In the aftermath of the mortgage crisis, loan servicing files and histories that were examined for consistency and accuracy often came up short. Over and over, discrepancies were found that made it nearly impossible for regulators to understand systems and decision-making processes, which contributed to the creation of new mortgage servicing regulations handed down by the Consumer Financial Protection Bureau.
The final rules that took effect Jan. 10 include amendments to the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z), and ensuring compliance with these new requirements is a tall task for servicers.
The servicing file is the CFPB's way of establishing an accessible, auditable trail of loan origination and servicing activities, including both data and documentation. The servicing file requirement calls for servicers to provide complete servicing files within five calendar days.
Disparate back-office systems and the sheer volume of detail required by the regulations are causing some heartburn in the industry. The only way for servicers to address these concerns is by testing an organization's servicing file compilation ability and providing the successful proof of compliance.
But what's a reasonable test scenario for organizations to see if they can pass the "1% test" for scalability and responsiveness? Before auditing servicing files for completeness and adherence to policies and procedures, organizations need to test their compliance management system's ability to successfully compile 1% to 5% of the files in their active servicing portfolios in less than five business days.
Compliance with the CFPB's new regulations may indeed pose a challenge to an organization, but innovative technology is available to aggregate, format and electronically deliver the servicing file as requested. With the right focus, technology and processes in place, servicers and their systems will be more capable of passing the 1% test.
How an organization responds to a request for audit files can be telling. Siloed information creates barriers that make data accuracy and access to relevant data and documents more difficult, which can result in a scramble to piece together records with reassigned staff. This unplanned work causes a drag on operations and often significant expense. It also calls into question concerns about the quality of assets and the validity of loan documents—causing no small amount of concern and opening doors for further scrutiny.
An organization's ability to successfully manage the servicing file may be viewed as a critical measure of a quality compliance management system. Even on an individual record, aggregating this amount of detail in a comprehensive and understandable format is no doubt daunting. When an audit request arrives, organizations should be ready to respond quickly and efficiently. The required detail in the new regulations and the CFPB's stated intent will make a "react when we receive it" plan nearly impossible.
Instead, a technology-driven approach that employs an established, previously-tested and systematic process instills confidence that operations are audit-ready and demonstrates the proof of compliance the CFPB requires. A consolidated approach to servicing can help achieve greater transparency between regulators, borrowers, investors and departments within an organization.
The breadth and depth of the information auditors require in the servicing file poses a compliance challenge for most servicers. The CFPB defines five mandatory components of a complete servicing file.
All Transactions: From January 10, 2014 until the loan is paid off, complete transaction data detail from the platform(s) used to service the loan must be included in the servicing file. Other documents, records and artifacts that provide detail on transactions and interactions should also be considered for inclusion. The history and required documentation will get increasingly long and complex as a loan goes through its life cycle.
Security Instruments: The file must include a copy of the security instrument that establishes the lien for the mortgage loan. Servicers must identify the correct copy among several that may exist in files or image archives, and be prepared to present the final supporting documentation to demonstrate evidence of compliance to regulations, policies and procedures which are current at the time of closing.
Servicers' Notes: Any system notes reflecting communication with the borrower about the mortgage account needs to be included in the servicing file. This requirement may prove quite complicated since many servicers create notes in multiple systems, including main servicing platforms, customer relationship management systems, loss mitigation systems, core banking platforms, spreadsheets and databases. Servicers must be able to aggregate, standardize and export all of those unique messages into a single file format, and within the five-day window.
Data Fields Report: A data fields report relating to the borrower's mortgage account is created by the servicer's systems, and must include fields from the loan servicing system. Any relevant data and details regarding contact with the borrower—from systems for collection, CRM, business process outsourcing, interactive voice response, phone and third-party support—need to be gathered, read and understood to provide the "proof of compliance" that the CFPB wants. The industry should expect that requests for additional audit data will increase over time, which only magnifies the need to get this requirement right from the start.
Borrower-Initiated Documents and Information: Copies of any information or documents provided by the borrower to the servicer to initiate a servicing request or transaction, such as recorded borrower interaction, requests made online and through the servicer's website, phone calls and voicemail messages, must be included in the servicing file. Borrower documents can include emails, faxes, letters and even the back of the payment coupon. Though the regulations do not specifically state lender response documents, lenders should include the complete chain of documentation to demonstrate proof of compliance.
The lending environment has become increasingly complex, and in light of new regulations, servicers need to take a fresh look at their servicing file tools, processes, policies and procedures. A comprehensive loan completion system can automatically gather documents for the required servicing file, track missing documents, audit transfer files, and accumulate and archive notes, documents and borrower communication.
All servicers should be asking important questions regarding servicing file compliance. Have the relevant systems been identified, catalogued and are they accessible? Who in the organization is responsible for servicing file creation work? Can the file be exported for review? Has the organization tested a standard service file creation and export scenario for 1% to 5% of its files?
Answering these and other questions about policies and procedures, roles and responsibilities, accessibility, aggregation, scalability, documentation and testing can help servicers breathe a little easier.