For servicers seeking to differentiate themselves with mortgage investors, the ability to quickly resolve a delinquent loan has taken a backseat to demonstrating a strict adherence to the swath of new compliance requirements that have transformed the industry.
Establishing strong compliance and audit programs "can be a real differentiator out there in the market and can help the strong servicer actually save money," said Scott Samlin, a partner with the law firm of Alston & Bird, at an industry conference earlier this year.
A decade ago, the servicer's main objective was speed, with the government-sponsored enterprises grading them on how quickly they could get the ball rolling on a foreclosure, Samlin added. But now, servicing is under more regulatory scrutiny than any other segment of the mortgage business, including originations. Companies must make compliance a focal point of their operations in order to survive the intense regulatory scrutiny permeating the business.
And it may not be long before individual states start coming out with more stringent regulations than what the Consumer Financial Protection Bureau has put forth, Samlin declared.
At Bayview Loan Servicing, "we talk about compliance being at the top of the waterfall," said Michael Waldron, its chief compliance officer. Compliance needs to be woven in the fabric of a company's servicing platform.
When a servicer meets with outside parties, no matter if they are regulators, clients, potential clients or investors, "the focus of those meetings is in and around compliance," he continued.
It's the regulators' job to ensure servicers maintain compliance with regulations, particularly those that affect consumers, said Loren Morris, the executive vice president, general counsel and chief compliance officer of Fay Servicing. But it's up to servicers to find cost effective ways to implement those requirements into their processes.
However, many organizations do not devote sufficient resources to appropriately build out a compliance management system, Waldron noted. No matter if an organization services 10,000 loans or 300,000, the compliance function's foundation and framework are the same.
So in determining the appropriate amount of resources to devote to compliance, he said companies need to understand how the department will interact with the rest of the business and then align the framework in a way that allows the business to easily digest what the compliance unit is trying to accomplish.
Compliance officers should not put items in place that exacerbate the natural tension between compliance and the rest of the business, Waldron said. There are ways that allow compliance to be a market differentiator for the servicer, saving money while at the same time mitigating risk and further protecting the image of the company.
"I don't think that there is enough time spent recognizing the power of a true, effective compliance management system and what that does for an organization," he said.
There is plenty of "low-hanging fruit" to look at when building a compliance management system, Samlin said. First, servicers should highlight how their support services units coordinate with one another. Quality assurance people should not be doing the same things that independent quality control or compliance function people are, so they aren't looking at the same things.
Another area of low-hanging fruit is training. Companies purchase a curriculum off the shelf, and it never evolves to meet changing conditions, said Samlin.
Servicers should spend the money and customize that purchased training program. Plus best practices already in place need to be woven into the compliance management plan as well, he continued.
Compliance needs to be a part of the organization, "not some watchdog above it all, but a true partner to make sure it is embraced," Morris said.
It is important to have the right people in place who can figure out the root cause of a compliance problem and fix it, added Waldron. He said he's more worried about getting reports back from quality control staff with no findings rather than receiving reports that identify a problem.
"This is a business riddled with and rife with mistakes and human error. The question is what do you do to find them and what you do with them," Waldron said. Regulators take comfort that when servicers find things and they are addressing them appropriately.
"The only fear is the fear of not knowing," said John Levonick, chief compliance counsel for Opus CMC, a compliance consulting division of Wipro. Regulators are less concerned with the specifics of any one individual problem, but rather what a servicer does to remediate issues and prevent them from recurring, he added.
At Fay Servicing, employees are rewarded for helping fix problems, Morris added.
For small companies, the investment in compliance is worth the money because "if you are not compliant, you can suffer large fines and reputation risk and you may not have a business model that is going to work long term," he said.
There are some low-tech things that can be done such as holding an internal management meeting before a property put into a foreclosure sale to go over if everything has been done that could have prevented that from happening, Morris said.