When the Office of the Comptroller of the Currency announced in the spring of 2011 that a group of major mortgage servicers had signed consent orders agreeing to a host of new regulations and reforms, the regulatory landscape of the mortgage servicing industry was fundamentally altered in ways that would have a profound and lasting impact. The practical realities and day-to-day operational details of industry professionals have changed in some important ways.
While the big-picture priorities remain unchanged—accuracy, efficiency, integrity and service—the details of demonstrating robust and verifiable compliance has become more complicated. Servicing professionals immediately have had to learn and adapt, as detailed audits have become a fundamental and unavoidable piece of the servicing puzzle.
As with any new regulatory scheme, the scope and application of the new standards has at times been unclear or inconsistent from mortgage servicer to mortgage servicer. Moreover, the rise of frequent, detailed, and often repetitive audits have become a regular, if draining, part of the servicing landscape for all parties.
What follows is an overview of how these new standards are impacting the servicing industry, particularly the local law firms that supply the expertise and services for the legal process, and some basic strategies that attorneys and servicers can use to satisfy their new regulatory obligations and integrate productive audits into their operational profile—without compromising their ability to provide efficient and professional servicing.
Requirements remain unclear
Whether you are a lender, a borrower, a servicer or an attorney, the introduction of thoughtful regulation promoting responsible and responsive servicing is a positive development. The new OCC guidelines strive to provide that kind of regulatory structure, but, unfortunately, the steps to provide that type of structure have not been provided by the OCC.
That lack of clarity has prompted servicing entities to fill in their own details on how to achieve the kind of accountability, quality control and rigorous compliance that is required under the new guidelines. Accordingly, each entity demands similar, but disparate in detail, requirements of their business partners.
In an industry as legally, technically, and logistically complex as this one, there are no easy answers to solve the current issues that have been raised. Without specific and defined standards to use for measuring quality, each servicing entity is left to make its own decisions and to define the process as it deems appropriate.
For the foreseeable future, uncertainties surrounding compliance will remain. For attorneys in particular, servicer audits (both file-specific and more general procedural and standards compliance reviews) are here to stay. The key is to find a way to make those audits as productive and efficient as possible; minimizing disruption and maximizing impactful oversight.
Over prepare
The single most important way that attorneys can save time and money and manage resources efficiently during the audit process is to approach every audit fully prepared, with a detailed understanding of servicer goals and priorities. Preparation significantly enhances the ability to satisfy both the broad and the specific expectations of an audit, possibly reducing the amount of time auditors require in on-site meetings.
For their part, servicers and their selected auditing team should prepare and issue the fundamental questions that must be answered, and request the necessary documents and responses, in advance of the onsite meetings.
While “surprise” inspections may be necessary and/or advisable going forward, the initial full audit process must allow for some advance preparation by the firm in order to ensure that the right people and the correct information can be produced during the onsite process. This can save everyone time, money and a need for multiple follow-up.
Audit teams should also be knowledgeable about the legal process in the state(s) in which they will conduct an audit. This ensures that audit results will be accurate and will provide the servicing entity with the necessary information that is applicable to that state’s foreclosure processes.
Every audit is different, but there are key fundamentals that are relatively universal, allowing the attorney to fully present their operations to their mortgage servicing client.
Attorneys should be prepared to provide the following information:
Structural basics
Structural information includes IT resources, business continuity and disaster recovery plans, and information security and privacy protections. Audits typically review everything from physical infrastructure to electronic architecture, including data storage, data maintenance and data-handling policies and procedures.
Where, how and when your data is stored and backed up and what procedures will be implemented in the event of a flood, fire, power outage or other emergency is a critical piece of the important abilities that must be ensured.
Operational details
The big questions here revolve around professional capacity and capability: is the law firm fundamentally capable of executing the work assigned to them? Personnel, policies, and processes are up for potential review here, including a close look at quality control mechanisms, training programs, handbooks and financial integrity. While not every firm needs to be the biggest in its state, each firm should certainly be able to demonstrate an ability to handle the work they receive on a day-to-day basis.
Get your docs in a row
Detailed, accurate and accessible documentation is central to minimizing audit disruptions and maximizing audit effectiveness. Attorneys and law firms should get out ahead of the inevitable and unavoidable audit requests by storing and organizing all important information in a manner for efficient provision to the auditing entity.
Whether that information is stored electronically or in physical binders or folders is immaterial; what matters is that the information is clear, comprehensive and well organized. Planning ahead of time is particularly important now that clients have the right (and in many cases the obligation) to initiate an audit at any time.
When making decisions about what information and documentation to maintain and how to arrange that information, remember that the auditing process is designed to confirm not just the accuracy of data, but the methods used to store and secure that data.
Clear and consistent communication
It is ironic that with all of the technical innovations available to the servicing community, perhaps the most important, effective (and affordable) way to streamline the auditing process and achieve full regulatory compliance remains a very old-school, low-tech solution: communication.
Collaborative, productive and proactive conversations between attorneys and servicers can clarify mutual expectations, minimize redundancies and avoidable delays and help all parties work toward a speedy, efficient and effective review. The mortgage servicers’ provision of advance notice, including detailed information about timelines and the scope and scale of an audit, is a professional courtesy that benefits both servicers and attorneys. Audits are clearly here to stay, and servicing professionals owe it to themselves and their clients to work together to meet their regulatory obligations in a way that enhances—not detracts from—their ability to provide accurate, efficient and professional servicing.
Kip J. Bilderback is a partner at Millsap & Singer, LLC.
Alberta Hultman is executive director and CEO of USFN.
