Dodd-Frank Still Top 2012 Servicing Challenge

Thanks to the Dodd-Frank Act, mortgage servicers will continue to have their hands full this year.

Panelists at a mortgage symposium in New York organized by SNR Denton US LLP, Digital Risk, and KPMG to discuss “antidotes to the challenges facing the mortgage industry in 2012” agreed that meeting the terms of Dodd-Frank Act is servicers' number one concern.

“The fact that the Consumer Financial Protection Bureau will have an enforcement authority with respect to servicers is huge,” said Robert E. Bostrom, the co-head, global institutions and funds sector at SNR Denton US LLP whose decades of experience in the mortgage market include over five years as general counsel for Freddie Mac.

The Dodd-Frank Act gave the CFPB oversight power over mortgage servicers at yearend 2011 when it started reviewing delinquent loans following the CFPB Supervision and Examination Manual. It was an additional oversight layer that adds to the ongoing reviews and monitoring of pre foreclosure processes and foreclosures from various other entities including courts and state legislators.

The fact that fair lending applies to servicers “is also huge,” Bostrom says, because as servicers strive to modify loans, or provide other workouts such as deed-in-lieu and short sales, they have to comply with lending tests and report on who benefits from the different programs available.

His observations from the marketplace concur with conclusions from many of his peers in the industry who worry about the poor quality of loan servicing and the market's “insufficient capacity to move servicing any place else, especially non-performing loan servicing.”

Part of the problem is lack of compensation incentives. If servicing fees were increased the move would attract more servicing compensation into the mortgage space since the current .25 bp compensation for .75bp or more in costs for the high touch loan servicing cases cannot bring about needed servicing quality improvements. There is talk about how that compensation structure has to change probably following the same steps that were taken in the NPL space, he argued, where NPL servicing fees are going up to ensure the required quality of service, “banks that are holders of these mortgages have to pay.”

In summary, the biggest pressures in the servicing space this year will continue to be: poor performance, inadequate compensation fee structure, and a true lack of processing capacity.

The list however does not end there. Similarly to other Dodd Frank legislation provisions, the Federal Housing Finance Agency conservatorship of Fannie and Freddie, which is seen by many, including Bostrom, as a step in the right direction, at the same time “is a big, big problem.”

What may start to improve this year? Bostrom expects a quiet regulatory environment this year. There will not be any new legislation pertaining to mortgage servicers, “maybe some enforcement power over abusive practices by the CFPB,” he says, along with changes to the fee structure to attract more capital and help improve servicing performance and bring more high-touch servicers into the market.

The focus this year will remain on high-touch servicing, single point of contact borrower engagement, how to benefit form multiple opportunities to fix problems and to modify loans, while foreclosure process continue, he says. “We’ll hear more from the State AGs and local governments. It’s a very politically popular cause given the very consumer friendly environment.”