by Sanjeev Dahiwadkar, November 10, 2014
This new era of regulatory compliance requires services to change their mindset.
Slight improvements in origination volumes and the growing promise of new niche loan products should not be catalysts for servicers to let their guards down and think the industry is in full rebound. The reality is that the new regulatory climate, driven mainly by the Consumer Financial Protection Bureau (CFPB), requires servicers to be more aware of their business processes, as well as those of their business partners. This new era of compliance requires servicers to change their mindset regarding how they conduct business; they must make more effective use of human resources, establish malleable business processes and implement new technologies in order to achieve success.
The new servicing industry
Servicing, like every other segment in the lending industry, seems to be ever-changing, especially with the new scrutiny of federal regulatory entities such as the CFPB. What’s more, industry giants such as JPMorgan Chase, Bank of America and Wells Fargo have been dotting the headlines with settlements related to their servicing efforts. The national mortgage settlement continues to put additional pressure on all servicers to improve the way they manage customer relationships. Subscribe Today! Servicing, like every other segment in the lending industry, seems to be ever-changing, especially with the new scrutiny of federal regulatory entities such as the CFPB. What’s more, industry giants such as JPMorgan Chase, Bank of America and Wells Fargo have been dotting the headlines with settlements related to their servicing efforts. The national mortgage settlement continues to put additional pressure on all servicers to improve the way they manage customer relationships.
Further, reports on the status of the industry have been consistently inconsistent. On a Monday, one can read news of an industry rebound; on Wednesday, the market is crashing again; and on Friday, no one is sure what is happening. This makes one thing clear: The state of the recovery is truly a matter of perception.
The slew of changes to the mortgage servicing rules in late 2013 and early 2014 requires servicers to establish some common-sense practices, including the following:
- Maintaining accurate and up-to-date records
- Giving troubled borrowers direct access to servicing personnel and
- Crediting payments and correcting errors upon request.
The CFPB has taken a strong stance on protecting homeowners who might be experiencing financial difficulties. This has translated into tighter regulations for the once-unfettered industry. Servicers must now give borrowers more opportunities to take control of their financial situation by contacting them within 36 days of missing a payment - instead of waiting three months or more. Servicers cannot initiate a foreclosure until a borrower is more than 120 days late. Overall, servicers now have to be more lenient and understanding of delinquent borrowers.
Additionally, the CFPB’s increased scrutiny of vendor relationships was intended to enhance and clarify the communication between vendors and their lender-servicer partners, as well as minimize the risk of consumers not getting the financial help they need. The result has been increased operating costs for originators and servicers alike.
Servicers must understand how their overall operations - from receiving a loan portfolio to working with their third-party call center partner - are affected by these new regulations. Not only must they manage their day-to-day business, they must stay on top of changes to the regulations and the relationships they have with their vendors - all without sacrificing the quality of their service and the performance of their loan portfolio.
Having the right technology in place can help. Take, for example, the story of an auto lender being punished for erroneous credit reports generated by its computer system. First Investor Financial Services Group agreed to pay a $2.75 million penalty based on accusations that it consistently furnished flawed data to the giant credit-reporting agencies, such as Experian and Equifax. According to the CFPB, First Investor’s executives knew, since 2011, that a flawed computer system was dispatching incorrect information about borrowers to the credit bureaus, but did nothing to fix the problem. This costly mistake could have been rectified with the proper use of technology.
Focus on what is needed
With the vast number of regulations that have been clarified in the past two years, servicers must maintain a strong focus on what is necessary to stay within those regulations.
Still, even in light of the new regulatory environment, servicers can have a positive business trajectory if they are willing to entertain the possibility of expanding into new niche products. To meet the needs of consumers who are underserved yet qualified, originators have ventured outside of traditional A-paper loans. These are not the hyper alt-A products of the late 1990s and early 2000s that ultimately led to the last market downturn - they are renovation loans, demographic-specific loans (such as loans to Native Americans), reverse mortgages and non-qualified mortgage products.
Servicers that are prepared to service these loans, which are growing in popularity, will be able to expand their business and add new revenue streams. Servicers need to take the time to learn about these niche loan products and the opportunities they present. Awareness is key when changing one’s mindset.
Servicers with up-to-date and relevant technology will be best-positioned to adapt to the changing market. Not only can technology help servicers ensure they are compliant, it can also provide real-time, transparent access to loan files. The best of today’s new platforms give servicers the means to communicate with lenders for review purposes, as well as to manage internal efficiencies.
For example, managers can use these systems to determine when updated valuations are received or when additional documentation is added. Further, such systems can alert managers as to when documentation has been modified or when an employee may need to be retrained on portfolio management processes. The best systems allow administrators and managers to monitor workflow and make adjustments based on findings from their monitoring efforts. These findings can provide managers with information needed for internal reports and assessments, as well as a paper trail for external audits.
Some forward-thinking servicers have already engaged third-party auditing firms to verify loan documents and data within 72 hours of closings. These firms make sure the loans will pass all the regulatory requirements from the CFPB, as well as the Real Estate Settlement Procedures Act, the Truth in Lending Act and qualified mortgage rules, and also include all the details of the verification in the loan file. This level of transparency is no longer a luxury; it is now a necessity. It demonstrates that the process - and the quality of the process - will satisfy regulatory requirements.
Another factor driving the need for transparency is the new quality control (QC) and audit requirements. Gone are the days when servicers could sample 30% of loans and declare the entire loan pool compliant. In today’s regulatory environment, each and every loan must meet quality requirements without exception. No doubt, QC on every loan is the wave of the future.
This shift requires the effective use of technology to ensure each loan is reviewed correctly. Technology, people and processes will help servicers be successful in this new era of regulatory compliance. Internal processes will need to be fully automated in order for servicers to consistently meet compliance and maintain operational efficiencies.
Believing that the industry has fully recovered would be a mistake for everyone involved, including servicers. Being poised to move effectively into niche markets as the industry shifts will make the difference between a successful servicer and one that is out of business.
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