For years, the struggle for profitability and the fine line between success and failure have been present in the servicing space. Throughout the industry, vendors have created niche markets in which to perform and fill voids. Much funding has been devoted to the development of technological tools, performance reporting and other initiatives designed to reverse servicers' shrinking profits that, when combined with dramatically increased defaults, have caused unprecedented damage to the industry.Â
Backlogged, struggling court systems in many judicial foreclosure states, governmental involvement with home-retention programs, mandated moratoria and lengthy ‘holds’ placed on pending foreclosure cases, and dramatic but temporary reductions in new foreclosure referrals bring unresolved defaults to all-time highs.Â
The moratoria and new referral reductions severely hamper the ability of default law firms to invoice cases, resulting in further financial duress on an already stressed segment of the industry. Robo-signing, document execution and notary issues have additionally plagued the servicing industry, creating a feeding frenzy in the American public – sensationalizing failings in our industry while ignoring a simple fact that the vast majority of cases in default were legitimately the result of a borrower's failure to make his or her mortgage payment.
So, what now?
As the servicing industry evolves, it is imperative that its focus on timeline management with default-servicing law firms be counterbalanced with other measurements depicting the quality of work performed and responsiveness to borrower inquiries and concerns. This is an important shift, both throughout the mortgage servicing organization as well as the vending community, with a heavy emphasis on the law firms handling defaulted loans.
Quality control is a process used to ensure a defined level of quality in a product or service. The goal of quality is to ensure that the processes or services provided meet specific requirements and are both dependable and fiscally sound.Â
To achieve quality in daily operations, servicers must begin with a high-level focus, answering the following questions as the operations are reviewed:
- What is the business need?
- What is broken?
- What works well?
Using these simple questions as a guide, servicers may then develop specific quality-control standards, communicate the standards to business partners, measure the results against the standards and continue to identify and resolve potential operational weakness, resulting in improved performance. In order to prioritize which ‘broken’ issues to fix first, servicers should analyze their current portfolio risk by reviewing default volumes by state (recognizing state-specific risk factors), the servicing complexity involved with the default volumes, and the ever-present liability known as ‘headline risk.’
A critically important issue in a successful quality-control plan involves performing the appropriate due diligence during vendor selection. Law firms, in particular, should take note of the scrutiny and oversight that is being placed on them, as well as consider applying similarly stringent oversight of their own vendor management program. Legal firms' captive-vendor relationships should be disclosed to servicers, and it is very important that they fall under even higher scrutiny for performance and pricing than would a third-party vendor.
It is also crucially important for servicers to be diligent in determining which third-party services or products will help achieve their goals and operate within established risk parameters. A thorough review of a potential business partner's reputation, the qualifications and backgrounds of company/law firm principals, and the vendor's internal controls and recovery processes are only a fraction of the due diligence that should occur.
Service-level agreements (SLAs) setting forth performance expectations relating to both timeline management and quality control should be specific and measurable. This is an area where quantity does not necessarily equal quality. A clear, concise SLA setting forth milestone measurements to which the vendor will be held accountable may be more beneficial than would a 150-page document without clear, definitive measuring points. A solid SLA, coupled with published regulatory guidelines from industry investors and insuring agencies, will provide a solid basis for the next phase.
The next phase in a successful quality-control program involves the use of an audit function. For servicers and attorney firms alike, it is important to audit not only internal policies and procedures, but also items for which clients hold them accountable. A law firm's quality-control program should include not only the review of the legal process, but also a client-centric review that could consider, for example, whether a firm's compliance checks for the Servicemembers Civil Relief Act adhere to the requirements outlined by the firm's servicer client.
One area that is consistently of concern to servicers is whether their vendors are adequately staffed to meet performance and quality requirements. Labor resources are routinely the most expensive segment in a cost center, but they are also an obviously critical piece.
Consider staffing in a law firm: Many factors are going to determine personnel levels. Is the legal process in which the firm operates a judicial or nonjudicial environment? Is there mandated mediation that requires greater labor resources? Not to be forgotten is the technology component, which also impacts the number of people required.Â
Generally, an attorney firm's staffing can be measured in cases-per-person, which mirrors the common standard in loan servicing of loans-per-person. However, there is not a hard and fast rule on these standards any more than there is in a loan servicing environment. Other issues dramatically impact the measurement, such as how technology is used, the type of loans handled, the court systems involved and specific state requirements.
In a heavy judicial environment, cases-per-person in a law firm could run from 75 cases-per-staff/paralegal and 600 cases-per-attorney, up to 125-150 cases-per-staff/paralegal and 800 cases-per-attorney in a firm with highly sophisticated technology.
In addition to technology providing a positive impact in these numbers, another heavy influence is the number of touch-points associated with a file. For example, how many times throughout the process is the attorney actually reviewing that case, and how much time is spent on the case?
Contrast this to a nonjudicial process, where an attorney is not required to conduct the action. A typical nonjudicial foreclosure process might correspond to staffing levels of 125 to 175 cases-per-staff-member and upwards of 200 to 250, if a trustee has a highly refined use of technology.
Another standard that is entering the law firm venue involves a ratio of staff-to-attorney – i.e., the number of staff members an attorney is supervising. Again, there is not a hard and fast rule to this ratio. A common ratio is 1:30, one attorney for every 30 staff members. This number can be influenced by the firm's use of technology, as well as other aspects of a firm's infrastructure; if a firm has invested in a management infrastructure with supervisors and management staff, this ratio could effectively be higher. If the attorney is the frontline manager of the staff, the ratio should probably be a bit lower.
With regard to insurance coverages, every servicer and agency has its own internal standards, but it is a common requirement for a law firm to carry a minimum of $1 million to $2 million in professional liability coverage. Be aware that there may be other coverages necessary, such as workers' compensation or errors and omissions.
The bottom line is that the need to establish strong internal controls, measure internal and vendor quality and timeline in a balanced scorecard, and enforce a solid internal and external audit program to ensure quality standards are achieved will help ensure that future scrutiny of the servicing industry is minimized. Self-policing will help maintain an important balance in an industry that historically has been fraught with sensationalized media.Â
Terri Key-Cravens and Kathleen Guerrette-Mitchell are managing partners of Springboard LLC, a service provider that specializes in auditing law firms and related vendors in the default-servicing space. Key-Cravens can be contacted at email@example.com, and Guerrette-Mitchell can be reached at firstname.lastname@example.org.