The mortgage landscape is an ever-changing environment. Lenders and loan servicers have to be diligent to ensure they stay up to date with the constant changes in laws, regulations and policies.
Although all lenders and loan servicers focus on compliance and regulation changes from different regulators – such as the Consumer Finance Protection Bureau (CFPB) or the Treasury Department, where changes can have serious effects on how a company operates – changes on a smaller level can also have a substantial effect on servicers’ bottom lines. The loan servicing industry has to endure constant change in an environment where profit margins are continually becoming tighter and tighter. Mistakes at the servicing level could cost companies hundreds of thousands of dollars in penalties, fees and losses.
Tax servicing, for example, represents an intricate part of the industry. Tax servicing is a complex but important part of loan servicing. There are more than 24,000 tax agencies or taxing authorities across the country and U.S. territories, each with its own rules, processes and guidelines for providing tax information and collecting and processing tax payments. Many states on the West Coast as well as Midwest and Mid-Atlantic regions collect taxes at the county level; however, agencies on the East Coast often collect at the municipal level, such as town, township, city, school, village, municipal utility district (MUD), public utility district (PUD), and fire or irrigation districts.
Certain Southern states also may have city or town bills to collect. Texas properties may have two county bills. Some cities, like Philadelphia, Baltimore and the five New York boroughs, collect their own taxes.
Aside from the rules each tax authority imposes on servicers, tax cycles vary from state to state, but even within a state, there are variances to those tax cycles between jurisdictions, and that’s just current tax payments.
When it comes to delinquent taxes, each state has its own laws for assessing penalties, fees and interest. For example, California charges a 10% one-time penalty against taxes due immediately when the payment becomes delinquent, as well as interest per month on unpaid balances once a property transfers to the delinquent tax roll. Illinois tax agencies charge a 1.5% per month penalty, compounded on all unpaid amounts. Massachusetts agencies charge a 14% annual rate on delinquent balances, prorated and charged daily.
Certain states, including New Jersey, New York, Pennsylvania and Texas, have unique rules that make tax servicing in these states highly precarious and require highly trained employees to ensure all the necessary information is gathered from all the necessary tax authorities, law firms and/or collection agencies that collect tax payments. Take into consideration that in smaller jurisdictions or rural areas, tax collectors may only work part-time or out of their homes, which makes contacting them for information even more complicated, as they might not work regular business hours.
Needless to say, tax servicing in each state and tax jurisdiction provides challenges for even the largest loan servicers. At our company, we have witnessed how small mistakes by employees have caused lenders to lose properties and incur hundreds of thousands of dollars in losses. This sometimes happens when they attempt to perform tax servicing internally.
For example, a recent situation shared with us by a lender involved delinquent taxes for a residential property tax bill from 2011 that had past-due taxes totaling more than $3,500. Employees working on the file were aware of the past-due amounts, but were unaware that in this particular state, the delinquent tax bill could be split between multiple attorneys for collection.
A second attorney collecting a portion of the delinquent bill – school taxes in this case – was never contacted and payment never made to the attorney. Due to non-payment, the property went to tax sale and foreclosure, and the lender had to repurchase the property. When all was said and done, this one small mistake caused the lender more than $63,000 in losses.
In another case, delinquent taxes from 2015 (in the amount of $3,100) cost a lender more than $84,000 in losses when the tax and escrow department failed to properly process the tax payments. The delinquent tax payments were made to the county tax office. Unfortunately for this loan servicer, in the tax jurisdiction in question, delinquent payments must be paid to the county sheriff, and ultimately, this small mistake led to tax sale and property loss.
No amount of technology or process improvement will work without a workforce that has the skills and abilities to do the job correctly; training matters. Tax servicing is an intricate and highly detailed industry that requires employees to have a solid foundation of knowledge to properly do the job. Finding employees with backgrounds in loan servicing, and specifically tax servicing, is not always the easiest task. To minimize the risk of losses, loan servicers need to invest in training their workforce.
There are a few basic training initiatives even small companies can incorporate that do not require large capital investments or resources but will help even the most inexperienced employees learn the business and effectively perform their jobs.
One, give them basic training. When we talk about basic training, we refer to the process of real estate lending and servicing. Help them understand the industry, the terminology, and how the process works. Most employees who do not own a home do not know what property taxes are, let alone the repercussions of not paying them.
Teach them what loan servicing entails and the effects even the slightest mistakes could have on the business. Even something as simple as a glossary of terms will help a new employee understand the difference between a current tax bill, a delinquent tax bill or a supplemental tax bill. Start with the basics, build a foundation and continually improve their skills and knowledge. Build a library of job aids and tools that will help your employees continue to grow.
Have new or less experienced employees work with or assist more experienced employees so they can start to learn the intricacies of the industry from your more seasoned workers. Also, give newer, less-experienced employees easier tasks. Silo their activities to tasks that are not as intricate or do not require experience or a breadth of knowledge in the industry. Hands-on training is effective if you have employees you trust to share best practices and have the patience and personality to guide a new employee through the learning process. Assigning a new employee a mentor or a “job coach” for the first 90 days to six months of employment will help them acclimate to the job and provide a faster ramp-up period.
Provide your employees with clear and concise processes and procedures. Document the steps your employees need to take to complete a specific task. Having a procedural guide to help new employees learn the job will help them learn quickly with fewer mistakes. Audit their work and ensure they are following the procedures, and help them to learn from any mistakes.
A small investment in time and money to properly train an employee will pay off in the long run through eliminating costly mistakes. In addition to investing in training and skill development, companies should understand the importance of periodically reviewing and upgrading training programs when needed. Consider providing instructor-led classroom training, instructor-led, web-based courses or self-paced online e-learning to make sure you are constantly improve your employees’ skills and abilities.
As Henry Ford once said, “The only thing worse than training your employees and having them leave is not training them and having them stay.”
Marcus Balocca is vice president, outsource current disbursement manager, and John Permejo is vice president, training and development manager for LERETA, a provider of tax services to the mortgage servicing industry.