Although the Standard & Poor’s/Experian Consumer Credit Default Indices have been reporting a decrease in default rates for first mortgages in recent months, the industry is still struggling to identify the best methods to effectively manage defaulted loans. Despite this decrease in the default rate, servicers need default servicing systems that deliver greater flexibility - without integration issues and without depleting their technology budgets. Increased scrutiny from federal agencies regarding the accuracy of borrower information means servicers have no choice but to embrace technology, as it is the only way to maintain efficiency while also monitoring compliance efforts.

Technology, to date, has been able to manage the requirements of each stakeholder in the servicing food chain, no matter what the volume. Nonetheless, there are certain features and capabilities that default servicing systems should deliver in order to help all parties in the process react to the ever-changing requirements. What follows are the top five things servicers should look for in a default servicing system that will help them navigate future change.


1. Workflow automation and oversight

Technology, and particularly automation, is helping servicing employees work in a smarter and more efficient manner. However, in order to take processes and automate them, it is important to understand how all of the processes fit together.

Without the proper technology, employees invariably end up focusing on non-value-added activities and not on value-added activities. This is why workflow automation is important: It keeps employees focused on the value-added activities. As such, servicers should select systems that offer workflow automation, which is the ability to automatically move documents and tasks through a business process. It can be a sequential progression of work activities or a complex set of processes happening simultaneously, eventually affecting each other according to a set of rules, routes and roles.

If all of the servicing staff members use an automated workflow, every case can be evaluated consistently. It increases productivity and minimizes - if not eliminates - human error. Because all cases are processed through the workflow system, no step is overlooked. Management can have complete oversight of all the cases on the system; this helps management monitor productivity and make the necessary adjustments.


2. Regulation changes

After the financial downturn that began in 2008, there was an increase in regulations for almost every aspect of default servicing. These new regulations have even extended to include auditing the stakeholders and any cases they worked on. The Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. are just a few federal agencies that have updated or issued new regulations - and they continue to make modifications based on the market.

A default servicing system must be able to easily adapt to these new regulations. In other words, it must be simple for a user to implement new workflows or to modify existing ones. This ensures the staff will be able to work on cases using automated workflows that are based on the latest regulatory requirements.

Some of the newer default servicing systems can notify an employee of regulatory changes through alerts, which are helpful in the event a worker was not aware of the change. As new regulations and requirements come into play, many systems today allow management to determine if additional employee training is necessary.



3. Security

In the past few years, there have been numerous security breaches that have compromised consumers’ financial information. One of the most well-known breaches occurred at Target in 2013. In that event, more than 40 million customers’ financial information was compromised. The breach cost Target more than $1.5 billion in fines and penalties. The lesson? Servicers must enforce strict security procedures when using a default servicing system to ensure such a breach does not occur.

Most default servicing systems are delivered via the Software as a Service model, as opposed to the traditional, on-premises model. Irrespective of the way the software is delivered, there are certain regulations and requirements regarding security that must be met, such as SSAE 16 Type I or Type II audits for data hosting. It is vital that servicers be aware of the regulatory requirements before purchasing or licensing an application.


4. Collaboration and communication

Every defaulted loan requires multiple stakeholders to view and access loan information in order to assist the borrower as soon as possible. This can be accomplished through early intervention, loan modification or loss mitigation. Having everyone involved in these processes using one platform, with the ability to collaborate and communicate, can help the borrower at least facilitate the best outcome.

Once the system identifies the borrower’s unique situation, workflow automation kicks into gear. Based on established criteria, the system can automatically message the other parties (counselors, servicers, lawyers, etc.) regarding the next steps that need to be taken. Whether the system is working with the borrower to make the mortgage payment or request a loan modification, it should have predefined workflows and, thus, should know exactly what steps to follow. This level of communication can save time and money for all parties involved in the default servicing process.


5. Reporting

With counseling agencies getting increasingly more involved in the default servicing process - and becoming more and more of a go-between for borrowers and servicers - the timing of their communications has become critical. This is also where default servicing systems are playing a key role. It is important to consider a system that can facilitate this communication.

In general, counseling agencies are funded based on the number of cases they have managed or on the amount of time that they spent on each case. Now, due to regulatory requirements, some counseling agencies receive funding from servicers based on the number of borrowers they actually help. All of these factors make generating reports in a timely manner crucial.

A default servicing system should be able to generate these reports and, if required, be able to alter those reports automatically when the billing requirements change. There are a few involved parties that would have to submit the report directly from the system in order to be paid. Other than these standard billing reports, the system should also be able to generate reports in various graphical formats - with easy export - to present to upper management and other stakeholders. A robust reporting feature also makes the audit trail much easier to follow.

With ever-changing regulations, it is often a challenge for servicers to manage compliance efforts while staying on top of day-to-day business. By implementing the right default servicing system, all parties can benefit. In order to meet regulatory requirements and to allow for successful default loan management, the above-mentioned characteristics should always be considered.


Pramod Karachur is project manager at IndiSoft, a provider of software solutions to the mortgage banking industry. He can be reached at (410) 730-0667.


Top Five Things To Look For In A Default Servicing System

By Pramod Karachur

There’s a slew of default servicing systems available on the market today, making it harder for servicers to know what features and capabilities they really need.




































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