Letters to Regulators: Letter Commenting on HUD’s Proposed Defect Taxonomy for Servicing Loan Reviews

View or download a PDF of the letter here.

January 28, 2022  

Lopa Kolluri, Principal Deputy Assistant Secretary for Housing
Office of Housing / Federal Housing Administration
Department of Housing and Urban Development
451 7th Street SW
Washington, D.C. 20410-8000  

RE: Joint Comment to FHA’s Defect Taxonomy of the Single Family Housing Policy Handbook  4000.1 (Handbook 4000.1)  

Dear Ms. Kolluri:  

On behalf of the industries, clients, and communities we represent, we write to comment on  HUD’s proposed defect taxonomy for loan servicing reviews. This joint industry-consumer  comment supplements our organizations’ individual comments and sets out essential principles  we see as vital in the creation of any defect taxonomy.  

We appreciate HUD’s work on developing a servicing defect taxonomy because we think an  effective one can be a critical tool in clarifying HUD’s expectations to servicers and thereby  improving borrower outcomes. As described below, however, we believe that HUD’s proposed  taxonomy lacks sufficient detail needed to be effective, and we would greatly appreciate the  opportunity to meet with HUD to discuss the proposal before any further action is taken.  

HUD’s defect taxonomy should provide detail to stakeholders about HUD’s priorities and its  expectations for servicer performance. Specifically, a successful taxonomy should:  

1) Classify which violations of HUD policies are most severe and which are not;  2) Assess severity based on the level of concrete harm the conduct poses to borrowers  and FHA;  

3) Assign a range of appropriate remedies for each specific violation;  

4) 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  5) Describe how HUD will address systemic issues identified in the evaluation process.  

A defect taxonomy satisfying these criteria will promote HUD’s program and policy goals. It will  facilitate compliance because servicers will use it to enhance their own quality control process.  By promoting fairness and predictability, it will reduce FHA servicing costs and will help retain  existing lenders and encourage new lenders to participate in the FHA program. It will ensure for  all stakeholders that HUD’s review process is focused on significant issues that support  sustainable homeownership and the health of the MMI fund and not more minor violations.  

The version of the taxonomy that was published by FHA on October 28th does not meet these  essential criteria for a successful taxonomy. Outside of fraud or misrepresentation, which are 

specifically addressed, the taxonomy does not provide insight into HUD’s servicing policy  priorities through the categorization of particular violations by severity. It instead provides broad  statements of what conduct is unacceptable without detailing how the agency considers each  issue. In addition, in those broad statements, HUD specifically fails to mention borrower harm  and only focuses on harm to the property and FHA.  

The proposed taxonomy also does not state the range of remedies available for a particular  violation. Instead, HUD indicates that all remedies are available for any violation without giving  any guidance on how the agency will employ particular remedies. The taxonomy states that a  servicer may mitigate a defect finding through documentation; however, because the taxonomy  lacks detail on the connection between violations and remedies, the precise role of mitigating  and aggravating factors is also unclear. Finally, there is no discussion of how HUD will address  systemic defects revealed through the use of the taxonomy.  

In addition, the draft taxonomy does not provide detail about how HUD will apply it. It does not  state whether reviews will take place post-claim, pre-claim, or under both time frames. HUD also  does not define critical terms, such as “defect,” “materiality,” and “adverse impact.”  

The proposal appears designed for review of documentation in loan origination files and 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. 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.  

Because HUD’s draft defect taxonomy lacks sufficient criteria for it to be successful, HUD  should not finalize it and should instead further engage with stakeholders in connection with  developing a more detailed draft. We request that HUD meet with us, collectively or individually,  so that we can better understand HUD’s proposal and the policy goals that HUD seeks to  achieve. This meeting would clarify a number of specific questions that we have regarding the  structure of HUD’s oversight of FHA servicers. Through an engagement process, stakeholders  can discuss with HUD recommendations for how it should prioritize violations and assess  remedies and HUD can incorporate feedback in creating a more detailed and comprehensive  taxonomy.  

We look forward to further dialogue regarding the taxonomy, and we appreciate the opportunity  to comment on the draft.  


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  

National Housing Law Project