Troubled Asset Relief Program: More Efforts Needed on Fair Lending Controls and Access for Non-English Speakers in Housing Programs
Published: 2014-02-06T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Treasury introduced MHA in February 2009 and indicated that up to $50 billion would be used to help 3 to 4 million struggling homeowners avoid potential foreclosure. Since then, questions have been raised about participation rates and the overall success of the program. The Emergency Economic Stabilization Act of 2008 requires GAO to report every 60 days on the Troubled Asset Relief Program (TARP) activities.
This 60-day report examines (1) the status of MHA and steps Treasury has taken to increase program participation, (2) Treasury's oversight of the MHA-related fair lending internal controls of servicers, and (3) Treasury's and MHA servicers' policies and practices for ensuring that LEP borrowers have equal access to the program. For this work, GAO reviewed program documentation, analyzed HAMP loan-level data, and interviewed officials from Treasury, fair lending supervisory institutions, and the five largest MHA servicers.
section_title: What GAO Found
paragraphs: Participation rates in the Home Affordable Modification Program (HAMP), a key component of the Making Home Affordable program (MHA), peaked in early 2010, generally declined during 2011, and remained relatively steady from 2012 through November 2013. As of November 2013, about 1.3 million borrowers had entered into a HAMP permanent modification. Treasury has made several efforts to increase participation, such as extending the program deadline through December 2015, expanding program eligibility requirements, and initiating the MHA Outreach and Borrower Intake Project. This project provides funding to counseling agencies to help borrowers complete and submit MHA application packages. The project was scheduled to end in December 2013 but was recently extended through September 2014.
Treasury requires MHA servicers to develop internal control programs that monitor compliance with fair lending laws (the Fair Housing Act and Equal Credit Opportunity Act) but has not assessed the extent to which servicers are meeting this requirement. Treasury noted that it shares HAMP loan-level data with the federal agencies responsible for fair lending enforcement. GAO's analysis of HAMP loan-level data for four large MHA servicers identified some statistically significant differences in the rate of denials and cancellations of trial modifications and in the potential for redefault between populations protected by fair lending laws and other populations. Such analysis by itself cannot account for all factors that could explain these differences. Reviewing the fair lending internal controls of MHA servicers could give Treasury additional assurance that servicers are complying with fair lending laws.
Despite an Executive Order issued in 2000 and a 2011 Attorney General's memorandum regarding improving access to federal programs for limited English proficiency (LEP) persons, Treasury only recently developed LEP-related written guidelines and procedures for the MHA programs. Treasury has taken measures to reach out to these borrowers and requires servicers to have a policy for “effective relationship management” with LEP borrowers. However, Treasury has not provided any clarifying guidance to servicers on what such a policy should contain or assessed servicer compliance with this requirement. Housing counselors have noted that LEP borrowers continue to encounter language-related barriers in obtaining access to MHA program benefits. Without a comprehensive strategy that includes guidance for servicers on engaging with LEP borrowers and monitoring of servicers, Treasury cannot ensure that all potential MHA participants have equal access to program benefits. Because the MHA program provides direct outlays of taxpayer dollars, it is important that Treasury take appropriate steps to ensure that all eligible borrowers, including those whose primary language is not English, have access to MHA program benefits.
section_title: What GAO Recommends
paragraphs: Treasury should (1) assess the extent to which servicers have established internal control programs to monitor compliance with fair lending laws, (2) issue guidance to servicers on working effectively with LEP borrowers and (3) monitor servicers' compliance with the guidance. Treasury noted that it was considering GAO's recommendations and agreed that it should continue to strengthen its program. Treasury also provided technical comments that were incorporated into the report as appropriate.

section_title: Letter
paragraphs: The Making Home Affordable (MHA) program is one of the last active  programs under the initially authorized $700 billion Troubled Asset Relief  Program (TARP) created by the Emergency Economic Stabilization Act of  2008 (EESA). Among other things, EESA was intended to preserve  homeownership and protect home values. The U.S. Department of the  Treasury (Treasury) introduced MHA in February 2009, providing up to  $50 billion to help as many as 4 million struggling homeowners avoid  potential foreclosure. Treasury has subsequently reduced the amount  obligated for housing programs under TARP to $38.5 billion, of which  $29.9 billion is allocated to MHA programs. MHA’s key component is the  Home Affordable Modification Program (HAMP), which provides servicers  and mortgage holders/investors with incentive payments for modifying  first-lien mortgages. These modifications are intended to prevent  foreclosures by reducing homeowners’ monthly mortgage payments to  affordable levels. Treasury has implemented additional programs that use  TARP funds, including a program aimed at helping homeowners in areas  hit hardest by the housing crisis and another to help underwater  borrowers who owe more on their mortgages than their homes are worth.  Entry into the MHA programs was originally scheduled to end in  December 2012, but Treasury has extended the deadline twice, most   Only loans originated on or before  recently until December 31, 2015.
January 1, 2009, and that meet other requirements, are eligible for  assistance under the MHA program.
Since its implementation, however, HAMP’s participation rates have  remained low relative to initial estimates of the number of homeowners  the program was expected to assist. Treasury has made several efforts to  increase participation rates, such as extending the deadline for  participation in the MHA programs and working with a network of  counseling agencies to increase borrower awareness of the programs.  Some advocates have recently expressed concern about the extent to  which groups that have been traditionally underserved by the mortgage  markets have the same access to MHA programs as other borrowers.  Specifically, these advocates point to racial and ethnic minorities and  individuals with limited English language skills.
In four prior reports, we looked at Treasury’s design and implementation  of HAMP and other MHA programs and made several recommendations  to improve Treasury’s oversight of the programs and the programs’  effectiveness. This 60-day report examines (1) the status of MHA and  steps Treasury is taking to increase participation in the program, (2)  Treasury’s oversight of the MHA-related fair lending internal controls of  participating servicers, and (3) Treasury’s and MHA servicers’ policies  and practices for ensuring that borrowers with limited English proficiency  (LEP) have equal access to the program.
To address these objectives, we reviewed MHA program documentation  that Treasury issued, including supplemental directives for the recent  MHA program changes, and interviewed officials from Treasury and  NeighborWorks America (NeighborWorks). We spoke with the 5 largest  MHA servicers, which, as of October 2013, collectively represented about  77 percent of the total trial HAMP loan modifications approved. We also  spoke with various mortgage industry participants, including associations  representing housing counselors and legal services attorneys. To  understand Treasury’s oversight of the MHA-related fair lending controls  of servicers, we spoke with Treasury officials and reviewed MHA program  policies. We also spoke with the 5 largest MHA servicers mentioned  above and those federal agencies authorized to examine servicers for  compliance with federal fair lending laws. We analyzed loan-level data  from Treasury’s HAMP database that included information reported by  servicers on borrowers evaluated for HAMP participation through April 17,  2013. This analysis allowed us to identify the outcomes of borrowers at  four large servicers at various stages of the HAMP process and to  compare these outcomes across borrower groups, including populations  protected by certain fair lending requirements. To understand how  Treasury and MHA servicers work to ensure access to MHA for LEP  borrowers, we obtained information from Treasury officials and spoke with  the five servicers we contacted about their policies and practices. We also  examined Treasury’s draft LEP plan and MHA guidelines. For additional  information on our scope and methodology, see appendixes I and II.
We conducted this performance audit from February 2013 through  February 2014 in accordance with generally accepted government  auditing standards. Those standards require that we plan and perform the  audit to obtain sufficient, appropriate evidence to provide a reasonable  basis for our findings and conclusions based on our audit objectives. We  believe that the evidence obtained provides a reasonable basis for our  findings and conclusions based on the audit objectives.
subsections: section_title: Background
subsections: section_title: Making Home Affordable Programs
paragraphs: Treasury’s Office of Homeownership Preservation within the Office of  Financial Stability (OFS), is responsible for overseeing the TARP-funded  programs that are intended to help prevent avoidable foreclosures and  preserve homeownership. MHA is the primary TARP initiative for  addressing these issues. Treasury allocated $29.9 billion in TARP funds  to MHA, which consists of several programs designed to help struggling  homeowners prevent avoidable foreclosures.
HAMP first-lien modifications. These loan modifications are available  to qualified borrowers who took out loans on or before January 1,  2009. Only single-family properties (one to four units) with mortgages  no greater than $729,750 for a one-unit property are eligible. HAMP  uses a standardized net present value (NPV) model to compare  expected cash flows from a modified loan to the same loan with no  modification, using certain assumptions. Treasury also shares some  of the costs of modifying mortgages with mortgage holders/investors  and provides incentives of up to $1,600 to servicers for completing  modifications. The Home Price Decline Protection Incentive provides  investors with additional incentives to modify loans on properties  located in areas where home prices have recently declined and where  investors are concerned that price declines may persist.
The original HAMP first-lien modification structure, or HAMP Tier 1, is  generally available to qualified borrowers who occupy their properties  as their primary residence and whose first-lien mortgage payment is  more than 31 percent of their monthly gross income, calculated using   In June 2012, Treasury  the front-end debt-to-income (DTI) ratio.made a second type of first-lien loan modification available under  HAMP. HAMP Tier 2 is available for either owner-occupied properties  or rental properties, and borrowers’ monthly mortgage payments prior  to modification may be less than 31 percent DTI. Mortgages secured  by owner-occupied properties must be in imminent default or be  delinquent by two or more payments to be considered for either  HAMP Tier 1 or HAMP Tier 2. For mortgages secured by rental  properties, only those that are two or more payments delinquent are  eligible for HAMP Tier 2. Under both HAMP Tier 1 and Tier 2,  borrowers must demonstrate their ability to pay the modified amount  by successfully completing a trial period of at least 3 months (or  longer if necessary) before a loan is permanently modified and any  government payments are made.
The Second Lien Modification Program (2MP). Under 2MP, when a  borrower’s first lien is modified under HAMP and the servicer of the  second lien is a 2MP participant, that servicer must offer a  modification and/or full or partial extinguishment of the second lien. A  servicer need not service the related first lien in order to participate in  2MP. Treasury provides incentive payments to second-lien mortgage  holders in the form of a percentage of each dollar of principal  reduction on the second lien. Treasury has doubled the incentive  payments offered to second-lien mortgage holders for 2MP  permanent modifications that include principal reduction and have an  effective date on or after June 1, 2012.
Principal Reduction Alternative (PRA Program). In October 2010, PRA  took effect as a component of HAMP to give servicers more flexibility  in offering relief to borrowers whose homes were worth significantly  less than their mortgage balance. Under PRA, Treasury provides  mortgage holders/investors with incentive payments in the form of a  percentage of each dollar of principal reduction. Treasury has tripled  the PRA incentive amounts offered to mortgage holders/investors for  permanent modifications with trial periods effective on or after March  1, 2012. Servicers of nonenterprise loans must evaluate the benefit of  principal reduction for mortgages with a loan-to-value (LTV) ratio that  is greater than 115 percent when evaluating a homeowner for a  HAMP first-lien modification. Servicers must adopt and follow PRA  policies that treat all similarly situated loans in a consistent manner,  but are not required to offer principal reductions, even when NPV  calculations show that the expected value of the loan’s cash flows  would be higher with a principal reduction than without. When  servicers include principal reductions in modifications under PRA, the  principal reduction amount is initially treated as non-interest-bearing  principal forbearance. If the borrower is in good standing on the first,  second, and third anniversaries of the effective date of the  modification’s trial period, one-third of the principal reduction amount  is forgiven on each anniversary.
Home Affordable Foreclosure Alternatives (HAFA) Program. Under  this program, servicers offer foreclosure alternatives (short sales and  deeds-in-lieu) to borrowers who meet the eligibility requirement for  HAMP and cannot be approved for a HAMP trial modification, do not  successfully complete a HAMP trial modification, default on a  modification (miss two or more consecutive payments), or request a  short sale or deed-in-lieu. to investors, servicers, and borrowers for completing these  foreclosure alternatives.
Under a deed-in-lieu of foreclosure, the homeowner voluntarily conveys all ownership  interest in the home to the lender as an alternative to foreclosure proceedings. In a short  sale, a homeowner sells a house rather than going into foreclosure. Proceeds from short  sales are generally less than the mortgage amount, so the homeowner must have the  lender’s permission for the sale. Under a HAFA short sale, a lender must forgive the  shortfall between the loan balance and net sales proceeds and release the lien on the  subject property. Under HAFA, a deed-in-lieu must satisfy the borrower’s entire mortgage  obligation in addition to releasing the lien on the subject property. unemployment. Borrowers can receive a 12-month forbearance period  during which monthly mortgage payments are reduced or suspended.  Servicers can extend the forbearance period at their discretion if the  borrower is still unemployed. Borrowers should be considered for a  HAMP loan modification following reemployment or expiration of the  forbearance period or a foreclosure alternative, such as the HAFA  program. No TARP funds are provided to servicers under this  program.
In 2009, Treasury entered into agreements with Fannie Mae and Freddie  Mac to act as its financial agents for MHA. Fannie Mae serves as the  MHA program administrator and is responsible for developing and  administering program operations, including registering, executing  participation agreements with, and collecting data from servicers and  providing ongoing servicer training and support. Freddie Mac serves as  Treasury’s compliance agent and has designated an independent  division, Making Home Affordable Compliance (MHA-C), which is  responsible for assessing servicers’ compliance with program guidelines,  including conducting onsite and remote servicer loan file reviews and  audits.
section_title: Fair Lending
paragraphs: The Equal Credit Opportunity Act (ECOA) and the Fair Housing Act  (collectively, fair lending laws) prohibit discrimination in making credit  decisions. Specifically, ECOA prohibits creditors from discriminating  against credit applicants on the basis of race, color, religion, national  origin, sex, marital status, or age, or because an applicant receives  income from a public assistance program or has in good faith exercised   The Fair Housing  any right under the Consumer Credit Protection Act.Act prohibits discrimination in connection with real estate-related  transactions by direct providers of housing, as well as other entities  whose discriminatory practices, among other things, make housing  unavailable to persons because of race or color, religion, sex, national  origin, familial status, or disability. Under one or both of the fair lending  laws, a lender may not, because of a prohibited basis:  fail to provide information or services, or provide different information  or services regarding any aspect of the lending process, including  credit availability, application procedures, or lending standards; discourage or selectively encourage applicants with respect to  inquiries about or applications for credit;  refuse to extend credit or use different standards in determining  whether to extend credit;  vary the terms of credit offered, including the amount, interest rate,  duration, or type of loan; use different standards to evaluate collateral;  treat a borrower differently in servicing a loan or invoking default  remedies; use different standards for pooling or packaging a loan in the  secondary market or for purchasing loans; use different standards in collecting indebtedness; or use different standards in modifying existing loans.
Responsibility for federal oversight and enforcement of the fair lending  laws is shared among eight agencies: the Department of Housing and  Urban Development (HUD), Department of Justice (DOJ), the Federal  Trade Commission (FTC), the Bureau of Consumer Financial Protection  (CFPB), and the four prudential regulators, which supervise depository  institutions. The four prudential regulators are the Federal Deposit  Insurance Corporation (FDIC), the Board of Governors of the Federal  Reserve System (Federal Reserve), the Office of the Comptroller of the  Currency (OCC), and the National Credit Union Administration. Under the  Fair Housing Act, HUD investigates all complaints alleging discrimination  and may initiate investigations and file administrative complaints against  any entity involved in residential real-estate related transactions, including  independent mortgage lenders or any other lender, such as depository   DOJ, which  institutions that HUD believes may have violated the act.has enforcement authority for both ECOA and the Fair Housing Act, may  initiate investigations of any creditor—whether a depository or  nondepository lender—under its own independent authority or based on  referrals from other agencies. CFPB has supervisory and primary  enforcement authority under ECOA over mortgage servicers, all insured  depository institutions with assets greater than $10 billion and their  affiliates, and certain nondepository lenders (including independent  mortgage originators). The four prudential regulators generally have  ECOA oversight responsibilities for insured depository institutions with  assets of $10 billion or less, as well as certain subsidiaries and affiliates  of those institutions. Each of the prudential regulators has authority to  examine the institutions it supervises for compliance with the Fair  Housing Act.
The prudential regulators conduct examinations of institutions they  oversee to assess their compliance with fair lending laws and regulations.  Under ECOA, prudential regulators and CFPB are required to refer  lenders to DOJ if there is reason to believe that a lender has engaged in a  pattern or practice of discouraging or denying applications for credit in  violation of ECOA. A prudential regulator that identifies a possible  ECOA violation, that may also be a Fair Housing Act violation, must notify  HUD about the potential violation if the regulator does not refer the matter  to DOJ. Under the Fair Housing Act, HUD is required to transmit  information to DOJ regarding any complaint in which there is reason to  believe that a pattern or practice of violations has occurred or that a group  of persons has been denied rights under the Fair Housing Act and that  the matter raises an issue of general public importance.
section_title: Limited English Language Access
paragraphs: Title VI of the Civil Rights Act of 1964 provides that no person shall be  subjected to discrimination on the basis of race, color, or national origin  under any program or activity that receives federal financial assistance.    In certain circumstances, failure to ensure that LEP persons can  effectively participate in and benefit from federally assisted programs and  activities may violate the prohibition under Title VI against national origin  discrimination. Executive Order 13166, issued in 2000, addresses the  application of Title VI’s prohibition on national origin discrimination in  connection with federally conducted and assisted programs and activities.   The Executive Order requires that federal agencies examine the services  they provide and develop and implement systems by which individuals  with limited proficiency in English can access agency programs and  services. While the Executive Order does not prescribe specific  approaches to language access services, it does require federal agencies  to prepare plans (referred to as LEP plans) outlining the steps they will  take to ensure that eligible LEP persons can meaningfully access their  programs and activities.
With respect to recipients of federal financial assistance, DOJ issued  guidance which states that recipients should provide LEP individuals with  “meaningful access” to their programs, services, and activities. Rather  than express uniform rules of compliance, the guidance suggests that  agencies assess whether recipients have provided meaningful access  through consideration of factors such as the number or proportion of LEP  persons eligible to be served or likely to be encountered by the program  or recipient; the frequency with which LEP persons come in contact with  the program; the nature and importance to people’s lives of the program,  activity, or service provided by the recipient; and the resources available  to the recipient and the costs of language access. The intent of DOJ’s  LEP guidance is to ensure meaningful access by LEP persons to critical  programs, services, and activities.
section_title: HAMP Participation and Expenditures Have Remained below Expectations
paragraphs: HAMP participation levels—number of new permanent modifications  added on a monthly basis—have made it uncertain whether Treasury will  disburse the nearly $30 billion it has obligated to help borrowers avoid  foreclosure. Treasury has taken several steps to increase participation,  such as extending the program deadline, expanding program eligibility  criteria through HAMP Tier 2, and providing funding to counseling  agencies to assist homeowners with completion and submission of  application packages (intake project). Since the implementation of HAMP  Tier 2 in June 2012, the number of new HAMP modifications started each  month has been relatively stable through November 2013. Treasury has  recently begun to assess the performance of counseling agencies  participating in the intake project, which has been extended to provide  funding for packages submitted through September 2014.
subsections: section_title: HAMP Participation Has Slowed, Leaving Obligated Funds Unspent
paragraphs: Treasury has reported that about 1.3 million borrowers have received  permanent loan modifications under HAMP as of November 30, 2013.  However, as shown in figure 1, participation in HAMP, as measured by  trial and permanent modifications started each month, peaked in early  2010, generally declined in 2011, and has remained relatively steady  through November 2013. Treasury made several changes to HAMP to  address barriers to borrower participation, such as extending the  application deadline for new HAMP modifications to December 2015 and  expanding eligibility criteria for program participation. In particular,  Treasury expanded the pool of homeowners potentially eligible to be  assisted through the launch of HAMP Tier 2 in June 2012. HAMP Tier 2  expanded eligibility to various borrowers previously ineligible for HAMP,  including borrowers with mortgages secured by “rental property” and  borrowers with a wider range of debt-to-income ratios.
HAMP Tier 2 appears to have helped stem the decline in the number of  new HAMP modifications added on a monthly basis. More than one-fourth  of the permanent modifications started in November were Tier 2  modifications (3,460 out of 12,996 modifications).  Through November  2013, a cumulative total of 29,134 borrowers had entered into a HAMP  Tier 2 permanent modification representing about 11 percent of all  permanent modifications started since the implementation of Tier 2 in  June 2012. Tier 2 trial modifications represented about 18 percent of all  trial modifications started since June 2012.
When HAMP was first announced in February 2009, Treasury had  developed an internal projection that up to 3 million to 4 million borrowers  who were at risk of default and foreclosure could be offered a loan  modification under HAMP. However, we subsequently reported that  because of the unsettled dynamics of the mortgage market and overall  economic conditions, actual outcomes may well be different from the  projection. Further, Treasury stated to us that the number of potentially  eligible borrowers has shrunk steadily since the beginning of the program,  as has the number of delinquent borrowers across the mortgage industry,  generally. Extending the deadline for HAMP applications and expanding  program eligibility may provide more borrowers the opportunity to  participate in the programs. However, because the number of borrowers  that have received permanent modifications as of November 30, 2013  (1.3 million) is well below Treasury’s initial estimate of 3 million to 4  million and the pool of estimated HAMP eligible borrowers is declining, it  is unclear whether Treasury will disburse all the funds it has obligated to  MHA. As of November 30, 2013, $7.0 billion (23 percent) of the 29.9  billion set aside for MHA had been disbursed. According to Treasury, if all  active modifications made as of November 30, 2013, in association with  MHA were to remain current and receive incentives for the full 5 years,  $13.6 billion in incentives will ultimately be disbursed. However, this  estimate does not take into account modifications that borrowers enter  into after November 2013 through the program’s deadline of December  31, 2015 nor does it consider the impact of redefaults on projected  outlays. The Congressional Budget Office (CBO) has estimated that  Treasury will ultimately disburse much less than the $29.9 billion currently  obligated for MHA. In its May 2013 TARP update report, CBO estimated  that only $16 billion, (about 53 percent) for all of the TARP-funded  housing programs (MHA, HHF, and FHA Short Refinance Program),  would likely be disbursed over those programs’ lifetimes.us that about $11 billion of their estimate was attributable to HAMP.  CBO’s estimate assumed that participation rates would continue at the  current pace and that redefault rates on modifications would remain  consistent regardless of the year in which the modification was started.  However, CBO’s May 2013 estimate did not consider the impact of the 2- year extension of MHA through 2015. Treasury officials told us that  because of the uncertainty in uptake due to the constantly changing  economic environment, potential program changes, and in order to be  conservative in their forecasts, they continue to assume that the entire  $29.87 billion currently allocated for MHA will be used.
section_title: Impact of Treasury’s MHA Outreach and Borrower Intake Project on Program Participation is Unclear
paragraphs: In May 2013, Treasury launched its MHA Outreach and Borrower Intake  Project in “an effort to ensure that every potential borrower has a chance  to be considered for foreclosure prevention assistance under MHA.”  Treasury entered into an agreement with NeighborWorks to launch a  nationwide effort with housing counselors to increase the number of  homeowners that successfully request assistance under MHA. The  project’s goal is to make more homeowners aware of the full range of  options under MHA and to help eligible homeowners successfully  complete an MHA assistance application for servicers to consider.  Originally the project was scheduled to end in December of 2013, but  Treasury extended the project through September of 2014. As a result, it  is too early to determine the project’s impact on HAMP participation.
The project pays housing counseling agencies to conduct borrower  outreach, assess borrowers for eligibility, help eligible homeowners  prepare complete application packages, and deliver those packages to  MHA servicers. The applications are to be submitted through the Hope  LoanPort, an Internet-based document delivery portal that allows  servicers to be notified when an application arrives. The Hope LoanPort  uses an intake code to indicate whether the counseling agency is eligible  for funding provided by Treasury under the project. Participating housing  counseling agencies receive a document preparation and submission fee  of $450 for each completed initial application package submitted to and  accepted by a MHA servicer, even if the borrower does not receive a  modification. Additionally, participating agencies receive funding to cover  outreach and administrative costs.
Initially, Treasury allocated $18.3 million in TARP funds for the MHA  Outreach and Borrower Intake Project. Of this allocation, $12.6 million  was to cover the costs of the document preparation and submission fee  for 20,000 applications, outreach and certain administrative costs incurred  by counseling agencies, and supplemental outreach funds to target  specific populations that require specialized services. Treasury  allocated the remaining $5.7 million to NeighborWorks’ for outreach and  administrative costs associated with the project. However, according to  NeighborWorks, only two-thirds of the housing counseling agencies  eligible to participate in the project have decided to participate and  received an application package allocation, resulting in a total of 92  agencies participating with a production goal of 15,318 application  packages to be submitted on behalf of borrowers. As a result, nearly  5,000 packages and $2.9 million remain unallocated to counseling  agencies. As shown in table 1, NeighborWorks ultimately allocated about  $9.2 million in funding to the 92 participating agencies to cover the cost of  document preparation fees, outreach, and administration.
The MHA Outreach and Borrower Intake Project became effective in May  2013. As of December 31, 2013, counseling agencies had submitted  2,253 initial packages that had been accepted as complete by servicers  under the program with another 878 initial packages in the process of  being reviewed by the servicers. Document preparation fees associated  with these packages totaled about $1.0 million.  As of December 2013,  NeighborWorks reported to us that they had disbursed over $1.9 million to  housing counseling agencies for outreach and NeighborWorks had  expended about $779,121 in administration costs associated with the  project.
To assist agencies in meeting stated production goals, NeighborWorks  generates a semimonthly Production Dashboard report for each housing  counseling agency that is shared with the respective agency.Production Dashboard summarizes historical information, such as how  many initial packages have been accepted by servicers as complete, and  the percentage of the agency’s cumulative goal that has been reached.  The Production Dashboard also includes intermediate goals and  projections, such as how many initial packages the agency must submit  each month to reach its cumulative goal, and how many initial packages  are projected to be delivered by the end of the performance period (based   The  on the agency’s average submission rate). Treasury stated that they  periodically review the Production Dashboard for individual agencies, as  needed.
An agency that does not meet its production goals would receive less  compensation because document preparation fees are only paid for  complete initial packages accepted by servicers. In addition,  NeighborWorks may re-allocate funds from an underperforming agency to  another agency if it reaches its allocation goal. However, Treasury  officials noted that the funding for 20,000 applications had not been fully  allocated and, thus, NeighborWorks would first allocate unallocated funds  to any agency needing a higher allocation before reducing the allocation  of an underperforming agency.
In addition to the Production Dashboard report, NeighborWorks provides  Treasury with quarterly reports describing what housing counseling  agencies have characterized as successes and challenges to project  implementation. For example, in September 2013, NeighborWorks  reported that 55 counseling agencies identified internal programmatic  changes such as streamlining processes, specialized staff, and direct  engagement with borrowers as factors associated with success.  Counseling agencies also reported challenges with servicers that did not  subscribe to the Hope LoanPort, unresponsive servicers, and borrowers  that did not engage with counselors. Fully understanding and analyzing  the nature of these successes and challenges could be useful to Treasury  in working with NeighborWorks to improve the performance of the project.  For example, Treasury stated to us that the majority of large MHA  servicers subscribe to the Hope LoanPort, representing over 80 percent  of HAMP activity. Treasury stated to us that servicers may have chosen  not to subscribe to the Hope LoanPort due to the related subscription  costs, and that the servicers that did not subscribe were generally either  smaller servicers or those with their own document collection system.  Additionally, Treasury noted that its compliance agent has begun  assessing servicers’ processes associated with the MHA Outreach and  Intake Project and has noted instances where certain servicers could  enhance their design and execution of controls, but, the compliance  agent’s loan level testing indicated that in most instances the loans were  processed accurately and timely. By extending the project from  December 2013 through September 2014, it is more likely that Treasury  will reach its goal of 20,000 HAMP application packages completed  through the project. However, it is not clear if the project is in fact  increasing access to the program given the challenge of determining  whether a borrower would have applied successfully in the absence of the  project.
section_title: Treasury Has Not Assessed Servicers’ Internal Controls or Borrower Data Related to Fair Lending
paragraphs: Treasury requires MHA servicers to develop an internal control program  to monitor compliance with fair lending laws. However, Treasury has not  evaluated the extent to which servicers have effective internal control  programs for assessing compliance with fair lending laws. Additionally,  Treasury requires servicers to collect and report data on the race,  ethnicity, and gender of MHA applicants, but has not analyzed the data  for potential differences in outcomes of groups protected under the laws.  Our analysis of HAMP loan-level data, which focused on four large MHA  servicers, identified some statistically significant differences within these  servicers’ portfolios for certain protected groups in denials and  cancellations of trial modifications and in the potential for redefault of  permanent modifications, which might indicate a need for further review.
subsections: section_title: Treasury Requires Servicers to Develop and Maintain Systems to Monitor Compliance with Fair Lending Laws
paragraphs: The MHA Servicer Participation Agreement and MHA Handbook require  that servicers have an internal control program to monitor compliance  with relevant consumer protection laws, including ECOA and the Fair  Housing Act, and that the servicers review the effectiveness of their  internal control program quarterly. The internal control program must  document the control objectives for MHA activities, the associated control  techniques, and mechanisms for testing and validating the controls.  Servicers are also required to provide Treasury’s compliance agent with  access to all internal control reviews related to MHA programs performed  by the servicer and its independent auditing firm and to provide a copy of  the reviews to the MHA program administrator.
Although Treasury requires MHA servicers to certify that they have  developed and implemented an internal control program to monitor  compliance with applicable consumer protection and fair lending laws,  Treasury has not monitored servicers to determine whether they have  developed such internal control programs. Specifically, Treasury officials  told us that it has not required its compliance agent to obtain information  from servicers on such programs. The five MHA servicers we spoke with  told us that they had not shared with Treasury details on their internal  control programs for monitoring compliance with fair lending laws.  However, four of the servicers said that they regularly shared the details  of these programs, as well as the results of fair lending analyses, with  their federal financial regulators.
Treasury officials explained that Treasury does not examine servicer  compliance with fair lending laws because other federal agencies— CFPB, DOJ, FTC, HUD, and the banking regulators—have the sole  responsibility for enforcement and supervision of federal fair lending laws.  Therefore, only those agencies, and not Treasury, are charged with the  responsibility for determining whether a servicer (subject to the  jurisdiction of the appropriate agency) complies with the federal fair  lending laws. According to representatives of the prudential regulators,  their fair lending reviews have a broader overall focus, which include  examining the servicers’ overall servicing and loss mitigation activities.  They added that, while the reviews may not specifically focus on MHA  activities, HAMP modifications may be included in the loan portfolios of  the MHA servicers examined. Officials from two prudential regulators said  that their examinations of servicing portfolios had resulted in supervisory  guidance to a few of the larger MHA servicers related to (1) potential  disparities between certain fair lending protected classes and their  comparison populations, (2) communication issues with non-English  speaking borrowers, and (3) handling of loss mitigation and loan  modification complaints. Additionally, one regulator, on behalf of the  Financial Fraud Enforcement Task Force’s (FFETF) Non-Discrimination  Working Group, conducted exploratory analysis to characterize outcomes   According to  of the HAMP program and identify fair lending risks.officials from this regulator, the aggregate results of the exploratory  analysis were shared with Treasury and other members of the Non- Discrimination Working Group in January 2012, and no fair lending issues  of note were identified. Additionally, officials said that this regulator also  shared the supervisory guidance discussed above and summaries of its  fair lending reviews, which included statistical analysis of MHA servicers  under its jurisdiction, with the working group.
Officials from the prudential regulators noted that they consider  complaints from consumers alleging discriminatory practices in their  examinations of regulated banking institutions. According to the prudential  regulators, results of their fair lending examinations are considered  confidential supervisory information and are sensitive and privileged. The  regulators explained that because of the nature of the information, they  would not have shared the details of examination results with Treasury.  Further, these regulators told us that they had not identified fair lending  violations related to the MHA program specifically.
Treasury officials told us that while they have not specifically examined  servicers’ controls for ensuring compliance with fair lending laws, the  compliance agent did examine servicers’ internal controls related to other  HAMP requirements, such as soliciting borrowers who are 60 days  delinquent and performing “second look” loan reviews which focused on  determining whether HAMP denials were appropriate. Additionally,  Treasury officials noted that the processes servicers use to solicit  borrowers and determine the eligibility and terms of a modification were  highly structured due to MHA requirements. These processes limit  servicer discretion with respect to implementing the MHA requirements,  and as a result, outcomes in HAMP modifications are less likely to result  in fair lending compliance issues, according to Treasury officials. Despite  the structured nature of HAMP, we have previously found instances  where servicers varied their application within HAMP guidelines. For  example, in 2010 we reported that servicers have inconsistent practices  for evaluating borrowers for imminent default because Treasury has not  provided specific guidance on how to evaluate nonenterprise borrowers  for imminent default.  Additionally, Treasury does not require servicers  to apply principal reduction in connection with modifications; instead  servicers are required to establish written policies detailing when principal   While these policies must treat similarly  reduction will be offered.situated borrowers in a consistent manner, there may be variations  across servicers in the use of principal reduction and in some cases  servicers may reasonably refuse to reduce principal.
Also, servicers, and their employees, may make errors in applying HAMP  policies to modifications. For example, in 2010 we reported that 5 of the  10 servicers we contacted reported at least a 20 percent error rate for  income calculations. We noted that without accurate income calculations,  which are key in determining borrowers’ DTI, similarly situated borrowers  applying for HAMP may be inequitably evaluated for the program and  may be inappropriately deemed eligible or ineligible for HAMP. Treasury  also assesses servicers on their income calculations and tracks the  percentage of loans for which MHA-C’s income calculation differs from  the servicer’s on a quarterly basis. In their July 2013 assessment results,  Treasury noted an average income error rate of less than 2 percent, down  from an average of about 7.5 percent in July 2011.
Although the prudential regulators have not identified any fair lending  violations of MHA servicers, they did share some fair lending-related  concerns of some large MHA servicers with Treasury. Furthermore,  opportunity for variations and errors within and across servicers can  impact borrowers. By evaluating the extent to which servicers have  developed and maintained internal controls to monitor compliance with  fair lending laws, Treasury could gain additional assurance that servicers  are implementing the MHA program in compliance with fair lending laws.
section_title: Treasury Collects but Has Not Analyzed MHA Data Related to Fair Lending
paragraphs: data, including information on the servicer and the borrowers’ race,  ethnicity, and gender, with the federal agencies with fair lending oversight  and enforcement authority. Treasury also makes a more limited public  file available to the general public that excludes, among other things,  information identifying the servicer and personal identifying information  about the borrower (name, address, etc.). On first releasing the public file  containing loan-level data in January 2011, Treasury stated that it  intended to engage one or more independent, third-party research firms  to conduct a more detailed analysis of fair lending in MHA and that it  would make the results of this analysis available to the public. In March  2013, Treasury entered into an interagency agreement with HUD to  engage a third-party contractor to conduct a fair lending analysis of  HAMP loan modifications. As of September 30, 2013, HUD secured a  contractor to conduct the analysis.
Our analysis of Treasury’s HAMP data through April 17, 2013, suggested  that there may be some issues that warrant a closer look at servicers’ fair  lending internal control systems by Treasury and the pertinent fair lending  regulatory agency. We examined the rate of denial or cancellation of  HAMP modifications, and the rate of redefault of permanent HAMP  modifications experienced by selected population groups and compared  them to the same rates for their comparison populations at various stages  of the HAMP process. We primarily focused on the outcomes for certain  protected groups under federal fair lending laws plus low-income groups  and groups in neighborhoods that consisted primarily of minority  populations (substantially minority); we refer to these groups collectively  as “selected populations.” We used a multivariate econometric analysis  to control for several observable characteristics of the borrower, servicer,  loan, and property, allowing us to appropriately estimate the outcomes  these populations experienced. In focusing our analysis on four large  MHA servicers, we found some statistically significant differences in the  outcomes experienced by our selected populations compared to their  comparison population. For example, we found that for all four servicers  non-Hispanic African-Americans had a statistically significant higher trial  modification denial rate compared to non-Hispanic whites due to DTIs  being less than 31 percent. When examining denials of trial modifications  because borrowers had not provided complete information to the servicer,  denial rates were significantly higher for Hispanics than for the  comparison population of non-Hispanic whites for three of the four large  servicers we analyzed. We also found that for all of the servicers we  analyzed, non-Hispanic African-Americans had a statistically higher rate  of redefault than non-Hispanic whites, regardless of whether or not the  servicer applied capitalization, principal forbearance, or principal  forgiveness to the loan modification, holding other key factors constant.  For additional findings from our analysis, see appendix II.
We are unable to determine from the available HAMP data whether the  statistically significant differences between the selected populations and  their comparison populations identified in our analysis were the result of  servicer discretion, servicer errors in the application or interpretation of  HAMP guidelines or servicing protocols, differences among servicers’  policies, or the unintended consequences of HAMP guidelines or program  design. Additional analysis is needed to determine the reasons for the  differences and the extent to which servicer implementation of HAMP  guidelines could be a potential cause as well as other potential causes for  the differences in outcomes. As noted in appendix II, there are some  limitations of our analysis. For instance, we could not control for all  potential factors that affect these outcomes due to the lack of certain  data, such as the wealth of the borrowers and their knowledge of the loan  modification process. Also, our analysis cannot account for some  important factors, such as whether equivalent borrowers in these  populations apply to HAMP at different rates or are more or less likely to  receive assistance outside of HAMP. Further, race and ethnicity data  were not available for 54 percent of borrowers in the early stage of the  HAMP process and 43 percent of borrowers in the later stage of HAMP.  Although we took appropriate steps to minimize the impact of missing  data our results should be interpreted with caution.
Despite the limitations noted above, statistical differences in outcomes  among population groups might suggest potential fair lending concerns  that merit further examination. Officials from fair lending regulatory  agencies told us that results of econometric analyses of fair lending  populations were one of multiple sources of information they review when  examining fair lending compliance of banking institutions and servicers.  They noted that the existence of a statistical disparity alone would not  necessarily result in the finding of a fair lending violation but could be a  reason to further investigate an institution. Such analyses could be useful  to Treasury as the agency considers whether servicers participating in the  HAMP program have sufficient internal controls to assess compliance  with fair lending laws.
section_title: Treasury Has Provided Servicers with Limited Guidance and Oversight on Interacting with Borrowers with Limited English Proficiency
paragraphs: Treasury has taken various actions to increase access to the program for  borrowers whose primary language is not English, but only recently has  begun to systematically assess access to the MHA program, for these  borrowers. Federal agencies, including Treasury, are required by  Executive Order 13166, issued in August 2000, to “examine the services  it provides and develop and implement a system by which LEP persons  can meaningfully access those services.” Under MHA, borrowers apply  for and obtain mortgage modifications directly from their mortgage  servicers. Although Treasury has not specified for servicers how they  should meet the needs of LEP persons or assessed their efforts to do so,  it has taken steps to provide information and support to LEP borrowers in  connection with MHA through various sources and methods. For  example, Treasury publishes a website with information about the MHA  program (www.makinghomeaffordable.gov), which has a mirror Spanish  website and critical content pages in Chinese, Vietnamese, Russian,  Tagalog, and Korean. Treasury also has published advertisements and  public service announcements in Spanish, and conducted outreach to  Spanish-speaking media as well. Additionally, the MHA website, along  with Treasury’s outreach materials, directs interested homeowners to the  Homeowners HOPE™ Hotline, which provides over-the-telephone  support to LEP borrowers related to MHA programs. As part of the MHA  escalations process, Treasury also provides a toll-free call center—MHA  Help—where, according to Treasury, LEP borrowers can receive more  specialized assistance over the phone. Treasury has also translated the  MHA application form and certain outreach materials in other languages  such as Spanish, Chinese, Korean, Russian, Vietnamese, and Tagalog.  However, it does not require that servicers use the translated materials.
The executive order also directs federal agencies to “prepare a plan to  improve access to its federally conducted programs and activities by  eligible LEP persons.” The plans are to include the steps the agency will  take to ensure that eligible LEP persons can meaningfully access the  agency’s programs and activities. In February 2011, the Attorney General  issued a memorandum to the heads of federal agencies that renewed the  federal government’s commitment to language access obligations under  the executive order and called on agencies to, among other things, review  their programs and activities for language accessibility and submit an  updated LEP plan within 6 months after the date of the memorandum.Treasury issued its last LEP plan in 2000 and, as such, it did not cover  newer programs such as MHA that began in early 2009. As of November  2013, Treasury was working on finalizing an updated agency-wide LEP  plan, which would address newer programs and activities, such as the  MHA programs. The draft plan indicated that Treasury intended to publish  the plan in the Federal Register and on the Treasury website for public  comment. The draft plan included information related to Treasury’s  assessment of the language needs for the MHA programs. In addition, it  described Treasury’s current and planned steps to assist LEP borrowers  in accessing the information and support provided by Treasury in  connection with the MHA programs. Additionally, Treasury’s Office of  Financial Stability (OFS) has developed draft guidelines to assist OFS  staff in providing access to LEP persons in connection with the MHA  activities described above.
Department of Justice, Federal Coordination and Compliance Section, Civil Rights  Division, Language Access Assessment and Planning Tool for Federally Conducted and  Federally Assisted Programs (May 2011). policy on effective relationship management should include, which  Treasury confirmed. Treasury officials also told us that they had not  required their compliance agent to review servicers’ implementation of the  requirement for effective relationship management for LEP borrowers.  According to Treasury officials, concerns about LEP borrowers’ lack of  access to MHA were only recently raised as an issue by consumer  advocates in May 2013. In response to this feedback, Treasury  conducted a survey of the LEP-related policies of the 17 largest MHA  servicers to better understand how these servicers worked with LEP  borrowers. All of the 17 servicers Treasury surveyed reported that they  had staff that spoke Spanish, and 15 servicers indicated that they had  contracted with a vendor for real-time translation. Representatives of four  MHA servicers we contacted confirmed this practice. The remaining  servicer told us that they contract with a vendor for all non-English  customer communication related to modifications. Additionally,  representatives of three servicers told us that their firms had electronic  systems that could note in the borrower’s file if the borrower’s primary  language was Spanish. However, the systems contain no similar notation  for other languages. Three servicers we spoke with told us that they also  referred borrowers to the Homeowners HOPE™ Hotline to find a housing  counseling agency that could assist with languages.
Nonetheless, representatives of some advocacy groups we spoke to  raised concerns about the sufficiency of the practices followed by  servicers in meeting the needs of non-English-speaking borrowers. The  advocacy groups represented housing counseling agencies whose  counselors worked one-on-one with potential HAMP borrowers and legal  services attorneys. These groups were concerned that servicers’ current  practices of using Spanish-speaking staff or contracting with a language  interpretation service were insufficient. For example, one advocacy group  said that some servicers used Spanish-speaking customer service agents  who might be knowledgeable about banking and mortgages generally, but  not about servicing, loss mitigation, or HAMP specifically. Similarly,  representatives of three advocacy groups noted that staff from a  language interpretation service might not be familiar enough with banking  terminology or the details of HAMP to provide quality interpretation  services. Another group pointed out the importance of translated  documents and noted that it would be more beneficial for borrowers to  have important documents, such as the trial modification offer letter,  translated into their preferred language so that they could refer to it when  needed. In fact, in a 2013 national survey conducted by the National  Housing Resource Center and a similar survey conducted by a California- based research group, nearly half of the 296 housing counselors who  responded said their LEP clients who were seeking mortgage servicing  assistance “never” received translated foreclosure-related documents.   Additionally, in both surveys, over 60 percent of the housing counselors  said that their LEP clients were “never” or only “sometimes” able to speak  to their servicer in their native language or through a translator provided  by the servicer, while the rest said their clients were “always” or “often”  able to do so. Furthermore, in the national survey, nearly half of the  survey respondents said their LEP clients “always,” “often,” or  “sometimes” received worse loss mitigation outcomes than their English- proficient clients, while the other half said their clients “never” received  worse outcomes.
Ultimately, the lack of clear guidance and expectations of servicers on  what constitutes effective relationship management in serving LEP  borrowers can potentially affect the effectiveness of servicers’ ability to  work with such borrowers and result in unequal access to the program by  these borrowers. Treasury officials noted that MHA-eligible loans  represent a small portion of participating servicers’ overall servicing  activity, and thus Treasury is cautious in imposing additional requirements  on participating servicers that could lead to excessive costs and burdens.  They added that participating servicers interact with borrowers from a  number of communities that speak a variety of languages and are in a  better position to ascertain how to best provide effective relationship  management to the LEP borrowers they serve. According to Treasury,  servicers have told Treasury that mandating the translation or use of  certain documents, among other things, would be of little benefit given the  overall low demand for such documents in languages other than English,  the added legal risks, the potential for inaccurate translation, and  increased costs associated with the translation of documents. Treasury  also noted that it may not be appropriate to require servicers to conduct  business in languages other than English, especially when other  regulators have not done so. For example, they noted that CFPB’s recent  mortgage servicing rules do not require servicers to accept applications in  other languages or provide specific translation services. Treasury officials  stated that the issues faced by LEP borrowers extend beyond HAMP to  the broader areas of loss mitigation and mortgage origination.
Accordingly, Treasury believes that it is appropriate for such industry-wide  issues to be addressed by those government entities that have broad  jurisdiction over the financial institutions operating in these fields.  However, the MHA program provides direct outlays of taxpayer dollars to  servicers and is intended to provide benefits to eligible borrowers. As  such, it is important that Treasury take appropriate steps to help ensure  that all eligible borrowers, including those whose primary language is not  English, have access to the MHA program benefits.
Without guidance on effective relationship management for LEP  borrowers, the policies that MHA servicers develop may vary, and LEP  borrowers may be treated differently across servicers, depending on  which company services their loan. Additionally, because Treasury has  not provided guidance to servicers describing the essentials of a  relationship management policy for LEP borrowers, Treasury is limited in  what it can measure when assessing servicers’ compliance with  Treasury’s requirement or the effectiveness of their current practices for  interacting with LEP borrowers. Ultimately, the lack of LEP policies and  procedures for the MHA programs and clear expectations for effective  relationship management make it less likely that servicers may effectively  meet borrowers’ needs for language services and therefore limit their  opportunity to benefit from MHA.
section_title: Conclusions
paragraphs: While below initial expectations, over a million borrowers have had their  mortgages modified under the program. However, with respect to MHA  servicer compliance, Treasury could be taking additional steps to ensure  that borrowers are being treated in accordance with fair lending laws.  MHA servicers are required to develop an internal control program to  monitor compliance with fair lending laws that prohibit discrimination.  However, Treasury has not examined servicers’ internal control programs  or conducted any analysis of borrowers’ outcomes in HAMP modifications  to identify potential fair lending risks. Our analysis found some statistically  significant differences in the outcomes of fair lending populations, when  compared to others, and while these variations alone do not indicate that  borrowers were treated differently, they suggest that further examination  may be warranted. Conducting further analyses would permit Treasury to  better identify where it might apply examination resources, such as those  of its compliance agent, and ascertain whether these differences are due  to servicers’ discretion in the application of HAMP guidelines or other  factors. By requiring its compliance agent to review the fair lending  internal controls of loan servicers, or reviewing the data MHA servicers  collect on the race, ethnicity, and gender of borrowers, Treasury could  gain additional assurance that servicers are implementing the MHA  program in compliance with fair lending laws as the servicers contracted  to do.
Finally, despite an executive order issued in 2000 to improve access to  federal programs for people with limited English proficiency and a 2011  memorandum by the Attorney General renewing the federal government’s  commitment to that executive order, Treasury officials have only recently  developed a written plan that covers the Making Home Affordable  programs as of November 2013. While Treasury does take certain  measures to raise awareness and outreach to LEP borrowers, it does not  provide any clarifying guidance to servicers on its requirement to have a  relationship management policy for their LEP borrowers. According to a  Treasury survey of MHA servicers and our discussions with five large  MHA servicers, these servicers had some processes in place to assist  LEP borrowers, such as using an oral translation service. Housing  counselors and housing advocacy groups that work with LEP borrowers  have questioned the ability of servicers to assist LEP borrowers. Without  additional guidance on providing meaningful language assistance, LEP  borrowers may be treated differently across servicers and have unequal  access to the MHA program. Moreover, Treasury has not assessed the  effectiveness of its own or its servicers’ LEP practices. Further, without  more specific guidance on what it expects of servicers in ensuring LEP  access, Treasury and its compliance agent are limited in their ability to  assess servicers’ compliance with those requirements.
section_title: Recommendations for Executive Action
paragraphs: As part of Treasury’s efforts to continue improving the transparency and  accountability of MHA, we recommend that the Secretary of the Treasury  take actions to  require that its compliance agent take steps to assess the extent to  which servicers have established internal control programs that  effectively monitor compliance with fair lending laws that apply to  MHA programs;  issue clarifying guidance to servicers on providing effective  relationship management to limited English proficiency borrowers; and ensure that the compliance agent assess servicers’ compliance with  LEP relationship management guidance, once established.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to CFPB, DOJ, FDIC, Federal Reserve,  HUD, OCC, and Treasury for review and comment.  We received a  written comment letter from Treasury, which is presented in appendix III.  We also received technical comments from CFPB, DOJ, Federal  Reserve, HUD, and Treasury that are incorporated as appropriate in the  report. FDIC and OCC did not provide any comments on the draft report.
In its comment letter, Treasury noted that it was still considering our  findings and recommendations, and agreed that it should continue to  strengthen its program in order to help as many homeowners as possible  avoid foreclosure. Treasury also noted that since MHA’s launch in 2009,  more than 1.9 million homeowner assistance actions had taken place  under the program and that they continue to take action to maximize  participation rates. In response to our recommendation that it take action  to require that its compliance agent begin assessing the extent to which  servicers had established internal control programs that effectively  monitor compliance with fair lending laws, Treasury said that it remained  committed to working to ensure that homeowners are treated fairly by  servicers participating in MHA. Treasury stated that it had a robust  compliance program to assess servicers’ performance and that it  published the results of its assessments to provide greater transparency  and hold servicers accountable. However, as noted earlier, Treasury does  not require its compliance agent to assess servicers’ internal control  programs for monitoring fair lending compliance.  Treasury stated that it  planned to continue to explore ways to promote fair lending policies,  including through coordination with fair lending supervisions and  enforcement agencies and improving access to data. We agree that  continuing to improve the transparency and accountability of MHA is  important. As part of this effort, it will be important that Treasury require  its compliance agent to assess the extent to which servicers have  established internal control programs that effectively monitor compliance  with fair lending laws that apply to MHA programs.
Treasury also provided comments related to our recommendations that  Treasury issue clarifying guidance to servicers on providing effective  relationship management to limited English proficiency borrowers and  ensure that its compliance agent assess servicers’ compliance with this  guidance. Treasury noted that it recognized the challenges homeowners  with limited English proficiency faced, and had made some program  materials available in other languages and sponsored call centers that  offer translation services. Treasury added that the challenges faced by  these homeowners extend beyond MHA to industry-wide areas of loan  servicing and mortgage lending. Treasury stated that it would continue to  explore additional ways to assist LEP homeowners and work with federal  regulators that have broad jurisdiction over these issues. While these  challenges likely extend beyond the MHA program, the MHA program  provides direct outlays of billions of taxpayer dollars in incentive  payments to participating servicers and is intended to provide benefits to  all eligible borrowers needing assistance to avoid foreclosure. Taking  appropriate steps to help ensure that LEP borrowers have access to the  MHA program benefits would place this federal program in the forefront of  efforts to reach these borrowers and ensure that taxpayer dollars are put  to the most effective use.
In its technical comments, Treasury indicated that it disagreed with three  statements in the draft report. Specifically, Treasury disagreed with our  characterization of participation levels in the HAMP first-lien modification  program as declining despite Treasury’s efforts to increase participation.  We modified the text to clarify that since the implementation of HAMP Tier  2 in June 2012, the number of modifications started each month has been  relatively steady through November 2013. Treasury also questioned the  accuracy of our statement that it lacked assurance that the MHA program,  and servicers’ implementation of it, were treating all borrowers fairly and  consistently citing, among other things, the role of the prudential  regulators in enforcing fair lending laws and its compliance program for  assessing the performance of participating servicers. However, these  mechanisms only provide limited assurance since, as noted previously in  the report, the prudential regulators do not focus their fair lending reviews  on MHA program activity and Treasury’s compliance program does not  look at the fair lending controls of participating servicers. As a result, we  continue to believe that it is important that Treasury require its compliance  agent to assess the internal control programs that servicers are required  to put into place to monitor compliance with fair lending laws that apply to  MHA programs. Lastly, Treasury noted in its technical comments that it  disagreed with the statement that it has only recently begun to  systematically assess and take measures to ensure access to the  program for borrowers whose primary language is not English. We  clarified the text to acknowledge the actions taken to raise awareness and  outreach to LEP borrowers, but that Treasury has not provided guidance  to servicers on its requirement to have a relationship management policy  for their LEP borrowers or assessed the effectiveness of its own or its  servicers’ LEP practices.
We are sending copies of this report to the appropriate congressional  committees. This report will also be available at no charge on our website  at http://www.gao.gov.
If you or your staffs have any questions about this report, please contact  me at (202) 512-8678 or sciremj@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this report. GAO staff who made major contributions to this report  are listed in appendix IV.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: The objectives in this report were to examine (1) the status of Making  Home Affordable (MHA) and steps Treasury is taking to increase  participation in the program, (2) Treasury’s oversight of the MHA-related  fair lending internal controls of participating servicers, and (3) Treasury’s  and MHA servicers’ policies and practices for ensuring that borrowers  with limited English proficiency (LEP) have equal access to the program.
To examine the status of the MHA programs, we reviewed and analyzed  Treasury’s Monthly MHA Performance Reports and MHA program and  expense information in the quarterly reports to Congress issued by the  Special Inspector General for the Troubled Asset Relief Program  (SIGTARP). We also reviewed the Congressional Budget Office’s (CBO)  Report on the Troubled Asset Relief Program (TARP) and spoke to CBO  officials about their costs estimates for the MHA program. We also spoke  with Treasury officials to obtain their views on future MHA expenditures.  To understand steps Treasury has taken to increase program  participation, we reviewed Treasury’s Supplemental Directive and spoke  with Treasury officials about their MHA Outreach and Borrower Intake  Project. We also spoke to and reviewed documentation from  NeighborWorks America about their involvement in the project.
To examine Treasury’s oversight of the MHA-related fair lending internal  controls of participating servicers, we reviewed MHA program  documentation, such as the Servicer Participation Agreement, MHA  Handbook, and associated Supplemental Directives, to understand  servicers’ fair lending obligations. We spoke with officials at Treasury to  gather information on their oversight of MHA servicers’ practices. We also  spoke with other federal agencies with fair lending oversight authority to  gather information on the results of their fair lending oversight of MHA  servicers. Specifically, we spoke with officials from the Department of  Housing and Urban Development (HUD), Department of Justice (DOJ),  Bureau of Consumer Financial Protection (CFPB), and three depository  institution prudential regulators (the Federal Deposit Insurance  Corporation (FDIC), the Board of Governors of the Federal Reserve  System (Federal Reserve), and the Office of the Comptroller of the  Currency (OCC)). Further, we spoke with staff at the five largest MHA  servicers, in terms of HAMP trial modifications approved, about their  internal control programs and compliance with fair lending laws. The five  servicers we selected—Bank of America, CitiMortgage, JPMorgan Chase  Bank, Ocwen Loan Servicing, and Wells Fargo Bank—collectively  represented about 77 percent of the total HAMP trial loan modifications  approved, as of October 2013.
In order to determine if any potential disparities exist in the outcomes of  borrowers in protected classes and other groups, we compared their  outcomes to that experienced by other borrowers, for four large servicers.  We obtained and analyzed Treasury’s HAMP data in its system of record,  Investor Reporting/2 (IR/2), through April 17, 2013. For additional  information on the data reliability and methodology for this analysis, see  appendix II. We determined that the IR/2 data were sufficiently reliable for  the purposes of our analysis.
To understand how Treasury and MHA servicers ensure access to MHA  for LEP borrowers, we examined Treasury’s 2000 LEP plan and its  updated LEP plan and MHA guidelines, which are still in draft form. We  reviewed MHA program documentation to understand servicers’  obligations regarding LEP borrowers and spoke with Treasury officials  about their review of servicers’ LEP policies and practices. We reviewed a  recent survey Treasury conducted of 17 servicers to understand how  servicers work with LEP borrowers. Further, we spoke with the 5  servicers we contacted about their current LEP policies and practices and  Treasury’s oversight of servicers’ policies. Additionally, we spoke with  various mortgage industry participants, such as associations representing  housing counselors, including those who directly work with LEP  borrowers, and legal services attorneys. We also reviewed a national  survey conducted by the National Housing Resource Center and a similar  survey conducted by the California Reinvestment Coalition about servicer  compliance with the new servicing standards resulting from a settlement  involving 5 of the largest mortgage servicers and the federal and most   The national survey collected responses from 212  state governments.housing counselors representing 28 states and the District of Columbia  and the California survey received responses from 84 counselors and  legal service advocates.methodology used and determined it was reliable for the purposes of  reporting housing counselors’ views on the experiences of individuals  they work with.
We collected information about the survey  We conducted this performance audit from February 2013 through  February 2014 in accordance with generally accepted government  auditing standards. Those standards require that we plan and perform the  audit to obtain sufficient, appropriate evidence to provide a reasonable  basis for our findings and conclusions based on our audit objectives. We  believe that the evidence obtained provides a reasonable basis for our  findings and conclusions based on the audit objectives.
section_title: Appendix II: Description of GAO’s Econometric Analysis of HAMP Outcomes for Fair Lending Groups
paragraphs: This appendix provides a summary of our econometric analysis of the  Home Affordable Modification Program (HAMP) outcomes for selected  population groups—primarily focusing on the outcomes for protected  groups under federal fair lending laws plus low-income groups and  groups in substantially minority neighborhoods—at key stages of the  HAMP process.
The modification process under HAMP is highly structured, based on the  standard waterfall in the HAMP guidelines, so servicers’ compliance with  the required terms of the program may not necessarily warrant further  investigation of differences in HAMP outcomes across certain groups.  However, servicers have some discretion over certain actions and  outcomes in the process, such as calculating borrowers’ income,  determining the sufficiency of borrowers’ documentation and whether a  borrower is in imminent danger of default, and developing their own  policies to determine whether to offer principal forgiveness as part of the  modification.requirements. Further, even if standards were applied uniformly, it is   In addition, servicers may incorrectly apply program  possible that the application of HAMP and servicer-specific guidelines  could be resulting in unintended adverse consequences for some  population groups. We are unable to determine from the available HAMP  data whether the statistically significant differences between the selected  populations and their comparison populations identified in our analysis  were the result of servicer discretion, servicer errors in the application or  interpretation of HAMP guidelines or servicing protocols, differences  among servicers’ policies, or the unintended consequences of HAMP  guidelines or program design. Also, our analysis cannot account for some  important factors, such as whether equivalent borrowers in these  populations apply to HAMP at different rates or are more or less likely to  receive assistance outside of HAMP. To the extent possible, we have  controlled for several characteristics of the borrower and loan, as well as  other factors which could confound potential differences in the outcomes  experienced by the fair lending and other selected populations and their  comparison populations in our analysis. Nonetheless, further investigation  would be warranted to identify the source of the statistically significant  differences identified by our analysis and what action, if any, would be  appropriate to consider.
Borrowers applying for loan modifications under HAMP go through a  selection process, according to the HAMP guidance. Key parts of the  process include several steps at three key stages.
Pretrial or application stage: At the application stage the servicer  determines if the borrower is eligible for HAMP, including the  requirement that the borrower must be either 60 days or more past  due on mortgage payments prior to the modification, or in imminent  danger of default. The borrower’s application may be denied because  the application was ineligible or for reasons not related to eligibility,  such as an incomplete request or if the modification would require  excessive forbearance. Also, the borrower may decide not to accept  an approved offer from the servicer.
Trial modification stage: Once the borrower accepts the offer, they  must make three timely monthly payments of the modified loan or the  trial modification may be cancelled for nonpayment. Prior to June  2010, a borrower could begin a trial based on stated information with  data verification as a condition for conversion to permanent  modification. For these borrowers, the trial may also be cancelled  because the loan was subsequently determined to be ineligible. Trials  may also be cancelled for reasons not related to eligibility such as an  incomplete request and a negative net present value (NPV) result if  the loan were to be modified. The modification becomes permanent if  the borrower successfully completes the trial modification.
Permanent modification stage: A permanent modification is cancelled  if a borrower is unable to sustain the modification by redefaulting (i.e.,  the loan becoming 90 days or more delinquent).
If the borrower is eligible for HAMP, the servicer evaluates the loan using  a standardized NPV test, which compares the net present value of cash  flows with and without the modification. The HAMP Tier 1 modification  must reduce the borrower’s first-lien mortgage payment to as close to 31  percent housing debt-to-income (DTI) ratio using a sequence of steps— the so-called standard modification waterfall. The steps include  capitalizing accrued interest, reducing the interest rate on the loan, and  extending the term or amortization period of the loan. Principal  forbearance could be used as needed and principal forgiveness could be  offered at any stage of the modification process.
subsections: section_title: Description of Data Used
paragraphs: The main data source for the study is Treasury’s HAMP data in its system  of record, Investor Reporting/2 (IR/2) made available to government  agencies. The data used are restricted to first-lien loans in the 50 states  of the United States and in the District of Columbia. We excluded loans  owned or guaranteed by the Federal Housing Administration (FHA) or  Veterans Affairs (VA). The time period analyzed is for HAMP  applications and modifications from April 2009 through April 17, 2013.
The HAMP data were supplemented with housing- and mortgage-related  data from the 2010 Census from the Census Bureau: these data provided  neighborhood-level characteristics such as the poverty rate, household  education, mortgages with second liens, and ratio of rental values to  home values (property risk) that could be associated with HAMP  outcomes.
The HAMP data include a variety of information on individual borrowers  and other characteristics about the loan, property, investor, servicer, and  loan modification terms, and the current status of the modification. Some  of the data are specific to conditions before or after the modification, as  well as at the loan origination. The data are generally available for the fair  lending and our other selected populations and their comparison  populations; however, data on borrower income are not available in the  early stage of the HAMP process for borrowers whose applications were  denied. In general, borrowers whose HAMP application did not advance  to the NPV evaluation stage have more missing data because the  information used for the NPV evaluation was not recorded in the  database. the program. Servicers are required to report data when borrowers  request a modification, during the trial period, when the trial is converted  to a permanent modification, and to report the monthly performance of the  permanent modification. The data used for the analysis consist of 4.7  million loans, representing 92 percent of the HAMP applications as of  April 17, 2013. See table 2 for details of the HAMP data used in our  analysis, by phase of the HAMP process.
About 11 percent of the loans not approved/not accepted contain NPV data.
Pretrial or application stage   Completed applications  Trial modification stage  Successful trial modifications within 6 months  Unavailable outcome  Permanent modification stage  Ongoing or paid-off permanent modifications within 12 months Paid-off loans comprised about 1 percent of the loans.
For every loan, the data included a descriptor of whether or not the loan  completed the respective stage of the HAMP process, and, if it had not,  the reason for the loan not reaching the next stage. We separated the  denials of applications and cancellations of trial modifications due to  reasons we determined to be related to the HAMP eligibility guidelines  from the other reasons to provide additional insight into differences in  outcomes for the groups analyzed.
In the application stage, the top three reasons for denial of  applications for modification that were related to eligibility guidelines,  were (1) borrowers whose current DTI was less than 31 percent, (2)  ineligible mortgage, and (3) borrower was found to not be in imminent  danger of default. The three top reasons for denial of applications for  modification not related to eligibility guidelines were (1) incomplete  request, (2) approved offer not accepted by borrower or withdrawn  request, and (3) loan modification that would require excessive  forbearance.
In the trial modification stage, the three top reasons modifications  were cancelled due to reasons we determined were related to  eligibility guidelines were (1) borrowers whose current DTI was less  than 31 percent, (2) ineligible mortgage, and (3) the property was not  owner-occupied. The top reasons for trial modification cancellations  not related to eligibility or payment default were (1) incomplete  request, (2) approved offer not accepted by borrower or withdrawn  request, (3) loans with negative NPV. We also analyzed trial  modification cancellations due to payment default (loans that became  30 days or more delinquent).
Lastly, in the permanent modification stage, there was only one  reason that modifications could be cancelled—redefault (loans that  were 90 days or more delinquent).
Using information on where a property is located, we also include  variables to control for potential differences in state laws, regulations, and  programs that could affect the cost of foreclosure and treatment of  delinquent borrowers. We also constructed several mortgage- and  housing-related variables of the neighborhoods for the loans in our  analysis using data from the 2010 Census. Based on the census tract in  which the property is located, we associated various variables to the  HAMP loan-level data. The location-specific variables include  characteristics such as minority concentration, poverty, age, foreign-born  concentration, college education of household, and property risk  characteristics.
We examined the availability of HAMP data for the selected population  groups and their comparison populations for our analysis. The data show  that missing data for race/ethnicity reduced from 54 percent in the early  stage of the HAMP process when fewer data were reported by servicers  to 43 percent in the later stage. Although the race/ethnicity of some  borrowers was unavailable, the data suggest that the properties of  borrowers with unavailable race/ethnicity were disproportionately located  in areas where racial minorities were predominant, particularly in the early  stage of the HAMP process. The proportions of missing data were  generally much lower for gender, income, and minority composition of  the areas and their comparison populations. While previous studies that  used the HAMP data acknowledge the limitations of missing data on the  fair lending populations and their comparison populations, none of the  studies indicated that the available data are not suitable for fair lending  analysis. Nonetheless, we took several steps to reduce the potential  bias of missing data of the selected populations on our analysis. First, we  included observations representing the missing data as another category,  where possible, particularly since previous studies have indicated that  missing race/ethnicity data are not likely to be purely random.as part of our robustness checks, we also conducted the analysis  excluding the observations representing the missing data to learn about  its potential impact on our results. The results were similar for our key  findings. And, third, we restricted the data to the period since December  2009, when servicers were required to report fair lending-related data,  and the proportions of missing data for the fair lending populations and  their comparison populations decreased significantly.
All the variables used are in categorical format (i.e., each variable is  divided into sub-groups), except the modification types (capitalization,  principal forbearance, and principal forgiveness), which are measured by  the percent change of the loan balances.  There are fewer missing data  of the variables in the later stage of HAMP since the data availability  generally improved as the borrower moved through the modification  process.
section_title: Details of the Regression Analysis
paragraphs: Using categorical format helps to avoid the exclusion of variables with missing  observations. and time period analyzed.for all the HAMP outcomes, rather than tabular analysis, which allowed us  to control for several potential confounding factors, including credit risk- related factors, for which loan, borrower, property, and neighborhood  characteristics serve as proxies. In particular, we included several  variables that are used to capture the creditworthiness of borrowers in  mortgage markets, such as delinquency status of borrowers before the  modification, FICO credit scores at modification, the debt-to-income (DTI)  ratios for both the front-end before modification and back-end after  modification, and the LTV of the property at origination and at the time of  the modification. We also used income cohorts for borrowers relative to  incomes in their geographic areas (metropolitan statistical areas—MSAs)  instead of nationally. Also, we measured default and redefault by the age  of the loan since modification, which is important since default rates  generally vary over time. Some of these are important differences  between our study and Mayer and Piven, which is the closest of all the  previous studies to ours in terms of the data used and issues that were  addressed.
We used a multivariate regression technique  Mayer and Piven argued that, overall, the fair lending populations did not  experience differential outcomes compared to their comparison  populations. Thus, race, ethnicity, gender, or income has “very little”  impact on borrowers’ successful participation in HAMP as well as benefits  of the program at every key stage of the program. Their results,  nonetheless, suggest that the authors found some disparities for certain  groups. For instance, non-Hispanic African-Americans, compared to  whites, were more likely to redefault; Hispanics, compared to non- Hispanics, were more likely to have their trial or permanent modifications  cancelled; women were at least as successful as men with respect to  HAMP outcomes analyzed; and low-income borrowers were less likely to  redefault on their permanent modifications compared to higher income  borrowers. Moreover, their study assessed overall HAMP program  outcome results and did not analyze potential outcome differences and  actions of individual servicers because the data set used for the  analysis—the HAMP general public data file—did not contain variables  that could be used to identify the servicer of the loan.
A study by the California Reinvestment Coalition of HAMP trial  modifications in four MSAs in California found racial and ethnic disparities  in the experiences of borrowers, which they argued was supported by  their survey of housing counselors. The analysis involved tabulation  rather than multivariate regression analysis and did not consider the  effects of servicers due to the same limitation that the Mayer and Piven  study faced with the lack of servicer identifying information in the data set  used for the analysis.
The National Community Reinvestment Coalition conducted a study of  distressed homeowners who sought assistance from NCRC’s Housing  Counseling Network. The data were collected over a 2-month period in  2010 from 29 organizations and 179 borrowers. The 179 respondents  included both HAMP-eligible and noneligible borrowers. The findings  related to fair lending included the following—servicers foreclosed on  delinquent non-Hispanic African-American borrowers more quickly than  on their counterpart whites or Hispanic borrowers, and HAMP-eligible  white borrowers were almost 50 percent more likely to receive a  modification than their non-Hispanic African-American counterparts. The  study acknowledged the limitation that it did not use a nationally  representative sample of distressed homeowners. Furthermore, similar to  the CRC study, the analysis used tabulation rather than multivariate  regression.
Voicu et al. analyzed redefault rates using data for New York City for  HAMP and proprietary (non-HAMP) loan modifications from January 2008  to November 2010. While they found that borrowers who received HAMP  modifications were less likely to redefault compared to those that received  proprietary modifications, the borrower’s race or ethnicity was not  significantly correlated with the odds of redefault. The analysis covered a  limited geographic market and did not include outcomes in the early stage  of HAMP.
subsections: section_title: Model
paragraphs: Based on economic reasoning, data availability, and previous studies on  loan modifications, we used a relatively flexible specification to estimate  the outcome of a loan at certain stages of the HAMP process. The  general regression specification for the models is:  𝑦 =X𝛽 + Zδ + ε. y is the HAMP outcome measure being assessed, such as whether a  loan was eligible for trial modification compared to being denied due  to DTI less than 31 percent, ineligible mortgage, or not in imminent  default—a multinomial outcome; it could also be whether a loan  remained current or redefaulted within 12 months of the permanent  modification—a binomial outcome;
X represents the fair lending and other selected populations—the  income-related variables could not be used in the equations for the  early stage of the HAMP process due to lack of data;
Z represents a series of control variables, including other borrower  characteristics, the loan, property, neighborhood, modification terms,  geographic and time effects, as well as investor/lender and servicer  effects; β and δ are the parameters to be estimated; and   ε represents an error term.
subsections: section_title: Econometric estimates
paragraphs: We estimated the regression models using the logistic technique for  pooled data for all the servicers.based on the distribution of the outcomes at a stage of the HAMP process  because the sample used for the regression, especially in the early stage  of HAMP, differed from the full data due to missing observations for  certain key variables, including the fair lending and other selected   We used probability weights that were  populations and their comparison populations.statistically significant, and most of the control variables are also  significant at the 5 percent level or better and their effects (the direction of  their impacts) are generally consistent with our expectations. We present  below the results of the HAMP outcomes we analyzed for four of the large  servicers with significant HAMP activity, where there are statistically  significant differences between the fair lending and other selected  populations and their comparison populations. Although our results show  adverse as well as favorable outcomes for the selected populations  compared to their comparison populations, we focus on cases where the  outcomes were unfavorable to the selected populations because they are  underrepresented in housing and mortgage markets. This approach is  generally consistent with the focus of fair lending analysis on adverse  outcomes for protected groups. Also, we focus below on the effects  where the predicted probability of an outcome for all borrowers is 10  percent or more. Although this threshold has no strong statistical,  economic, or legal justification, it helps us to focus on the more important  findings, and is therefore appropriate for the diagnostic purpose of our  study. The complete estimated probabilities are presented in tables 3  through 5.
section_title: Pretrial or Application Stage Results
subsections: section_title: Denial of Application Due to Ineligibility
paragraphs: We compared borrowers who are ineligible for trial modification—due to  their debt-to-income (DTI) ratios being less than 31 percent, their  mortgages were ineligible, or they were found to not be in imminent  danger of default—to those eligible for trial modification. The estimates  are based on a multinomial logistic regression of denial of application for  these three reasons using pooled data for all servicers. The main results,  from table 3, are:
Overall, the denial rate of borrowers because their DTI was  determined to be less than 31 percent, was about 11 percent.
We found statistically significant differences in the denial rates of trial  modification between fair lending populations and their comparison  populations due to the servicer’s determination that the borrower’s  DTI was less than 31 percent.
The difference in denial rates between the non-Hispanic African- American borrowers and their comparison group of non-Hispanic  whites was at least 13 percent higher for all four large servicers.
The difference in denial rates between non-Hispanic American  Indians, Alaska Natives, Native Hawaiians, and Other Pacific  Islanders (collectively referred to as AIPI in this appendix)  borrowers and their comparison group of non-Hispanic whites was  at least 11 percent higher, for two of the large servicers we  analyzed.
Borrowers with unavailable information on their race/ethnicity  (these borrowers have properties in substantially minority areas)  or gender had at least 22 and 15 percent higher denial rates,  respectively, than their comparison populations for all four large  servicers.
Borrowers in substantially minority areas had at least 3 percent  higher denial rates than their comparison populations of borrowers  in nonsubstantially minority areas for all four large servicers.
On the other hand, non-Hispanic Asians, Hispanics, and females  had generally lower denial rates than their comparison  populations.
Although we found some disparities between the selected populations  and their comparison populations for denials due to servicers’  determination that borrowers had ineligible mortgages or were not in  imminent danger of default, the results are not discussed since the  overall denial rates are small.
section_title: Denial of Application for Reasons Not Related to Eligibility
paragraphs: A study, J. Karikari, “Why Homeowners’ documentation went missing under the Home  Affordable Mortgage Program (HAMP)?: An analysis of strategic behavior of homeowners  and servicers,” Journal of Housing Economics, vol. 22 (2013): 146-162, found that actions  by both servicers and homeowners are consistent with missing documentation. Servicers  have an incentive to “lose” the documentation of borrowers with low credit risks in order to  “steer” them away from HAMP to their own (proprietary) less costly modification programs.  At the same time, borrowers with high risks have less incentives or are unable to provide  complete documentation to support the reason for their ‘‘hardships,’’ as well as having  difficulty in fulfilling the HAMP requirements. borrowers’ properties were located disproportionately in  substantially minority areas. Also the difference in denial rates for  borrowers with unavailable information on their gender was at  least 24 percent higher for two of the three large servicers we  analyzed.
Borrowers in substantially minority areas had at about 1 percent  higher denial rates than their comparison populations of borrowers  in nonsubstantially minority areas for two of the three large  servicers we analyzed.
On the other hand, non-Hispanic AIPI and females were less likely  to be denied than their comparison populations.
Although we found some disparities between the fair lending and  other selected populations and their comparison populations for  denials due to borrowers not accepting their approved offers or for  excessive forbearance, the results are not discussed since the overall  denial rates are small.
section_title: Trial Modification Stage Results
subsections: section_title: Cancellation of Trial Modification for Ineligibility
paragraphs: We compared borrowers whose trial modification was cancelled because  their DTI was less than 31 percent, mortgage was ineligible, or property  was not owner-occupied to those borrowers that were eligible for  permanent modification. The estimates are based on a multinomial  logistic regression of cancellation of trial modification for these three  reasons using pooled data for all servicers.
Overall, the cancellation rate for borrowers with a DTI less than 31  percent was about 0.8 percent. The cancellation rate was about 0.3  percent for borrowers with ineligible mortgages and 0.3 percent for those  with non owner-occupied properties. Although we found some differences  between the fair lending and other selected populations and their  comparison populations, the results are not discussed since the overall  cancellation rates were small.
section_title: Cancellation of Trial Modification for Reasons Not Related to Eligibility or Payment Default
paragraphs: We compared borrowers whose trial modification were cancelled because  the servicer determined their request was incomplete, the borrower did  not accept the offer they received or withdrew their requests for trial  modification, or the servicer determined that modifying the mortgage  would result in a negative NPV. The estimates are based on a  multinomial logistic regression of cancellation of trial modification for  these three reasons using pooled data for all servicers.
Overall, the cancellation rate for borrowers with incomplete requests was  about 4 percent. The rate was about 3 percent for borrowers who did not  accept their approved offer or withdrew their request and 0.3 percent for  loans that would have a negative NPV if modified. Although we found  some differences between the fair lending and other selected populations  and their comparison populations, the results are not discussed since the  overall cancellation rates were small.
section_title: Cancellation of Trial Modification for Payment Default
paragraphs: We compared borrowers whose trial modification was cancelled for  payment default (i.e., their loans became 30 days or more delinquent)  within 6 months of the modification to those borrowers who were  approved for permanent modification.
Overall, the estimated default rate of trial modifications was 4 percent.  Although we found differences between the fair lending and other  selected populations and their comparison populations, the results are not  discussed since the overall cancellation rate was small.
section_title: Permanent Modification Stage Results
subsections: section_title: Cancellation of Permanent Modification for Redefault
paragraphs: We compared borrowers who received permanent modification but  redefaulted (i.e., their loans became 90 days or more delinquent) within  12 months of the modification to those borrowers who remained current  on their payments (or paid off the loan). The estimates are based on a  binary logistic regression of redefault using pooled data for all the  servicers, and including the three modification types—capitalization,  principal forgiveness, and principal forbearance—as covariates. The main  results, from table 5, are:
Overall, the estimated redefault rate of permanent modifications was  11 percent.
The redefault rates differ by the modification type—capitalization,  principal forgiveness, or principal forbearance. The use of principal  forgiveness results in lower redefault rates compared to capitalization  or principal forbearance. Capitalization increases the redefault rate by  3 percentage points while it decreases by 3 percentage points with  principal forgiveness; principal forbearance lowers the redefault rate  by 1 percentage point.
We found disparities in redefault rates between certain fair lending  populations and their comparison populations.
The difference in redefault rates between non-Hispanic African- Americans and non-Hispanic whites whose loans were serviced  by any of the four large servicers was about 14 percent higher,  irrespective of the modification type.
The difference in redefault rates between non-Hispanic AIPI and  non-Hispanic whites whose loans are serviced by any of three  large servicers we analyzed was about 7 percent higher,  irrespective of the modification type.
The differences in redefault rates between borrowers with  unavailable information on their race and income were about 5  and 18 percent higher, respectively, compared to their comparison  populations, irrespective of the modification type.
However, non-Hispanic Asians, Hispanics, borrowers in  substantially minority areas, and borrowers with low, moderate  incomes, and middle-income, were less likely to redefault  compared to their comparison populations.
section_title: Results of Additional Analysis on Household Area Incomes
paragraphs: While the results  Furthermore, we included area incomes by groups.were consistent with the key findings reported in tables 3 to 5, we also  found that households in low-moderate income areas were more likely to  be denied for DTI less than 31 percent and those in middle-income areas  were more likely to be denied for incomplete request compared to their  comparison populations of households in high income areas. Also  households in areas with unavailable median incomes were more likely to  re-default on their permanent modifications compared to their comparison  population.
section_title: Robustness Checks of Results
paragraphs: We took several steps to check these regression models for robustness,  particularly for the key findings on denials of HAMP applications due to a  servicer’s determination that the borrower’s DTI was less than 31 percent,  cancellation of trial modification due to the servicer determining the  request was incomplete, and for redefaults of permanent modification.  Specifically, we did the following: estimated the outcomes separately for each of the four large estimated the models excluding the observations for the missing fair estimated the model comparing Hispanics to non-Hispanics (the  majority comparison group);  restricted the data to the period since December 2009 when servicers  were required to collect fair lending related data;  for the estimation of redefault rates of permanent modifications we  used loans that had aged 24 months since the permanent  modification; and estimated the models without probability weights.
These checks were consistent with the reported key findings of  differences between the fair lending and other selected populations and  their comparison populations. Nonetheless, there are limitations of this  study, including limited data on the selected populations, the lack of  certain variables that could help capture the credit risks of borrowers and  the loans such as the wealth of the borrowers and their knowledge of the  loan modification process, and, in particular, if borrowers have accessed  housing counseling services. Also, as noted, this analysis concerns  potential disparate outcomes for some populations and does not mean to  imply disparate treatment by some servicers or that borrowers  experienced disparate impact in violation of fair lending laws, so the  findings in this study should be interpreted cautiously and further analysis  may be appropriate.
section_title: Appendix III: Comments from the Department of the Treasury
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Harry Medina (Assistant  Director), Bethany Benitez, Emily Chalmers, William R. Chatlos, Lynda  Downing, John Karikari, Anar Ladhani, John Lord, Thomas J. McCool,  Susan Offutt, Jena Sinkfield, Anne Y. Sit-Williams, Jim Vitarello, and  Heneng Yu made key contributions to this report.
section_title: Selected Bibliography
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