The current mortgage lending environment is driving demand for cost effective, adaptable and bullet-proof quality control and regulatory compliance.
Consequently, technology, time and treasure are being devoted to perfecting lenders’ compliance management systems (CMS), despite other cost-cutting measures to salvage dwindling margins.
In light of the emphasis on compliance in originations, mortgage servicing is receiving less attention – and for many mortgage servicers, compliance is now a low priority in terms of technology spend and resources.
It is no surprise to see mortgage servicing return to the “back of the line,” when it comes to prioritization, as the default market has reached historically low delinquency rates.
However, compliance complacency in loss mitigation is extremely risky.
Since the foreclosure crisis and advent of Dodd-Frank in 2010, servicers have transformed their entire approach to compliance, resulting in dramatic improvements. Much of this has been achieved at a high cost when compared to the technology innovation implemented at the front-end of mortgage finance.
Most companies have deployed legions of resources and/or have outsourced the servicing QC function – or have even spent efforts to upgrade policies and procedures. With those efforts, some companies still have a less-than-dynamic servicing CMS to ensure compliance and reconstruct defective processes.
Servicing compliance with the GSEs, private investors and Ginnie Mae is relatively easy, as the large majority of rules are objective, and technology improvements are automating more processes.
In fact, quite a few mortgage servicers are adopting innovations in mortgage lending to increase self-service options for their customers.
Self-service enhancements in servicing not only reduce expenses and improve the customer experience, but, if done with an eye toward compliance, they reduce risk, as well.
One of the more vexing regulatory pitfalls from the Bureau of Consumer Financial Protection (BCFP, formerly the CFPB) is the rule relating to unfair, deceptive or abusive acts and practices (UDAAP). It has been used in originations and also in servicing recently.
Since the BCFP has not specifically defined an UDAAP violation, the rule’s broad scope and inherent subjectivity lend it to a particular application in the loss mitigation process, which can now be initiated with the first collection call. UDAAP covers all banking activities, and the BCFP can use any appropriate action under federal law to target lenders for review.
The real catch is that “intent” is not required to constitute an UDAAP violation. Therefore, the normal miscues that occur in loss mitigation communications, which can be complex and extended regarding eligibility and documentation, pose a significant compliance challenge to even the best servicers.
It will be very interesting to see the test case involving a recent disclosure by a major servicer that modifications were incorrectly denied because of a decision engine glitch.
The Mortgage Bankers Association (MBA) provides a UDAAP Compliance Matrix based on the BCFP’s Supervisory Highlights from earlier this year. What follows are some loss mitigation activities that servicers should evaluate for UDAAP compliance during audit reviews.
A servicer took excessive time to process borrowers’ applications for foreclosure relief; failed to tell borrowers when their applications were incomplete; denied loan modifications to qualified borrowers and/or illegally delayed finalizing permanent loan modifications in violation of the BCFP’s mortgage servicing rules pertaining to loss mitigation or the Dodd-Frank Act’s prohibition on UDAAP.
In offering proprietary modifications, one or more servicers engaged in deceptive and abusive practices in connection with communicating whether and/or when outstanding fees, charges and advances would be assessed. Specifically, one or more servicers engaged in a deceptive practice by misrepresenting to borrowers that it would defer such charges to the maturity date of the loan, when in fact it often assessed hundreds of dollars in these charges after the borrowers signed and returned the permanent modification agreements.
Automation can relieve these problems by structuring the interaction, the dialogue and the exchange of information via agreed-upon status codes, similar to those used on Hope Loan Port’s HC2 portal, which many servicers are adopting as an adjunct to their proprietary borrower portals.
HLP’s collaborative portal requires users – servicers, consumers and their authorized third parties – to sign service level agreements or terms of engagement. It requires timely updates to status codes, which eliminates much of the miscommunication in loss mitigation dialogue.
Finally, UDAAP can be particularly troublesome in the area of dispute resolution and escalation. Many servicers, in an attempt to handle these with care, do not take advantage of commercial systems. Servicers should consider leveraging existing commercial platforms to manage these hypersensitive cases and place particular focus on the post-mortem case-level audits and quality control to make transactional and systemic corrections.
Camillo Melchiorre is president and director of regulatory compliance for IndiSoft.