
This issue has become even more complicated with the introduction of electronic communications in the debt collection space. For example, the CFPB’s Debt Collection FAQs explain that if a consumer submits a payment through a debt collector’s web portal during a time that consumer previously designated as inconvenient, and the debt collector responds with an automatically generated email, this violates Regulation F’s provisions on inconvenient times and places. The reason is that only responses using the same communication medium as the consumer’s initial contact qualify for the exemption for consumer-initiated contact, unless the servicer obtains prior consent during the interaction to use a different medium. [xxi]
Third, assess payment processing risks. In Supervisory Highlights, advisory opinions, and amicus briefs, the CFPB has detailed several payment processing practices that it considers harmful to consumers. Some of these include charging “pay-to-pay” fees not explicitly authorized by contract or law,[xxii] neglecting to follow borrower instructions regarding payment allocation, allocating payments differently than disclosed, and failing to auto-debit final payments without adequate notice to consumers.[xxiii]
Fourth, the CFPB has cautioned furnishers regarding FCRA compliance. Specifically, the Fall 2024 Supervisory Highlights[xxiv] noted that the CFPB required furnishers to conduct lookbacks and enhance policies, procedures, and issue management practices when examinations identified that the furnishers had knowingly provided inaccurate information to consumer reporting companies without providing consumers an accurate address for reporting errors and had failed to correct erroneous information promptly. Examples of furnishing errors include inaccurate past-due and charge-off amounts, payment ratings, dates of delinquency, and payment amounts.
For servicers of secured credit, such as mortgages or vehicle loans, fair servicing includes additional controls, monitoring, and testing related to those products. Mortgage servicers must ensure escrow disbursements and refunds are processed correctly.[xxv] They must ensure that flood insurance is maintained when federally backed loans are secured by properties in Special Flood Hazard Areas, Coastal Barrier Resource Systems, or Otherwise Protected Areas. Servicers also must comply with the servicing requirements of the Real Estate Settlement Procedures Act (RESPA) and Truth in Lending Act (TILA). Servicing transfers, loss mitigation requests, and foreclosures pose additional risks and have resulted in several consent orders issued by the CFPB, FRB, and the OCC.
Loan investors often have additional compliance requirements. For example, Fannie Mae and Freddie Mac require servicers to maintain fair lending data, including race, ethnicity, age, sex, and preferred language, for loans originated on or after March 1, 2023.[xxvi] Servicers must include this data in any post-delivery servicing transfers. Freddie Mac’s servicing guide specifies that the same credit score selection method must be used for all borrowers and all mortgages when evaluating borrowers for short sales and deeds-in-lieu of foreclosure. For FHA loans, servicers must follow a specific waterfall of home retention options before initiating foreclosure actions. USDA requires approved non-regulated lending entities to have written policies and procedures to ensure servicing adheres to federal and state fair lending requirements.
Auto loan servicers must ensure that repossessions are appropriate. The CFPB has identified issues with repossessions, including repossessing vehicles after borrowers made payments or lenders granted extensions and repossessing third parties’ vehicles without a recorded lien.[xxvii] Some auto loan servicers had excessive delays in providing titles after loan payoffs. The CFPB also identified auto loan servicer issues with payment allocation and insufficient notice of changes in auto-debit of payments similar to those discussed above. Finally, the CFPB entered into a consent order[xxviii] with an auto lender over its practices related to force-placed insurance, which allegedly included charging for force-placed insurance policies with unnecessary or duplicative coverage and repossessing cars when unnecessary force-placed insurance caused borrower delinquencies.
Vehicle loan servicers often service loans with ancillary products or service the add-on products and the loans. Some of the concerns identified by the CFPB[xxix] related to ancillary products include failures to identify the payee of the add-on products, onerous cancellation requirements, failures to honor contractual cancellation rights, collecting payments from consumers when the servicer knew that a GAP waiver would cover the outstanding balance, and failing to refund the full amount covered by a GAP waiver when the consumer also paid the balance. The CFPB also found issues with refunds for ancillary products, such as failure to refund unearned premiums after early termination of auto loans and inaccurate or untimely refunds for unearned premiums.
Student loan servicers have unique responsibilities and risks. In Supervisory Highlights: Special Edition Student Lending,[xxx] the CFPB discussed several examination observations related to federal or private student loan servicing. Some borrowers experienced long telephone hold times, the inability to manage their accounts using servicer applications and online portals, and difficulty navigating IVR systems. Some student loan servicers failed to accurately inform borrowers of eligibility for benefits, such as income-driven repayment plans, discharge of student loan debt under certain circumstances, including total and permanent disability, and cosigner release. Servicers also neglected to address borrowers’ claims related to school misconduct. The CFPB has also sued a student loan servicer[xxxi] for attempting to collect on loans discharged in bankruptcy. Another student loan servicer entered into a consent order with the CFPB for allegedly extending rehabilitation periods for Federal Family Education Loans in a manner that caused borrowers to incur collection costs.[xxxii] The California Division of Financial Protection and Innovation entered a consent order[xxxiii] with a student loan servicer for failure to provide accurate and timely servicing data in response to regulatory requests. All of these contribute to fair servicing risks.
Applying a fair lending lens
Finally, fair lending analysis of servicing is a robust compliance risk management practice, especially for default servicing. Unfortunately, due to the lack of data standards for servicing data, the most challenging step is often identifying key captured data points in formats that enable fairness testing. Although best practices recommend accessing loan origination data files and systems for gaps in data, and while demographic information capture rates in servicing are increasing following the mandate to retain fair lending data for loans sold to Fannie Mae or Freddie Mac, most analysis will require use of proxy methodologies to determine protected class status. Be aware of additional data requirements these methodologies may require such as the Bayesian Improved Surname Geocoding (BISG) proxy that utilizes name and location information to calculate a probability of belonging to certain race/ethnicity groups. Date of birth can also be utilized in a sex proxy to improve accuracy of classification of first names as male or female.
When developing a plan for fair servicing testing, it is often best to start with the end in mind and identify the various tests to prioritize for completion with their minimum required data fields necessary to complete these tests. Consider the factors you would evaluate for loan originations, such as traditional denial disparities or application processing time reviews. These same test structures can be used to evaluate servicing outcomes in mortgage loss mitigations, such as loan modification denial disparities and time-to-approval or denial. But digging deeper into the data can reveal more nuanced prohibited basis differences, such as patterns in the likelihood a distressed borrower kept or lost their home. Within home retention categories, were prohibited basis group borrowers less likely to receive more beneficial modifications, such as principal forgiveness or interest rate reductions instead of forbearance or term extensions? Within home liquidation outcomes, were different demographic groups more likely to face foreclosure rather than a short sale or deed-in-lieu? And were foreclosure processing times seemingly accelerated for some borrower groups? Data for these types of tests may be more difficult to obtain but can detect more subtle patterns in outcomes for different groups. Another area of increasing scrutiny is differences in fee assessments and particularly fee waivers. Are certain groups more or less likely to request and receive these waivers? Call handling practices, completeness of servicing files, and nonsufficient fund restrictions are also areas that may contain data sufficient for fairness testing.
Conclusion
In conclusion, fair servicing is critical to consumer protection across all types of financial products, from mortgages to student loans. It is a matter of compliance with federal and state laws and a reflection of the broader expectation that borrowers be treated fairly, respectfully, and transparently throughout the life of the loan. Regulatory bodies, including the CFPB, continue to scrutinize servicers’ practices, emphasizing the importance of clear communication, accurate payment processing, and adherence to fair lending and housing laws. As the landscape of financial services evolves, it is essential for servicers to integrate comprehensive fair servicing frameworks that account for both performance and distressed borrowers, ensuring that all consumer interactions are equitable and compliant. Considering servicing as a component of your fair lending monitoring and testing program mitigates risks and fosters trust and confidence in the financial system.
ABOUT THE AUTHORS
Lynn Woosley is a Managing Director with Asurity Advisors and a member of Case Western Reserve University’s Women in Finance Advisory Board and the Editorial Advisory Board for ABA Risk and Compliance magazine. Lynn has more than 30 years of risk management experience in both financial services and regulatory environments. She is an expert in consumer protection, including fair lending, fair servicing, community reinvestment, and UDAAP. Before joining Asurity Advisors, Lynn led the fair banking practice for an advisory firm. She has also held multiple leadership positions, including Senior Vice President and Fair and Responsible Banking Officer, within the Enterprise Risk Management division of a top 10 bank. Prior to joining the private sector, Lynn served as Senior Examiner and Fair Lending Advisory Economist at the Federal Reserve Bank of Atlanta. Reach her at lwoosley@asurity.com.
Jesse Taylor is a Senior Director at RiskExec with 15 years of compliance experience, having served in fair lending leadership roles at both depository and non-depository institutions. She specializes in building fair lending analytic programs including data scoping and model building for underwriting, pricing, steering, redlining, branch distribution, marketing, and servicing reviews. Jesse excels at training lenders in developing and evolving fair lending monitoring and testing programs. She serves as the emcee for RiskExec events, including the Fair Lending Forum and RiskExec Connect. You can contact Jesse at jtaylor@asurity.com.
[i] https://www.govinfo.gov/content/pkg/USCODE-2011-title15/html/USCODE-2011-title15-chap41-subchapIV.htm
[ii] https://www.ffiec.gov/pdf/fairlend.pdf
[iii] https://www.federalreserve.gov/boarddocs/caletters/2009/0913/caltr0913.htm
[iv] https://singlefamily.fanniemae.com/media/38346/display
[v] https://www.govinfo.gov/content/pkg/USCODE-2011-title15/html/USCODE-2011-title15-chap41-subchapIV.htm
[vi] https://www.ecfr.gov/current/title-12/chapter-X/part-1002
[vii] https://www.govinfo.gov/content/pkg/USCODE-2008-title42/html/USCODE-2008-title42-chap21-subchapV.htm
[viii] https://www.hud.gov/program_offices/fair_housing_equal_opp/fair_housing_and_related_law#statutes
[ix] https://www.govinfo.gov/content/pkg/COMPS-10343/pdf/COMPS-10343.pdf
[x] https://www.law.cornell.edu/uscode/text/15/45
[xi] https://www.congress.gov/111/statute/STATUTE-124/STATUTE-124-Pg1376.pdf
[xii] https://www.law.cornell.edu/wex/fair_debt_collection_practices_act
[xiii] https://www.ecfr.gov/current/title-12/chapter-X/part-1006
[xiv] https://www.law.cornell.edu/uscode/text/15/chapter-41/subchapter-VI
[xv] https://www.ecfr.gov/current/title-12/chapter-X/part-1005
[xvi] https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights_issue-34_2024-07.pdf
[xvii] https://www.consumerfinance.gov/compliance/compliance-resources/mortgage-resources/mortserv/
[xviii] https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights_issue-34_2024-07.pdf
[xix] https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights_issue-34_2024-07.pdf
[xx] https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights_issue-34_2024-07.pdf
[xxi] CFPB, Debt Collection FAQs, Unusual or Inconvenient Time or Places, Question 6 https://www.consumerfinance.gov/compliance/compliance-resources/other-applicable-requirements/debt-collection/debt-collection-rule-faqs/#unusual-or-inconvenient-times-or-places
[xxii] https://files.consumerfinance.gov/f/documents/cfpb_convenience-fees_advisory-opinion_2022-06.pdf
[xxiii] https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights-special-ed-auto-finance_2024-10.pdf
[xxiv] https://files.consumerfinance.gov/f/documents/cfpb_convenience-fees_advisory-opinion_2022-06.pdf
[xxv] https://www.nj.gov/oag/newsreleases23/2023-0710_Freedom-Mortgage-Consent-Order.pdf
[xxvi] https://singlefamily.fanniemae.com/media/31921/display
[xxvii] https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights-special-ed-auto-finance_2024-10.pdf
[xxviii] https://www.consumerfinance.gov/about-us/newsroom/cfpb-takes-action-against-fifth-third-for-wrongfully-triggering-auto-repossessions-and-opening-fake-bank-accounts/
[xxix] https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights-special-ed-auto-finance_2024-10.pdf
[xxx] https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights-special-ed-student-lending-issue-36-winter_2024-12.pdf
[xxxi] https://www.consumerfinance.gov/enforcement/actions/pennsylvania-higher-education-assistance-agency-pheaa-dba-american-education-services-or-aes/
[xxxii] https://www.consumerfinance.gov/enforcement/actions/performant-recovery-inc/
[xxxiii] https://dfpi.ca.gov/wp-content/uploads/sites/337/2024/04/Consent-Order-Higher-Education-Loan-Authority-of-the-State-of-Missouri.pdf