While the best outcome for a delinquent loan is for the borrower to become current again—for all parties involved—quite a few loans tend to be resolved at the opposite end of the spectrum.
This resolution process is lengthy and expensive, so it is essential that servicers focus on key default processing milestones that not only ensure safeguards in the default management process, but also provide a consistent and fair treatment of all customers currently underwater and facing hardships. To ensure regulatory compliance, servicers must implement five key checkpoints throughout the default process, including:
- 1. Timely Borrower Communication
Ensuring that all borrower communication, including notices and phone contact, occurs in a timely manner is of utmost importance. Effective communication that is easy for the borrower to understand along with providing the borrower with sufficient time to take corrective action is mandated by law. Additionally, the legal process within default management requires timely notices to the borrower, which requires the servicer to track the loan through the default process and trigger the notices in a timely manner. Many of the systems and processes that servicers use today do not support this need, thus causing delayed or missed notices and an overall delay in the default resolution process.
To ensure timely, effective communication with borrowers, servicers should consider a default system that features a real-time loan status reporting dashboard and complete insight into how the default life cycle is progressing. By streamlining communication with real-time loan reporting, all involved parties can quickly and efficiently fulfill all the required steps to complete a loan.
- 2. Vendor Oversight
Throughout the default process, servicers may work with a multitude of vendors including attorneys, appraisal management companies and title agencies. Ensuring these vendors are compliant with the servicer’s internal policies as well as investor and regulatory requirements is a challenge. Servicers’ process timelines are often missed by the vendors due to various reasons such as inadequate staffing, lack of experience or erratic volume flows apart from external uncontrollable factors, which cause unnecessary delays in the resolution process. Furthermore, servicers also need to verify the accuracy of vendor affidavits/statements made on their behalf.
To ensure vendors are compliant, servicers must develop a strong governance plan that monitors and directs the work being completed, as well as sign off on all statements made by the vendors. A strong monitoring and control process coupled with vendor rating and reward for timely and quality work is critical.
- 3. Knowledge Management
Consistency of servicers’ practices and decisions on loans in similar circumstances of default is critical. In order to make these consistent decisions, servicers must implement a standard policies and procedures document that its staff can refer to. Additionally, servicers must establish training programs to keep staff updated on new procedures. Furthermore, servicers should conduct periodic assessments of staff to test their knowledge and understanding of the functions handled to further ensure process consistency.
- 4. Workflow Management, Default File Documentation and Time Stamping
Since the default management process can be prolonged and is a consequence of multiple actions taken over different points of the process, servicers need to track the status of the loan and maintain the integrity of the loan documentation. Unlike the traditional approach of isolated systems for workflow and document management—which means physical files in some cases—an integrated default management workflow that can index and store documents is a necessity.
- 5. Reporting and Control
In order to ensure a strong default management process, the servicer’s management team needs to have a constant bird’s-eye view of all default components to quickly identify and resolve bottlenecks in the default pipeline. If unattended, loans can easily exceed legal timelines which will require the servicer to restart the default process at minimum, let alone the possibility of investor penalties and the likelihood of the servicer having to repurchase the loan. An intelligent system that identifies and flags bottlenecks in a timely manner will help servicers mitigate the risk of managing defaulted loans.
To implement these critical milestones into the default management process, servicers should leverage a default management platform that provides complete insight into their loan portfolios. By combining technology with automation as well as leveraging an experienced team of compliance professionals, servicers can increase productivity and provide significant risk and error reduction when processing defaulted loans. In order to offset the higher cost structure in default servicing, technology solutions are a key lever to improving precision, reducing cost and enabling lenders to focus strategically on their business.
Paul Imura is senior executive at ISGN.
