REQUIRED READING: Everyone loves a good horror story – as long as it is make-believe, of course. For too many servicing operations, however, every day seems like Halloween – after all, there is no shortage of haunted houses and ghoulish threats to bedevil the servicing professional.
But when it comes to cost containment, the savvy servicer might be able to formulate a solid strategy by taking a few tips from the protocol of horror stories. Indeed, the similarities between classic tales of terror and loan servicing can be – dare we say it? – frightening.
The trampled innocents. In any horror story involving monsters on the loose, it is inevitable that unsuspecting people who are minding their own business wind up getting stomped on by the unleashed behemoths. In the same way, servicers run into cost containment problems due to recklessness rooted in the origination process.
‘If servicers are not involved early enough, they will not know the quality of portfolio,’ says Dave Vida, chief strategy officer and executive vice president of loan servicing for Denver-based LenderLive Network Inc. ‘It requires energy and money to clear up mistakes from the past.’
‘Originators had high volumes of loans, but did not stop to see what problems might be happening,’ says Sue Allon, founder and CEO of Denver-based Allonhill. ‘They got into trouble with a lot of loans – they couldn't sell them or had to buy them back.’
Ruth Lee, executive vice president at Denver-based Titan Lenders Corp., notes that servicers inheriting less-than-fresh data can also find their costs spiking as they try to sort out problems with basic information.
‘If data is incorrect, servicers can get in trouble and may not be able to make claims,’ says Lee. ‘Where did that data come from? Many of those companies don't even exist anymore. That is a huge issue: servicers can be responsible for data they never produced and are not able to corroborate.’
The wrong weapons. Just as the shark-hunting heroes of ‘Jaws’ realized, perhaps a bit too late, that they would need a bigger boat, many of today's servicers also realize that they are struggling with cost containment issues without having the proper tools at their disposal.
‘We are working through a very unique period of time,’ says Vida. ‘The industry needs more sophisticated technology in terms of workflow.’
‘Not everyone is there in terms of technology, which is why vendors like us are growing rapidly,’ says Sanjeev Dahiwadkar, president and CEO of IndiSoft LLC, based in Columbia, Md. ‘There is a huge gap in the current system of records and in the changing regulatory environment. The existing technology and infrastructure is not ready, but everyone is scrambling to be ready.
‘Servicing is not just about making decisions – by documenting that decision-making process, it helps reduce to costs,’ Dahiwadkar adds. ‘If a servicing manager with good technology can capture the rationale behind decisions with supporting facts, the independent audit review becomes smooth and quick, which then translates to real dollar savings.’
According to Lee, a major cost containment horror involves the insertion of false positives into the data.
‘It is a time bomb,’ she says. ‘Dealing with them can be expensive and time consuming, and false claims even can put the company out of business.’
The long fight. In many horror stories, bringing an end to the reign of terror is not a simple and speedy endeavor. The same principle applies to cost containment.
‘The big example of that was robo-signing,’ observes Loren Morris, general counsel and chief compliance officer for Retreat Capital Management, based in Irvine, Calif. ‘It was designed to save time and money, and it did the exact opposite.’
‘Servicing is a big volume business,’ adds Allon. ‘Getting something a little wrong can have vast complications. There is no such thing as a small mistake in servicing.’
The right team for the fight. In almost every horror story, there are those who fall in their efforts to save the day and those who succeed. In cost containment efforts, however, there is no room for falling, and having the right team in place will help keep expenses under control.
‘In the bigger shops, they put as many people as they can into it,’ says Vida. ‘But that is like putting a Band-Aid on the problem and then circling back to fix the problem. You cannot have an all-hands-on-deck approach with no deep evaluation of costs.’
‘There is an obvious focus today on how to do more with less people,’ says Morris. ‘What we find is a gap in the governance, compliance and risk functions. But you need to put the right structure in place up front and check to ensure you get what you're expecting. It is a combination of people, process and technology that seems to be key.’
The unexpected challenges. In horror stories, it is fairly common that one attempt to stamp out a problem inadvertently unleashes a myriad of previously unknown dilemmas. In servicing cost containment, the heavy focus on dealing with the ongoing rush of new and evolving federal requirements can sometimes result in unexpected cost containment issues from other parts of the country.
‘If you're a servicer, there are many different fees at the state level that you may not be allowed to charge,’ says Annemaria Allen, president and CEO of The Compliance Group, based in San Marcos, Calif. ‘For example, if you charge an assignment fee in every state where you operate, but 10 states do not allow them, they will hit you. Most state regulators are not offering leniency anymore – they will make you go back and review all of your loan files since the inception of your state license, which can cost you hundreds of thousands of dollars.
‘Also, if a debt went delinquent, you will need to get a debt collecting license,’ Allen adds. ‘But if don't have the right license based on the activity you're doing, there can be all sorts of fees and penalties. And if your license is revoked or suspended, that will be reported to every state regulator.’
The never-ending story. Of course, every horror story fan knows that there is no definitive ending to the terror tale – sequels, prequels, remakes and reboots will keep the scares alive. And just when servicers think they have a cost containment situation under control, another headache comes pounding.
‘Take qualified mortgages,’ says Dahiwadkar. ‘How can we verify a borrower's ability to generate income for the next three years? You might as well just throw dice.’
Dahiwadkar adds that anyone expecting a neat wrap-up to a cost containment story is sadly mistaken.
‘The finish line keeps on moving,’ he adds. ‘We cannot win this race. We're not even sure when the race is over.’
Photo courtesy of New England Underground Film Festival