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With the national foreclosure crisis behind us and the Office of Mortgage Servicer Oversight (OMSO) shuttered after successfully completing its mission, some might conclude that the most serious challenges mortgage servicers face are now behind us. Although there is some truth in that, there are still serious challenges to be overcome in today’s market. One challenge that no financial services firm will be in a position to ignore for the foreseeable future is regulator oversight. The rules will continue to change, and the industry will be forced to retool in order to meet the new requirements. However, successful firms, including servicers, will consider this table stakes - the price to play the game.

When OMSO was established to oversee the compliance efforts of the nation’s five largest mortgage servicers, many feared that the new agency would one day oversee all mortgage services. In fact, Joseph Smith, who was in charge of that office, once said it was his hope that the OMSO charter would be expanded to oversee all servicers. That didn’t happen. However, the Consumer Financial Protection Bureau (CFPB) has made that seem like less of an industry benefit.

One key metric that the CFPB has used to regulate the industry is the satisfaction level of the American home loan borrower. Although a lot of attention has been given to mortgage loan origination efforts, given that a great deal of borrower dissatisfaction can always be found around the closing table, it’s really the servicers that face greater risk here.

Whereas the mortgage origination team will engage with the consumer for the 30 days it takes to originate the loan (well, closer to 49 under the new TILA/RESPA Integrated Disclosure, TRID, rules), the servicer will be with the borrower for many years - typically seven years at least. That opens the servicing operation up to many more opportunities to dissatisfy the borrower.

To mitigate this risk, servicers have taken great pains to ensure that borrowers have the information they need in a format that is acceptable to them. That means more communication via text and email and more transparency around the escrow account. In addition, servicers have had to work hard to make sure that the borrower data they have is accurate and that changes that occur over time, such as the credit profile of the borrower and the value of the property, are tracked.

Failure here puts the servicer at the risk of having the borrower post information about his or her bad experience on the CFPB’s very public consumer complaint database. Even if other borrowers don’t find it there, enough information posted to the database by consumers will prompt the CFPB to come calling.

It may come as a surprise that many of the data-related errors that trip up servicers occur at the very beginning of the process. That is where the real risk lies. There are three challenges servicers face at the very beginning of their new relationship with a borrower that they must overcome to avoid future problems. Servicers that hope to grow will pay close attention to the following three hurdles that they must still clear to achieve success.

 

1. Ensuring quality control during the mortgage servicing rights (MSR) purchase and loan boarding processes:

When a company purchases the rights to service a pool of loans, the process of boarding those loans into the servicing platform is very disruptive. Quality control (QC) is essential during this process but is often not performed in a manner that is sufficient to catch data errors before they are propagated into the servicing system.

The best servicers begin the QC process while they are still performing due diligence on the pool and before the final decision has been made to purchase it. It is essential that the servicer know as much as possible about each transaction in the pool, as the company will be under increased oversight by regulators as it grows the portfolio.

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2. Perfecting the loan files for borrowers entering their portfolios:

Servicers must have a process by which they periodically check the validity of the information they have on file about their borrowers. There are a number of low-cost reports and monitoring tools available for this purpose. This is especially true when the servicer buys a new portfolio of whole loans or MSRs.

As soon as new loans hit the portfolio, the servicer should determine when the last broker price opinion (BPO) or appraisal was ordered and when the title was last examined for additional liens or owners. Knowing about changes in the borrower’s credit profile is also important. BPOs are relatively inexpensive, and property reports are an affordable way of ensuring that the title to the property is still clear except for the servicer’s lien.

 

3. Making certain that information sourced from third parties arrives quickly:

Part of the reason that boarding new loans is so disruptive stems from the fact that everything must happen so quickly. If it takes too long to get information back about the new loans entering the portfolio, the risk increases that the servicer will be taking on future problems. Servicers count on third-party information providers for this data, and it’s critically important that turnaround times be kept short.

This is truly a critical hurdle because the solutions to the other two challenges described in this article depend upon it, at least in part. If the servicer is forced to hire additional personnel during the loan boarding process instead of effectively outsourcing some of this work to trusted partners, costs will go up and profitability will be pushed out into the future.

Not all of the challenges today’s servicers face are situated at the very front end of the process, but many are, and the downstream effects of mistakes during the loan boarding process are felt long afterward.

Effective loan boarding is an act of orchestration. It requires good quality assurance personnel who are experienced and know what problems to look for. It also requires good partners who can provide the right information quickly to fill in gaps in the servicer’s knowledge about the loans it’s purchasing.

If the servicer is prepared to face these three potential risks that exist in the loan boarding process, then overcoming the three challenges outlined in this article will be simpler - and they will be better positioned to succeed, even in a difficult market with heavy regulator oversight.

 

Timothy Moreland is senior vice president at ATPR Inc., which provides technology-based solutions for the real estate lending and settlement services industry. He can be reached at timothy.moreland@atprinc.com.

Regulatory Compliance

Three Challenges Servicers Still Face ...

By Timothy Moreland

... that they must overcome.

 

 

 

 

 

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