New mortgage servicing regulations have the propensity to transform the mortgage servicing industry into a system where servicers deliver, regulators protect, and consumers trust again. The Consumer Financial Protection Bureau’s (CFPB) mortgage servicing regulations aim to do just that—get delinquent borrowers into loan modification plans and establish effective communication channels between the servicer and borrower to ultimately protect them from foreclosure. However, there is a price to pay to achieve stabilization within the industry, and small to mid-size servicers will be impacted the most.
The CFPB’s mortgage servicing regulations are broad and encompass multiple areas of operations in a servicing company; however, early intervention, continuity of contact, and loss mitigation for delinquent consumers, as well as accurate reporting for all, are the top mandates and toughest obstacles servicers will place the most time, money, and effort into while on the road to compliance. Because small to mid-size servicers often lack the resources—personnel, technology, and training, among others—to implement CFPB-ready systems, the expense of achieving compliance presents a significant business concern.
In response to this challenge for smaller, boutique servicing firms, the CFPB has outlined what types of servicers are exempt from certain components of its new mortgage servicing rules. A firm that services 5,000 or fewer mortgage loans and is the creditor or assignee for all of them, or is a Housing Finance Agency, is not required to comply with specific mandates. However, if a servicer did not originate or own the mortgage loans it services, it cannot qualify as a small servicer and is not exempt.
A small servicer exemption is determined by the CFPB based on the number of loans the servicer and its affiliates manage. If a servicer crosses the 5,000-loan threshold, it will have six months or until the following January (whichever is later) to comply with any new requirements from which it was previously exempt.
The servicing industry was ill-equipped to help the overwhelming number of homeowners in need of assistance at the start of the financial crisis. In response, the Office of the Comptroller of the Currency (OCC) within the U.S. Department of the Treasury sought to reduce the number of foreclosures by establishing the single point of contact (SPoC) directive in 2011. The rule requires servicers to assign a human SPoC for delinquent borrowers to contact regarding their loan modification requests, similar in structure and the origin of the CFPB’s continuity of contact rule.
Under the CFPB’s continuity of contact mandate, servicers must establish live contact with delinquent consumers by the 36th day of delinquency and provide loss mitigation options and assigned personnel by the 45th day. Servicers must be accessible, respond to inquiries, and pursue all loss mitigation options in a timely manner and keep a concise record of all interaction attempts—including inbound and outbound calls—in the event of an audit. It is left to the servicer’s discretion if a delinquent borrower is assigned a single agent or team to satisfy the continuity of contact rule; however, small servicers, who are not exempt under the guidelines, will have scarce options.
By the 45th day of delinquency, servicers must provide delinquent borrowers with a written notice about loss mitigation options. Despite having orally communicated with borrowers about loss mitigation options, servicers must provide an array of options that would permit borrowers to retain ownership of their home and avoid foreclosure. Once again, a small servicer exemption is in effect for loss mitigation procedures, alleviating some burdens for boutique firms.
A small to mid-size servicing firm will find increased benefits of implementing a team continuity of contact approach because the number of loans in its portfolios that are subject to the regulation is diminished compared to its larger counterparts. Efficiencies will be greater if the burden of contacting a borrower is shared across a team of two to three people. However, the strength of developing and maintaining the borrower-servicer relationship, which is a top priority the CFPB wishes servicers to pursue, is compromised because a single borrower is communicating with multiple people as opposed to a single individual. As a practical matter, though, cost considerations dictate the processes smaller servicers will adopt, and in this case, a team approach is the most viable option.
Loss mitigation and payment time frames are carefully outlined in the CFPB’s guidance on mortgage servicing rules; however, servicers will encounter a major compliance hazard if they have not implemented mechanisms to ensure calls are being made according to a defined schedule. Servicers will need to rely heavily on technology to stay compliant instead of hoping tasks can be completed on time in a heightened regulatory environment.
An upside to the implementation of compliance technology, however, is that it has the capability to significantly increase overall efficiencies for servicers.
PARTNER WITH ALLIES
Many servicers choose to outsource certain business functions to third-party providers in order to increase efficiency, provide cost savings, and ensure compliance, but servicers should be aware that the CFPB’s new vendor relationship guidelines hold servicers accountable for their working relationships with outside service providers, The bureau expects each company to implement an effective compliance management system and conduct complete oversight of all affiliates or third-party providers.
Small to mid-size servicers will have varying portfolios, business models, and cultures that call for confined third-party vendor guidelines. A servicer’s relationship with a vendor must be maintained and given the opportunity to flourish, quite like a servicer-borrower relationship. Staffing, cost constraints, business objectives, established relationships with borrowers, and portfolio characteristics are components that smaller servicers may lack. However, if servicers have implemented configurable technology that can work in tandem with their third-party providers, small firms will still be able to accommodate any customer need.
REPORT CARDS AND REPORTING
Regulatory and internal compliance now call for much more detailed reporting of interactions between servicers and their borrowers. The CFPB lists two standard documentation requirements under its mortgage servicing rules:
Document Retention – Servicers are required to retain records that document actions in regards to a borrower’s mortgage account for one year after the date the mortgage is discharged or transferred. Records may be retained using any method that accurately reproduces them and is accessible at a moment’s notice.
Servicing File – Servicers must maintain the following documents and data in order to compile the information into a servicing file within a five-day time frame:
- A schedule of all transactions credited or debited to the mortgage account, including escrow and suspense accounts;
- A copy of the security instrument that establishes the lien securing the mortgage loan;
- Notes created by personnel that reflect communications with the borrower about their mortgage;
- A report of data fields a servicer’s technology system creates related to a borrower’s mortgage account, such as loan terms, occurrence of automated or manual collection calls, loss mitigation evaluation information, owner or assignee information, and any credit reporting history; and
- Copies of documents and information consumers submit as part of loss mitigation or error resolution requests.
Loan-level data in servicing reporting must be delivered on demand in the event of an audit. Vendors must utilize solutions that can easily facilitate the ad hoc reporting of loan-level information, as well as summary information that specifically addresses the CFPB’s minimum requirements listed above. However, if a servicer accumulates individual complaints within the CFPB’s Consumer Complaint Database, servicers must be able to defend themselves and their business practices against those grievances. Small to mid-size servicers can account for communication efforts and fight false representations if calls are better documented and borrower behavior is monitored.
THE SERVICER-BORROWER RELATIONSHIP
From the Treasury Department’s mandates down to those of the CFPB, an extensive emphasis is placed on building relationships with borrowers who have difficulty staying current on their mortgage payments. Long before the financial crisis and subsequent regulations to combat another crisis, some servicers, unfortunately, were quick to merely satisfy regulators by checking off the bare minimum requirements to maintain relationships with their borrowers.
Today, the industry better recognizes that strong borrower relationships can be a tremen¬dously effective methodology to ensure that when and if a borrower reaches a high-level state of delinquency, the servicer can move as quickly as possible to bring that borrower current. In terms of loss mitigation, whether it is a short sale or loan modification, servicers can achieve the optimal solution for borrowers and their investors due to their ongoing relationship and knowledge of a borrower’s behavior, accessibility, and loan terms.
LIGHT WALLET, HEAVY COSTS
The cost to implement a technology system that adheres to regulations and satisfies business objectives requires careful assessment. A configurable technology process that is effective in meeting compliance requirements, achieving business goals for loss mitigation, collections, and continuity of contact—while at the same time taking into account the special characteristics of the current regulatory environment—is now a vital requirement for servicers.
The servicing industry will find more flexibility and compliance assurance with a system that is configurable to allow for changes over time. Systems that can easily configure and accommodate variations and changes in requirements, such as portfolio changes and staff accommodations, will eliminate vendor visits to re-implement processes and make compliance more affordable in the long run.