Editor’s note: This feature originally appeared in the January issue of DS News
From increased fraud risk to the ongoing low-volume foreclosure environment, those working in financial services and default servicing law faced a multitude of challenges in 2019. Here at the dawn of a new decade, DS News spoke to an array of subject-matter experts representing the firms and servicers who are facing these obstacles on a daily basis. They spoke to us about their biggest takeaways from 2019 and the factors most likely to shape the year ahead.
On some fronts, the battles of 2019 were much the same as those that defined the past decade. Servicers continue to work to find ways to balance innovation, compliance, and customer service against the realities of cost and consolidation.
Meanwhile, at the federal level, there are several cases in play that may have significant impacts on the landscape of mortgage servicing, such as Seila Law LLC v. Consumer Protection Bureau, which places the constitutionality of the CFPB’s leadership structure into question.
Legal professionals have also dealt with the shifting tides of fraud. Tasked with maintaining extensive volumes of data and personal information, how can attorneys and servicers keep their clients safe from fraud and other malicious data attacks?
DS News spoke with financial servicing law professionals on what they’re looking out for in 2020, and what they’re doing to remain adaptable, nimble, and prepared.
Adapting to Market Shifts
“One of the major themes in 2019 has been the continuance of historically low delinquency rates across the nation,” said Caroline Reaves, CEO, Mortgage Contracting Services, who added that this trend “goes hand-in-hand with the strong economy and low unemployment rates we have also been seeing.”
In the past year, servicers have had to adapt to lower default rates. Mortgage servicers felt the pressure as they began to place limitations on their default departments. Courtney Thompson, SVP, Director of Default Servicing Operations at Flagstar Bank mentioned that this environment is preventing many servicers from “doing more.”
"In a lower volume environment, it creates a tension where we don't have all the resources we need to prepare ourselves for when there is more," Thompson said.
Some months did see month-over-month upticks. In October, for example, lenders repossessed 13,484 U.S. properties through completed foreclosures, up 14% month-over-month and the highest point in total number of completed foreclosures in 2019. However, Todd Teta, Chief Product Officer with ATTOM Data Solutions, stated that this number “is still below where it was a year ago and less than 15% of what it was during the depths of the Great Recession.”
CoreLogic reported in November that the foreclosure inventory rate fell to 0.4% in June, which equals the lowest for any month since January 1999. The share of mortgages that were in any stage of delinquency was 4% in June—a decline from last year’s 4.3%.
In response, servicers across the country have continued cutting costs, leaving many default departments “lean,” according to Schneiderman & Sherman, PC, Managing Partner Neil Sherman. It isn’t just default servicing either—other areas of the mortgage industry have seen streamlining and consolidation alongside volume challenges.
“We have also seen a significant amount of consolidation in both the bank and non-bank servicing space, the technology vendor space as well as legal services providers,” Sherman said. “As a result of the significant decrease in overall default volume, the consolidation and general aging patterns in our industry, the Great Recession is starting to be a period that many read about but did not live through.”
However, Michelle Garcia Gilbert, Esquire, President and CEO, Gilbert Garcia Group, P.A., notes that consolidation isn’t necessarily a trend that every company will fall into.
“Consolidation is a response to market forces, so a business can become more efficient and profitable,” Garcia Gilbert said. “I think it will continue, but I don’t think every business will consolidate. There is always room for a small, boutique player.”
Robyn Padgett, Chief Development Officer at Padgett Law Group, noted how her firm is dealing with the shifting tides.
“We've taken a dual approach to cost management by coupling localized legal expertise with support from our national operations, processing, and technology teams, which are centralized throughout our footprint,” Padgett said. “This model helps us manage costs, hedge against volume fluctuations, and support our state-specific practices, national bankruptcy clients, and our high-volume, project-based work.”
Technology, according to Christopher Carman, Litigation & Compliance Counsel for BSI Financial Services, will be key to pivoting should the market eventually take another downturn, pushing default volumes back into a significant upswing.
“As long as the servicers and law firms have the proper technology and processes in place, they should both be able to handle any increases at the time when the market does go down, like it inevitably will,” Carman said. “Having the proper groundwork in place will minimize having to just increase staffing which is often difficult to achieve.”
One Step Ahead of Fraud
Law professionals are in a unique position in the fight against fraud as they serve as custodians of our customers’ personal and sensitive information. For law firms, fighting fraud has largely been an issue of people, not technology. As Richard Nielson, Managing Shareholder, Reimer Law Co. notes, “Your weakest link is your weakest employee,” meaning training is more important than technology when it comes to fighting fraud.
“The actual technology piece of cybersecurity is now widely available and is good, by and large, within most organizations,” Nelson said. “It comes down to the training of your people. If you look at the big frauds that are being committed, that's where they're coming from. They're doing targeted fishing to get at your weakest link, and most often that is a company’s staff.”
Preparation is mostly about people. With this in mind, Sherman stresses that there is no simple fix to fraud prevention, especially as technology and the increased efficiency expectations have meant that fraud issues are ever-growing. Investment in fraud education, Sherman noted, should be “eternal.”
“If you are working at a feverish pace and lack substantial fraud prevention training, simple, every day emails or tasks that pose risk of identity theft or fraud may be missed,” Sherman said. “The industry needs to continue investing in education internally. Fraud prevention cannot be a ‘gotcha’ form of education alone. We try and tell a story when it comes to teaching our team about fraud prevention. We bring in speakers, provide presentations along with internal penetration testing. We also highlight how everything we learn about fraud and identity theft prevention can be applied at home with our families.”
Cases Impacting Default
While mortgage default has been dwindling, in some cities, borrowers have been plagued by increased levels of tax foreclosures. In Detroit, for example, 34.4% of homes are currently underwater, and the median home value at the Detroit-Warren-Dearborn metro-area level is $161,300, far below the national median of $226,300, but the city still faces other foreclosure-related challenges—notably, property tax foreclosures.
According to The Detroit News, around one in four Detroit homeowners owes more in delinquent property taxes than they did three years ago. A Quicken Loans report also stated that, as of 2018, 21% of homeowners were unaware their property was behind on property taxes, and another 61% of renters in tax-delinquent properties were unaware of the home’s tax status.
In response, the Michigan Supreme Court is being urged by Pacific Legal Foundation to halt a state law which allows counties to “profit” from the sale of foreclosed properties, after a home in Oakland County was sold for $24,500 after being foreclosed on for $8.41 in unpaid taxes.
“It is akin to stealing,” said Pacific Legal Foundation attorney Larry Salzman in Bridge Magazine. “The government shouldn’t be taking more than is owed to them to cure the tax deficiency. I understand that states are under [budget] pressure but government should not use citizens as a bank teller or an ATM machine.”
Meanwhile, on the West Coast, servicing law was further impacted in 2019 by the case Myles v. Pennymac Loan Services, LLC. The case resulted in the court determining that a loan in default can still be assigned. Myles had argued that his mortgage "was not legally transferred, conveyed, or assigned to Defendant [PennyMac]," claiming he had the power to invalidate mortgage assignments by deciding not to pay his mortgage.
“Myles’s legal argument is incorrect because he does not explain how the assignments of his mortgage are void as a matter of law,” the court stated. “His complaint seems to suggest that a borrower, by refusing to pay, can prevent a lender from assigning the debt. Why? Myles does not give a logical basis for this strange suggestion. Neither does he support it with legal authority. The trial court properly sustained the demurrer.”
Foreclosure law and debt collection practices saw further change in 2019 following the case of Obduskey v. McCarthy & Holthus LLP, which found that businesses engaged in nonjudicial foreclosure proceedings are not considered "debt collectors" under the Fair Debt Collection Practices Act.
Responding to the court’s decision, Matthew Podmenik, Managing Partner, McCarthy & Holthus Law Firm said, “I think the biggest takeaway of this case is what can happen when an industry like ours has everyone pulled together and had a common goal. This was a case of great importance and an undecided question for many years. We had the Legal League and 8 other organizations who filed amicus briefs. A total of 19 different parties joined us and all of us came together and this is a real team victory. So, I think that’s largely why this happened.”
The CFPB Effect
Throughout the year, the Consumer Financial Protection Bureau faced a legal battle with California firm Seila Law. With the Bureau’s constitutionality now in question, many are interested in seeing how the results of this case will impact financial services businesses, for better or for worse.
In a scheduling order released by the Supreme Court, the Court announced that it will be hearing the case of Seila Law LLC v. Consumer Protection Bureau on March 3, 2020. The case will include arguments against the Bureau’s leadership structure, as the law firm named in the case, Seila Law, alleges that the structure of the agency grants too much power to its director.
According to court papers, Selia Law asserts that, given the CFPB’s broad law enforcement powers, the fact that the president may only remove the director of the CFPB “for inefficiency, neglect of duty, or malfeasance in office” is unconstitutional.
American Enterprise Institute Senior Fellow Peter J. Wallison argues that there is more at stake than just the constitutionality of the Bureau.
On Real Clear Politics, Wallison argued that this CFPB case is an example of Congress enacting “broadly phrased laws, essentially delegating the key legislative choices to administrative agencies and violating the Framers’ constitutional plan of separation.”
The Supreme Court’s decision will also likely impact another case—the CFPB’s enforcement action against Ocwen Financial Corporation. According to a Florida federal judge, the CFPB is indeed constitutionally structured, meaning an enforcement action against Ocwen will not end on those grounds, even after the CFPB itself has officially adopted the legal position that its structure is constitutionally flawed.
CFPB Director Kathleen Kraninger reversed the Bureau's course and agreed that the "for-cause" removal provision, which states that the president can only remove CFPB's director for "inefficiency, neglect of duty, or malfeasance in office," does violate the U.S. Constitution's separation of powers, according to a brief filed earlier this year in the high court by U.S. Solicitor General Noel Francisco and in letters sent to Congress.
Outside of Seila Law LLC V. Consumer Protection Bureau, 11 state attorneys general are joined in a complaint challenging the structure of the Consumer Financial Protection Bureau, according to a brief filed with the United States Supreme Court. The brief argues that the leadership structure of the CFPB is unconstitutional, stating that its structure encroaches on the states’ own abilities to enforce its own consumer protection laws.
Servicers, meanwhile, are keeping one eye on the case to see how the Court’s ruling will impact financial services law.
Garcia Gilbert told DS News that this case “should be interesting to watch, because of the seeming overreach the Bureau has had in financial services.”
“It is an interesting choice for the court to take this case on, and I am unsure at this time how the court may rule,” Carman said. “It would be interesting to see if the free market would move differently if the CFPB was removed from the equation.”
Remaining Flexible for 2020
With so much at play in 2019 and going into 2020, financial services will need to be flexible, able to adapt to various shifts in the market. For some of the larger players, this means scaling back while also remaining prepared to reverse course should the market demand it.
Leaner default departments have the perfect opportunity to implement new strategies and be better prepared, and whether its fighting fraud or improving compliance, preparation starts now.
“The solution is truly quite simple: education, participation, and implementation,” Neil Sherman said. “We cannot wait until the last minute to invest in our default operations.”