The mortgage banking industry has only scratched the surface of potential consequences of Bulletin 2012-03, issued by the Consumer Financial Protection Bureau (CFPB) in April. The lightning bolt in that document was the assertion that the CFPB would hold lenders accountable for the actions of their ‘service providers.’ Unfortunately, the CFPB did not clearly define who would be considered service providers for this purpose.
To make matters worse, this is not a proposed rule or regulation with a notice or comment period. Rather, it is a statement about the way the CFPB is policing its domain right now. There is no ramp-up period.
So, what exactly is a service provider and for what actions can a lender be held accountable? It is fairly obvious that mortgage servicing companies fall under the statement's purview.
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But what about a mortgage broker? An appraisal management company? An appraiser? A title insurance company? An independent title agent or closing agent brought in by that title insurance company? How far does the chain of liability extend?
Of course, this raises a more troubling question: ‘How do I mitigate my risk when there is no clear roadmap?’ It's a difficult question, to be sure, but one with which lenders of all sizes must now grapple. Above all, it is certain that the days of pulling a vendor out of the telephone book and/or throwing operations work ‘over the fence’ have come to an end.
For lenders doing a limited volume of mortgage transactions in limited markets, the number of partners or ‘service providers’ being used is probably small enough to manage. For lenders doing business in multiple markets and/or in greater volume, however, this newly appointed liability could become fairly onerous.
The trend we are seeing, and which will likely continue, is centralization. Specifically, larger lenders are holding one or a few centralized service providers highly accountable for the actions of smaller partners working through the centralized provider. Where feasible, servicing, valuation and settlement tasks are being done directly by that centralized provider.
The reason behind this involves simple math. The fewer service providers, the fewer chances for things to fall between the cracks in the chain of accountability.
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Of course, it's well known that all real estate is local. As a result, not everything can be handled directly by a centralized partner. That is why it is critical that any centralized partner be able to clearly explain and document any providers it uses, and how they are vetted, managed and audited. This may be a time-consuming and costly process, but lenders are likely going to have to spend more time ensuring that their partners are up to snuff when it comes to customer service, compliance and quality.
This endeavor begins with the vetting process. Don't be shy about making on-site visits and asking as many questions as possible. The bottom line is that more thought and evaluation will have to go into the initial selection process. It's likely that lenders today will need to devote substantially more resources to selecting and managing any service providers. Reporting and auditing will become much more important than it ever has been.
But what happens if an existing service provider goofs up? Human beings make mistakes, of course, and it seems unlikely that the CFPB will lower the boom on lenders who can demonstrate that they've made reasonable and planned efforts to keep an eye on the quality of their service providers. But how will you prove you've made that effort?
For those lenders that haven't already considered this, the time to formalize a multi-step process for selecting, managing and auditing their service providers was yesterday. For some, this will be a titanic task. A technology upgrade or investment may be in order, and will likely allow for some streamlining, and a lot more efficiency, in that process.
More importantly, if it concerns the management of a service partner, it will need to be documented. But however it gets done, the burden will more than likely fall to the lender to explain how it selected and managed its service providers if and when the CFPB comes calling.
Needless to say, this will be a living process involving constant attention. As the market transforms, more regulations emerge and personnel change, a lender's service provider management process will need to change as well.
Remember that this will not be a one-time initiative. Accordingly, lenders will need to devote full-time resources to ensuring their service providers are holding up their end of the transaction.
Similarly, the onus will be on service providers to make quality and compliance a point of emphasis. A good vetting process will quickly determine if that has been the case.
The new age of tighter regulation, like it or not, will likely be with us for some time. The good news is that, in all likelihood, the best lenders and originators were already doing some of the things necessary to ensure their service partners were worthy. Furthermore, the best service providers make compliance and quality staples in their service offerings.
Nonetheless, it is clear that now is the time to review your process and your partners. A failure to do so could be extremely costly later.
James W. (Bill) Moody is executive vice president for WFG Lender Services, based in Westlake Village, Calif. He can be reached at (805) 915-5299.