The National Consumer Law Center (NCLC) submitted these comments on behalf of its low-income clients and on behalf of the National Association of Consumer Advocates.
NCLC believes that the existing model for servicer compensation is broken. Current servicer compensation is byzantine. The barriers to entry are high. And servicers are rewarded for bad behavior: servicers stand to profit from default and foreclosure, while modifications are costly.
Unfortunately, the models under discussion by the FHFA do not address adequately the existing weakness in servicer compensation. The first model raised in the discussion paper would continue to provide the bulk of servicer compensation through payment of a percentage of the outstanding principal, or an IO strip, but a portion would be held in reserve to be disbursed to service loans in default. The second model under discussion would pay a fixed amount per loan for regular servicing with an additional fee-for-servicer component.
The proposed changes to servicing compensation do not address the misaligned incentives or harms flowing from those misaligned incentives identified in the Discussion Paper. Nothing in the proposals ties servicer compensation closely to either the actual cost of servicing loans or to the performance of the loans. Servicers will still not be encouraged to keep loans performing. The worst and most harmful aspects of the existing model, from the standpoint of homeowners, the servicers’ retention of ancillary fees, will be retained.
The FHFA should promote a modified fee-for-service model, coupled with rigorous servicing standards and limited ancillary fees. Such a model could improve servicing for both homeowners and investors.