Mortgage servicing market insiders are monitoring regulators with the same attention the Consumer Financial Protection Bureau, the Office of Mortgage Settlement Oversight, the Department of Treasury and other federal and state legislators are monitoring mortgage banks in general and mortgage servicers in particular. The impact of
Since 2007 when the volume of delinquent mortgage loans increased to unprecedented levels, while surprised and unprepared, servicers started to reinvent their business and adjust. Today, besides that core adjustment servicers also are routinely challenged by regulators.
This year and in 2014 nine mortgage servicing rules recently issued by the CFPB will go into effect. The impact is big because, according to insiders, while servicers have been changing their operations and adopting new technology to catch up with the new reality, there still is a lot to do this year and the next so they remain in compliance.
At the MBA’s National Mortgage Servicing Conference in Dallas, Mark Fogarty, editorial director of the mortgage group publications, Amilda Dymi, managing editor, Mortgage Servicing News, and Evan Nemeroff, managing REO reporter, Mortgage Servicing News, sat down with industry insiders Ed Fay, CEO of Fay Servicing, John Vella, COO of Equator, and Loren Morris, general counsel and chief compliance officer of Retreat Capital Management, to hear, among other things, about their reaction to these rules.
While agreeing that servicers basically have a year to comply, which ought to be enough time, the panelists emphasized that starting right away is the right way to go. And while they admitted servicers may have made some mistakes during the onrush of defaults and foreclosures, they feel basically servicers want to do the right thing and will if given a chance.
Fogarty: The CFPB has issued nine mortgage servicing rules and they’re pretty detailed, and I’m just wondering what your initial reaction is to them, how’s it going to affect the servicing business?
Fay: As a servicer I can address them somewhat. There’s a combination of different things in the rules, and the most important piece is that I don’t believe there’s a total of rules that will make fundamental changes to how we do our business, with the exception of some of the single point of contact pieces. One of the biggest changes is just simply trying to make customers more aware of what’s happening with their situation—for example, with the ARM changes, adding an additional letter, 90 days instead of 45 days. So those changes for smaller servicers aren’t a big deal, it’s just adding another letter cycle. But if you’re talking about being a large bank or a servicer, how do you know a letter cycle is not a simple process? It will be difficult to implement some of the changes. Luckily they gave us a significant amount of time to make the implementations.
Fogarty: Not until 2014 that it comes into full effect, correct?
Fay: Yes. So again, we have plenty of time to make the changes, which I think—again, it can’t hurt. I’m not sure how much fundamental impact a lot of the changes will have, but it certainly can’t hurt.
Vella: There’s going to be a big impact. Even though it’s 2014, it’s going to take a lot of time for a lot of these servicers, even though they’ve been putting some of these rules in place. Still, by the time 2014, before we know it, it’s going to be here. And to implement it in a large organization, so many changes, in addition to the CFPB rules, all of the other investor rules and government rules that they’ve had to put in place, are still taking an impact.
The big piece, though, that’s going to be required, coming from a technology space here, is the need for proper technology to manage the process, because at the end of the day, it’s going to come down to compliance.
But in order to manage the compliance, you’re going to need proper data collection as well as audit trails, and what technology will do with these rules, it will allow for the servicers to document every step of the way the process that they’ve put in place to ensure that when it comes time to do an audit, they can go back and look at things such as dual tracking and 30-day notice and have snapshots of those decisions, the times they were made, and the underlying rules and attributes behind it, so if audited, and with penalties potentially facing them down the road, the need for proper compliance across, with most of these people, multiple sites. A lot of them use third-party-outsourced companies, so the need to properly manage it and dispose of all of rules and get them out to all the constituents, have proper training in place, have proper controls for documents and data, technology’s going to play a critical part in making sure that they’re within compliance.
Morris: What we may be seeing is a reconfiguration of the servicing industry as a whole, moving away from the large servicers who may not find default servicing economical or in the best interest of their shareholders. So you’re seeing the second- and even third-tier servicers as a specialty servicer or a subservicer coming into play, and that’s probably good from a consumer’s perspective as well as the industry’s perspective in that you’re going to have more high touch, which is the goal that the regulators are trying to achieve, is having a very high-touch servicing-orientated arena.
And I read somewhere where they recently said they want to put the word service back in mortgage servicing. Having said that though, it is going to be difficult for the large servicers to move quickly. The mega-servicers who are all part of the mortgage settlement, they’re already implementing a lot of this, but differently. So you have a lot of constituents, you have a lot of different investors. You have the GSEs, you have the mortgage settlement, as I mentioned, and then you layer in the CFPB. So the CFPB, while they’ve discussed how they will integrate with others, that, I don’t think, we’ve quite seen yet. So you have, as you mentioned, a lot of technology’s going to be needed, compliance is going to be key. It’s driving this industry like it never has before. It’s going to require a lot of gap analysis, a lot of sophisticated personnel, a single point of contact, or others who understand how to maneuver within it.
Fogarty: When the CFPB was getting started, they made a point of saying early on: We are targeting mortgage servicers for regulation. I guess because of the robo-signing problem and other foreclosure issues. Do you think that was fair? Do you think mortgage servicing needed to be singled out that way?
Vella: I think that servicers generally all try to do the right thing. I think with the sheer volume since 2007, the sheer volume of delinquent loans, everyone was caught off guard, so I don’t think anyone deliberately went out of their way not to do a good job. They were caught off guard and tried to react as quickly as possible. But to hire, train, put in technology, change your whole entire workflow process to meet the demands of all the new needs, it was unrealistic trying to do that in a short period of time. So I think there’s a misconception out there that loan servicers were doing things deliberately to not service the customer correctly. It was more that they were caught up in the fray of the 2007 onslaught of activity in delinquent loans and unrealistic expectations in a short period of time.
Dymi: How do they meet the deadline? Is it realistic for them to have just 12 months, less than 12 months, to comply with everything, and to change the technology, as you mentioned?
Vella: The deadline was realistic, because a lot of these things that were asked by the CFPB, they put the skeleton out there almost over a year ago and said, these are the things that we’re going to be looking at, these are the rules that potentially are going to be coming down. And they didn’t really deviate much from that, so there was a head start, and a lot of the best practices that are included in the CFPB rules most of the servicers have already implemented. So the change isn’t that drastic, so their ability to comply by 2014 should not be an issue.
Dymi: From the technology perspective, and you are in the same field, I’ve heard so many people tell me about being on pilot with certain products, and they say: We have to be on pilot for this. We started last year and now we are ready to launch the new product, the new tool, or whatever. I was talking to Fiserv the other day and they have developed a new loan completion tool that is going to serve a particular purpose. So is it that also, people like you and companies like yours, have been preparing for this for the past year, parallel to the servicers?
Vella: As any technology company, you have to be thinking ahead, of what’s coming next. So a lot of this was fairly obvious of what was coming, so having flexible rules engines that you could obtain the right attributes and adjust the rules engines in advance allows you to adjust to the rules that are placed upon these servicers very quickly. So if you have that infrastructure of technology and the right rules-based technology, you can adapt to this pretty quickly. So yes, most technology companies, or some technology companies, have thought that far in advance and were prepared and are prepared for it.
Fogarty: I think you can put it out for comment, too, you have six months or so to—but they don’t put it out to comment just for intellectual purposes. They do it because they’re planning to put this into play unless something big comes along, so that would give you six months to prepare for it.
Fay: John had a good point before, though. Making the changes…to make them fundamental in how we do our jobs on the servicing side…a year is plenty of time for those changes. It is concerning because it’s not just you did it, it’s how you prove you did it. And that is a big piece of this, because there is concern. If you can’t prove you followed all these actions at certain times, then that can cause litigation, it can cause other issues for the servicer. So I couldn’t agree more with John when he says that being able to document this through technology and have rules-based systems in place is incredibly important in this step. Again, we’re a relatively small servicer. For us to put these in place is significantly easier than a big shop. For many shops, you’re talking about they’ve been doing the same thing for 50 years-plus, and now you’re saying you have to change the way you do your business fundamentally, and it’s very difficult to do. And not only change how you do it, how do you prove you did it?
Morris: Right. I agree with John and Ed. It’s having the ability to document it, but I think also what’s going to be key is training, because at the end of the day, you have to train people to use the tools, you have to train people to interact well with the borrower and achieve the borrower-centric relationship that the regulators are trying to drive.
Fogarty: Do you think that this—somebody described it as a tidal wave of new regulations—is going to cause a lot of companies to staff up, or will there be a lot of outsourcing to companies like John’s and other vendors, or a combination of the two?
Fay: From what I’m seeing, it’s a combination. Some companies are staffing down, reducing their staff, moving their servicing rights to the banks. It’s very public the banks are doing that. And other companies are doing the exact opposite, they are growing at exponential paces. If you look at some of the big public servicers, their growth over the last year and expecting this year is extraordinary.
Vella: What you’re seeing growing are compliance departments and risk management departments. As default/delinquent loans and REOs level off from a volume perspective, what you’re seeing is the hiring that’s taking place on the risk management side to make sure all these rules and all of these new changes that are put in effect, that people are properly trained, and before things go live, that they’ve been run through all the proper channels. So you’re seeing staffing in those areas—the audit groups, the compliance groups and even the technology interface groups. With this side of the business, you’re seeing that pick up, but the staffing is probably evening off to even declining as delinquent loans are declining and the use of outsourcers to help on this. Because they’re so penalty-intensive if things go wrong, you could bring consultants in to help you roadmap it. But at the end of the day, your infrastructure has to understand these rules and make sure that they’re there full-time working with the staff for compliance. It’s not something you can outsource and then let it leave your culture. It now becomes ingrained in your culture and in your process.
Morris: You’re going to need to be able to monitor it, because you’re never going to be able to abdicate your responsibility, whether you outsource it or not, so to some extent it’s shifting of the relationship. So you may have different types of employees—as you said, risk and compliance. But you may have the processing of a modification maybe outsourced, for example, or other components of it would be outsourced, simply because I think that the largest current servicers can make money elsewhere. Origination is coming back, for example, and so it’s a matter of where you put your resources and your money.
