Since 2007 when the volume of delinquent mortgage loans increased to unprecedented levels, while surprised and unprepared, servicers started to reinvent their business and adjust to the new reality. Besides that core adjustment today servicers also are routinely challenged by regulators, such as the Consumer Financial Protection Bureau, which recently updated its mortgage servicing requirements. At the MBA’s National Mortgage Servicing Conference and Expo 2013 in Dallas Mark Fogarty, editorial director of the mortgage group publications, Amilda Dymi, managing editor, Mortgage Servicing News, and Evan Nemeroff, reporter, Mortgage Servicing News, sat down with mortgage industry insiders Ed Fay, CEO of Fay Servicing, John Vella, COO of Equator, and Loren Morris, general counsel and chief compliance officer of Retreat Capital Management, to hear, among others, about their reaction to these rules.
Ed Fay, CEO of Fay Servicing, thinks the fact that the CFPB has now finalized nine mortgage servicing rules the industry must abide to “will make fundamental changes” to how his special servicing company will do business “with the exception of some of the single point of contact” requirements. “One of the biggest changes is just simply trying to make customers more aware of what’s happening with their situation,” he says. For example, servicers must send customers a second letter in 90 days instead of just one 45 days after they become delinquent. If for smaller servicers it is not a big deal to add another letter cycle, he says, for a large size bank or servicer who needs to ensure a letter cycle is a simple process it could be difficult to implement some of the changes . “Luckily they gave us a significant amount of time to make the implementations.”
The CFPB rules are going to have a big impact, agrees John Vella, COO of Equator, even though the deadline is 2014 and servicers have been putting some of these rules in place for a while now, “it’s going to take a lot of time." To implement new requirements in a large organization, “in addition to the CFPB rules, all of the other investor rules and government rules that they’ve had to put in place," has not been easy for servicers. The biggest challenge from a technology perspective is the need to secure efficient tools to manage the process, because at the end of the day everything is about compliance. And to remian in compliance servicers will need proper data collections and audit trails. Technology will allow servicers to document every aspect of loan servicing. Audit results will depend on the process they have put in place. they have to be ready before an audit when they will need to be able to go back and look at things such as dual tracking and 30-day notices and have snapshots of those decisions, the times they were made, and the underlying rules and attributes behind it. If audited, and with penalties potentially facing them down the road, they need proper compliance tools, people, and multiple sites. Servicers who use third-party outsourced companies need to properly manage them, they need to get the rules out to all the constituents, train their staff and have proper controls for documents and data. “Technology is going to play a critical part in making sure that they’re within compliance.”
What we may be seeing this year and the next, says general counsel and chief compliance officer of Retreat Capital Management, Loren Morris, is “a reconfiguration of the servicing industry as a whole,” as it moves away from the large servicing operation structures that will likely find default servicing uneconomical or not in the best interest of their shareholders. He expects "coming into play" second and even third-tier servicers engaging as specialty servicers or subservicers, which is “probably good from a consumer’s perspective as well as the industry’s perspective” since they will enable more very high-touch servicing, which is the goal of the regulators. “…put the word service back in mortgage servicing.” But it’s going to be difficult for the large servicers to move quickly. The mega-servicers who are all part of the mortgage settlement, they’re already implementing a lot of this, but differently. You have a lot of constituents, you have a lot of different investors, you have the GSEs, you have the mortgage settlement, and then you layer in the CFPB, he says. So it is early to foresee how they will integrate.
Like many others in the industry Vella acknowledges the robo-signing fiasco and foreclosure processing issues in many states put mortgage servicers under the microscope even though most mortgage servicers “tried to do the right thing.” But since 2007, due to the sheer volume of delinquent loans, “everyone was caught off guard, so I don’t think anyone deliberately went out of their way not to do a good job.” Servicers were caught off guard and tried to react as quickly as possible, he argues, but to hire, train, put in place technology, change your whole entire workflow process to meet the demands of all these new needs, and so on, “it was unrealistic trying to do that in a short period of time. So I think there’s a misconception out there that loan servicers were doing things deliberately to not service the customer correctly.” In his view more than anything “they were caught up in the fray of the 2007 onslaught of activity in delinquent loans and unrealistic expectations in a short period of time.” It is why technology providers have to be thinking ahead, of what’s coming next and create flexible rules engines in advance, he says.
Morris also finds having the ability to document all the details of the servicing process and communication with borrowers is key. In addition, he says, “what’s going to be key is training, because at the end of the day, you have to train people to use the tools, you have to train people to interact well with the borrower and achieve the borrower-centric relationship that the regulators are trying to promote.” Servicers may have to further change their attitude about staffing versus outsourcing to vendors, or implement a combination of the two. Such decisions depend on what their future strategies are, including whether they prefer to keep servicing rights or sell them.
Preparation, timely changes of processes and technology are crucial to the servicing business, says Fay. John made a good point before about making the changes in a way that is fundamental to how servicers do their job, and at this point one year, until January 2014, is plenty of time to make those changes. It is concerning however because “it’s not just about how you did it, it’s how you prove you did it,” which is an important piece of the requirements that concerns servicers. “If you can’t prove you followed all these actions at certain times, then that can cause litigation, it can cause other issues for the servicer. So I couldn’t agree more with John when he says that being able to document this through technology and have rules-based systems in place is incredibly important. Again, we’re a relatively small servicer. For us to put these changes in place is significantly easier than for a big shop.” Many of the large servicers have to fundamentally change they do business after having done the same thing for over 50 years, "and that is very difficult to do.”