Housing advocacy groups, mortgage lenders, and banks came together on January 28, 2022 to take issue with the HUD’s proposed policies on defect taxonomy for loan servicing reviews.
The defect taxonomy, as defined in article 8.0 of the Single Family Housing Policy Handbook 4000.1, is the FHA’s method of identifying defects at the loan level.
In a joint letter to Lopa Kolluri, the principal deputy assistant secretary for the FHA, the American Bankers Association, Americans for Financial Reform Education Fund, Center for Responsible Lending, Consumer Action, Housing Policy Council, National Consumer Law Center (on behalf of its low-income clients), National Fair Housing Alliance, National Housing Conference, and National Housing Law Project all said that the HUD’s proposed defect taxonomy “lacks sufficient detail needed to be effective.”
In the joint letter, the groups suggested that a more effective taxonomy should:
- Classify which violations of HUD policies are most severe and which are not;
- Assess severity based on the level of concrete harm the conduct poses to borrowers and FHA;
- Assign a range of appropriate remedies for each specific violation;
- State the aggravating and mitigating factors that HUD will consider in determining the particular remedy and the process for how HUD will consider these factors; and
- Describe how HUD will address systemic issues identified in the evaluation process.
The groups condemn the version of the taxonomy that was published by the FHA on October 28, 2021, as it does meet the essential criteria listed above. Other than fraud or misrepresentation, the taxonomy does not specifically address or provide insight on HUD’s servicing policy priorities through the categorization of particular violations by severity. Instead, it provides broad statements of what conduct is unacceptable without detailing how much the agency considers each issue.
The HUD also fails to mention borrower harm and only focuses on harm to the property or the FHA.
Additionally, the taxonomy does not address the remedies available for each particular violation, indicating that all remedies are applicable for any violation. The draft taxonomy does not even provide detail on how HUD will apply it. There is no statement indicating whether reviews will take place post-claim, pre-claim, or under both time frames. HUD’s draft also lacks to define certain terms, such as “defect,” “materiality,” or “adverse impact.”
Authors of the joint letter also point out that the proposal is designed for post-claim, pre-claim, or under both time frames, yet it does not account for important differences between loan origination and servicing functions.
“Servicers, for example, are engaged in long-term relationships with many thousands of borrowers at one time,” the letter states. “A severity assessment must differentiate between those defects that have an ongoing impact on multiple borrowers and those that reflect isolated errors with no material impact on borrowers.”
Overall, the housing groups and mortgage lenders in this joint letter do not believe HUD should finalize this Taxonomy as it stands. Instead, they recommend “further engagement with stakeholders in connection with developing a more detailed draft.” Specifically, they wish to meet with representatives of HUD to better understand HUD’s policy goals and ask questions regarding HUD's oversight of FHA servicers.
According to the taxonomy, if the FHA is “unable to determine servicing compliance due to missing or incomplete records, individual account information or related data,” the penalty could be as light as mitigating documentation or as harsh as indemnification.
