Editor's Note: This article is an excerpt from DS News' March 2018 issue. You can view the article in its entirety on March 1, by reading our digital magazine or subscribing to DS News today to get the print edition delivered straight to your doorstep.
In the past decade, decreasing volumes on both the servicer and attorney side have forced companies to tighten their belts to remain profitable. One area of particular concern for both parties is the attorney audit. Law firm audits cost servicers millions of dollars annually while the firms spend tens of thousands of dollars per audit in employee time. On top of this, attorneys spend numerous hours filling out audit questionnaires, while managers are taken from their daily duties to sit in on each individual audit. The irony is that the bulk of the information requested is the same, so why hasn’t the industry been able to come up with a universal solution? It turns out the answer is already here.
THE UNIVERSAL PROBLEM
When the Consumer Financial Protection Bureau (CFPB) was created, the Bureau instituted the audit, in part, to resolve the issue of potential attorney malfeasance. Issues such as robo-signing, impossibly shortened timelines, and a failure to comply with federal statutes, such as the Servicemembers Civil Relief Act, indicated that some borrowers were being foreclosed upon in inappropriate ways. Since the work was being done on behalf of the default servicing community, servicers were called upon to provide the oversight of third-party vendors.
Immediately, companies scrambled to come up with new protocols to ensure their counsel were utilizing entirely compliant processes.
While talk immediately began of a universal protocol, in order to move quickly each servicer began establishing its own requirements, as well as establishing staff that would perform onsite audits.
With no prior guide, auditors and compliance staff undertook developing questionnaires and audit protocol based upon their individual interpretation of the rules. Accordingly, there were discrepancies from servicer to servicer. Further, the fact that audit and compliance teams needed to be established, created a situation where management level staff had to be appropriated away from their primary tasks, leaving particular duties unfulfilled.
“Often times, a different set of standards based not on need but on preference cause confusion for creditors, servicers, vendors, and anyone else involved in the practice of default services,” said Jim Bonner, Senior Partner at Brock & Scott PLLC.
While profitability has been shrinking for most, the nonrecoverable expense of attorney audits has only heightened this situation. The cost per attorney audit averages between $8,000-$12,000, causing many servicers to look for new ways to save money. On the law-firm end, costs can range between $10,000-$40,000 in productivity per audit.
To mitigate this, the use of larger, multi-state law firms has become the norm, even where such firms have longer timelines or diminished customer service. When the GSEs began requiring servicers to use at least two approved firms per state, the thought was that work would be spread around, giving smaller firms an opportunity to compete. It also helped alleviate the risk of “putting all of your eggs in one basket”. Sadly for the industry, the opposite has happened. Numerous small firms have closed, left the industry, or been bought for pennies on the dollar. Small firms frequently cannot afford to absorb the cost of audits, or the extreme level of associated compliance, without sufficient volume to help defray the costs ....
To be continued in the March 2018 edition of DS News.