Select Print Feature, originally appeared in the September 2013 issue of DS News magazine.
As new regulations take shape, one thing’s for certain: A clear, methodical response is key to tapering regulatory risk and preventing servicers from seeing red.
Servicers can finally catch a breath after almost drowning in recent years under a sea of defaults. As marketplace turbulence settles, the strongest players are resurfacing and new competitors are jumping into the game. Regardless of their relative strength or maturity, all servicers face the stark reality of a daunting regulatory presence over all they do. Every servicer is focused on responding to heightened regulatory oversight, each with its own approach.
Larger and more sophisticated servicers have legions of staff and access to the best outside advisors, all well-qualified to delve into their processes and test their controls to ensure practices are up to par. Yet these are the very institutions that garnered some of the most shockingly high penalties to date. Penance
for non-compliance, though, runs the gamut. Smaller servicers also have been audited and received harsh penalties as well as notices of subsequent and deeper reviews. With more limited resources, these firms have taken a wide array of approaches in response to increased regulatory risk, ranging from engaging the advisory services of law firms and consultants to hiring internal staff.
Regardless of size or approach, none are immune to regulatory risk. All servicers can identify and assess key risk factors and options for managing and reducing risk. In doing so, servicers can chart a course that’s still appropriate to their business models and risk tolerance levels while addressing the concerns and needs of their clients. This response will make for smoother sailing in the coming year.
What Are the Risks?What has captivated the attention of an entire industry? It is risk and the fact that risk is now monetized and brought to reality much more quickly than once was the case.
Borrowers face risks, and those risks can easily translate to servicer and investor risk. Flawed servicing practices can push borrowers into default and into a world of other troubles stemming from poor credit. Even a borrower’s ability to get a job or buy a car to drive to work can be hampered.
Investors know now that servicing practices can influence heavily the fate of the investor. The biggest penalty may be liability flowing to the investor from bad servicing. This risk goes beyond the assumed risk of losses and poor performance. The residential mortgage-backed securities (RMBS) investor’s plight is a tough one—they take on liability and face losses for poor servicing practices, yet they must mount major lawsuits to look inside the servicers they depend on for this aspect of the business. The whole loan investor faces similar liabilities and the potential of reputational risk for poor servicing practices.
But servicers may face the greatest risk of all. Penalties from regulators can be dramatic. Enforcement actions for compliance violations can be severe. Reputational risk is extreme in this new world. The servicer must find a way to mitigate risks to protect itself, borrowers, and investors, all at a time when growth is dicey, margins are slim, and performance expectations are high.
Be Calm and Carry OnThe mortgage servicing industry faces seemingly insurmountable pressures of the unknown. Servicers share a collective (and arguably justifiable) fear of regulations that haven’t been published or thought through but are nevertheless vigorously enforced. Stories abound of servicers caught unprepared and dealt huge penalties.
And looming forebodingly on the horizon? January’s implementation date for the Consumer Financial Protection Bureau’s (CFPB) new servicing standards.
What can a servicer do right now with resource limitations, capacity constraints, an unsteady market, and regulators looking over their shoulders as never before? When faced with a problem that seems overwhelming, the first step is to respond in a measured way with the resolve to continue.
One management approach that has been tried and tested over and over with successful outcomes seems simple. Business leaders can approach the situation facing their company from the safe distance of a business school case study. This perspective provides the objectivity and clarity that can lead to surviving—and
Business School Case Study ApproachServicers must start by understanding what regulations apply. The set of rules and regulations is not perfect, and it changes constantly, but servicers can build upon the following list, which includes the promulgations of a variety of regulatory bodies:
The CFPB published the nine areas it will focus on in its mortgage servicing examinations. The attorneys general/Department of Justice settlement provided a very granular list of acceptable servicing practices.
The Office of the Comptroller of the Currency (OCC) issues bulletins with some frequency.
States publish their own individual rules and guidelines.
For each area subject to audit or review, each servicer should define the quality standard the company must attain and then test to see what needs shoring up and what’s working. Every area of exposure needs testing. Servicers can’t assume something works based on published policy or even based on someone’s statement about how they do something. Testing actual loans and then retesting periodically is absolutely essential to knowing what’s truly in place.
The next step is prioritizing actions and remediation efforts based on the biggest gaps discovered and the greatest risks. If a state notifies a servicer that it will audit in the short term, then place that state’s guidelines ahead of others for review and assessment. Similarly, barring a pending state audit, prioritize based on geographic loan concentration.
Servicing fees is one area every servicer should include in its risk review. Building or subscribing to a database of allowable fees, under the guidelines of the various entities such as regulators and the GSEs, is critical to any servicer’s ability to monitor its own performance in an area that is high risk and high exposure.