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

Letter

Background

Making Home Affordable Programs

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.

Fair Lending

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.

Limited English Language Access

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.

HAMP Participation and Expenditures Have Remained below Expectations

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.

HAMP Participation Has Slowed, Leaving Obligated Funds Unspent

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.

Impact of Treasury’s MHA Outreach and Borrower Intake Project on Program Participation is Unclear

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.

Treasury Has Not Assessed Servicers’ Internal Controls or Borrower Data Related to Fair Lending

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.

Treasury Requires Servicers to Develop and Maintain Systems to Monitor Compliance with Fair Lending Laws

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.

Treasury Collects but Has Not Analyzed MHA Data Related to Fair Lending

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.

Treasury Has Provided Servicers with Limited Guidance and Oversight on Interacting with Borrowers with Limited English Proficiency

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.

Conclusions

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.

Recommendations for Executive Action

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.

Agency Comments and Our Evaluation

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.

Appendix I: Objectives, Scope, and Methodology

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.

Appendix II: Description of GAO’s Econometric Analysis of HAMP Outcomes for Fair Lending Groups

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.

Description of Data Used

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.

Details of the Regression Analysis

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.

Model

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.

Econometric estimates

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.

Pretrial or Application Stage Results

Denial of Application Due to Ineligibility

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.

Denial of Application for Reasons Not Related to Eligibility

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.

Trial Modification Stage Results

Cancellation of Trial Modification for Ineligibility

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.

Cancellation of Trial Modification for Reasons Not Related to Eligibility or Payment Default

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.

Cancellation of Trial Modification for Payment Default

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.

Permanent Modification Stage Results

Cancellation of Permanent Modification for Redefault

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.

Results of Additional Analysis on Household Area Incomes

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.

Robustness Checks of Results

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.

Appendix III: Comments from the Department of the Treasury

Appendix IV: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

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.

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