Servicers Face Customer-Investor Accountability Balance

As the Consumer Financial Protection Bureau officially opened its doors last week, lenders and servicers began bracing themselves for the increasingly tougher challenge of keeping a fair balance between their customer and investor accountabilities.

According to Patton Boggs Mortgage Banking Group, a Washington-based law firm that specializes in federal consumer financial protection laws, “The new agency’s impact on the residential mortgage industry will be substantial and complex,” since its goal is to coordinate customer protection regulations with the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the requirements of state residential mortgage regulators.

Regulation is driving the current metamorphosis of the mortgage servicing market, so at least for the near future customer advocacy groups, investors and mortgage banks will continue to compete for regulation leniency.

Speakers at SourceMedia’s third annual Best Practices in Loss Mitigation Conference in Dallas said current federal actions that aim to regulate the mortgage lending and servicing industry have placed a premium on the banks’ decision-making process.

In light of what has happened lately including legal hurdles in defaults and foreclosures and the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, argued Thomas Hiner, one of the panelists, and a partner at Hunton & Williams, it is more of an issue to be fair to the investor than to be fair to the borrower because after all the investor is a servicer’s primary customer and responsibility.

The overall validation of the servicing process and its compliance efficiency is becoming more proactive in the use of staff expertise, gathering of reliable data and technology to improve their systems. Servicers are rushing to create systems capable to provide timely compliance action that simultaneously honors the requirements prescribed by the regulators and by investors.

One example is compliance with MPV-Test, Moody’s Portfolio Variation Test, the Excel-based scoring model of residential mortgage-backed security collateral used primarily by originators to test whether a proposed replacement portfolio meets Moody's criteria, which often becomes a loan modification hurdle for servicers.

“It’s complicated,” Hiner said, because among other criteria these MPV-test models “need to be sensitive” to differences in state regulatory requirements that ultimately require the constant addition of new layers of regulatory requirements from different regulatory bodies and entities. Plus, how can the servicer identify what process controls they need knowing that federal rules may differ significantly from state rules? “It is really, really hard,” he said, because servicers’ primary duty is to fulfill investor requirements and not expose their assets to undue risk.

Determining how to build a MPV model that is fair and consistent when navigating through the maze of government regulation and the requirements of private investors is a growing problem. “Consistency is important,” said John Levonick, chief legal and compliance officer of Mortgage Cadence, yet having it is better than not having one at all. “Process drives accountability.”

Many of the new regulatory requirements—including the mandated intervention of specialty, third-party servicers based on the loan risk threshold as a way to help improve the mortgage workout success rate—are untraditional for the servicing market, he said. At the end of the day, however, “the common theme is ‘comply.’”

It means servicers need to design new compliance programs capable to deal with issues at hand and train staff accordingly. Newly created loan monitoring and processing models need to be tested by knowledgeable professionals who are capable to answer to all related questions, said bank regulatory national advisory partner at Grant Thornton LLP, Molly Curl, making training “more crucial than it has ever been before.” Especially now when servicers are required to establish one point of contact communication with the borrower the staff’s skill level is decisive.

The good news is that new resources are becoming available. Attorneys with the Patton Boggs Mortgage Banking Group have designed a practical guide for residential mortgage industry professionals that was reviewed by the Practising Law Institute. The group’s Mortgage Finance Regulation Answer Book 2011-12 outlines Dodd-Frank and other federal requirements and how they interrelate. It features chapters on the treatment of residential mortgages in bankruptcy, the use of electronic signatures, the Telemarketing Sales Rule, consumer privacy and data security, and the Fair Labor Standards Act’s impact on the mortgage industry.

Information and training is helpful, argued Robert Gow, director of compliance, mortgage, home equity servicing and default at Capital One, but servicers struggle with the multitude of considerations they need to take into account, “the rules are not so clear.”