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Intense Regulations Sow Homogeny Where Diversity Once Flourished

The following is a print feature that appeared in MReport's April 2014 issue.

What once was a vibrant industry that thrived on creativity and differentiation from one’s competitors, the mortgage servicing industry is now relatively homogenous as servicers attempt to play it safe while adapting to myriad new regulations.

From the mid-1990s through the bubble, mortgage originations and servicing followed the path of an unregulated industry, says Michael Wippler, managing partner at the Los Angeles office of Dykema Gossett and former counsel for American Home Loans, based in Santa Ana, California. "If one type of mortgage started to decline, a new type of loan would be developed. There was a lot of creativity in the mortgages and in the serving."

As regulation and risk exposure increased and consolidation in the industry occurred, servicers found it much safer to follow similar practices so as not to draw the additional scrutiny of regulators or litigators, Wippler continued.

Government Intervention

Michael Waldron, partner and practice leader of the mortgage banking group of Ballard Spahr LLP based in Los Angles, California, points to the main drivers of the increasing commonality among servicers as the OCC and Fed consent decrees of April 2011 and the Dodd-Frank servicing rules that became effective January 10.

"What we got was a uniform, maybe burdensome, set of laws applicable for the servicing industry," Waldron said. Though the servicing industry did have some rules before, the latest government laws were more detailed and in-depth than previous rules.

The consent decrees (one per servicer) were extremely expensive for the industry. Ten mortgage servicers have agreed to pay more than $8.5 billion in cash and other assistance to borrowers. Beyond the payments, the rulings required servicers to "correct deficiencies in residential mortgage loan servicing and foreclosure practices." The decrees required servicers to make significant improvements in practices for residential mortgage loan servicing and foreclosure processing, including communications with borrowers and dual-tracking, which occurs when servicers continue to pursue foreclosure during the loan modification process. The enforcement actions further required servicers to ensure foreclosures are not pursued once a mortgage was approved for modification and to establish a single point of contact for borrowers throughout the loan modification and foreclosure processes.

These and subsequent rulings found various accused "robo-signing" and various other violations and involved other steep financial compensation. One of the most recent was in December when Consumer Financial Protection Bureau (CFPB) and state officials reached a $2.1 billion settlement with Ocwen over allegations the company charged unauthorized fees, among other issues.

Under the Dodd-Frank servicing rules, servicers are required to make good-faith efforts to contact a borrower within 36 days of delinquency, must provide assigned representatives for a borrower's inquiries, must follow certain loss mitigation procedures, and must follow a number of other guidelines.

The American Bankers Association (ABA) expressed concern that the rules are overly broad and could cause highquality servicing to become uneconomical, particularly at small banks.

Regulators continue to keep a watchful eye on servicers. In early March, Benjamin Lawsky, the state of New York's superintendent of financial services, requested details about Nationstar Mortgage Holdings' staffing levels, modification procedures, and affiliated businesses following "hundreds of complaints" from New York consumers.

Just a few weeks before, Lawsky halted Wells Fargo's planned sale of $39 billion in mortgage servicing rights to Ocwen Financial Corp., citing potential conflicts of interest between the firm and its vendors.

The government rulings make it important for servicers to follow similar rules so as not to run afoul of regulators again, meaning more similar-looking operations and more collaboration, experts agree.

"It used to be that once a servicer sold a loan, it could pretty well wash its hands of it, but that's no longer the case," said Sanjeev Dahiwadkar, president and CEO of IndiSoft, located in Columbia, Maryland.

Due to possible litigation from borrowers, servicers have an ongoing interest in any mortgages they have ever handled, so servicers have to collaborate in order to trace the chain of ownership and responsibility for loans. Collaborating makes it much easier for one servicer to sell the business to another, with relatively clean traceability, according to Dahiwadkar.

CFPB deputy director Steve Antonakes, addressing the Mortgage Bankers Association's annual servicing conference in February, said he was "deeply disappointed by the lack of progress the mortgage servicing industry has made" and would be closely scrutinizing sales of servicing rights.

"We expect you to pay exceptionally close attention to servicing transfers and understand we will as well. This process should be seamless for consumers," Antonakes added.

Any transfers need to keep all current borrower elements of the servicing in place, Dahiwadkar explained. For example, a new servicer can't introduce a credit score condition that was not in the original agreement.

 

Differences Still Exist

Even with the collaboration and the desire to follow best practices to stay under the radar of regulators, there are still important differences among servicers, experts say.

"The industry is always trying to differentiate itself on service," Wippler said. "Some have better systems; some have better people." Either could make one servicer more responsive, quicker to complete transactions, or have fewer errors than a competitor.

Some servicers employ different technologies in order to be more responsive. For example, IndiSoft offers RxOffice a Software-as-a-Service (SaaS) workflow solution designed to provide complete transparency to all participants in the mortgage process. RxOffice features case management, document management, and workflow features. According to the company, RxOffice's open architecture enables stakeholders to determine any bottlenecks in the process as well as to provide various levels of access to different information. The solution, used in other industries as well, also has a compliance component designed for the mortgage industry.

While some servicers rely on technology systems such as RxOffice, others do not. Furthermore, even different users of the same technology may be more or less efficient than their competitors due to personnel or internal policies and procedures.

Some servicers will likely opt for technologies like Black Knight Financial Services' VeraStrat Scores, which was first announced in early March. VeraStrat Scores is a loan-level indicator of borrower risk and historical payment pattern. Servicers can use this solution to create borrower contact strategies designed to help the servicer in complying with various guidelines by identifying and contacting the highest-risk borrowers early.

"Servicers are required to follow GSE stipulations for contacting delinquent borrowers," said Mark Milner, director of Portfolio Analytics for the data & analytics division of Black Knight Financial (formerly the LPS data & analytics division), in a prepared statement. "VeraStrat Scores help servicers in complying with these requirements by identifying high-risk loans for early borrower contact. To further increase efficiency, each month servicers receive average-payment-day information, which helps them timely contact delinquent borrowers."

VeraStrat Scores can be delivered directly to the client or accessed through MSP, Black Knight's mortgage and consumer loan servicing platform.

Other servicers use still other technologies, work flow processes, management or personnel that differentiate them from their competitors, according to industry participants.

"It's a constantly evolving business," Waldron said. "Servicers have been incredibly innovative. They will continue to differentiate themselves. Servicers have put additional technology in place to help with the oversight and to make themselves more efficient. The business has been incredibly labor intensive the last couple of years. The additional technology makes complying more efficient and makes the customer experience better. There are all sorts of things today that didn't exist a few years ago."

Waldron expects large financial institutions to continue to shed portions of their servicing businesses, with non-bank servicers and sub-servicers picking up larger portions of the market.

Picking a Servicer

To select the best servicer, Wippler recommends lenders audit servicer files to inspect the number of errors and how those errors are resolved. The servicer's organization of technology systems and the personnel will help differentiate it from its competitors.

Waldron recommends lenders look at various levels of customer service the servicing firms offer as well as process workflows, compliance culture, and product specialties. The servicer's compliance practices should be strong enough that the lender doesn't need to devote more of its own resources to compliance. The servicer should also offer different approaches to help borrowers stay current with loans.

Internal compliance enforcement and training, along with technology, help differentiate one servicer from another, according to Dahiwadkar.

Looking Ahead

Though he predicts the status quo will continue for some time, Wippler expects in a few years regulations will be relaxed a little, new servicers will enter the market, and servicers will again look much less alike than they do today.

"The industry is still licking its wounds," Wippler said. "There will be a steady increase in the business, and sometime there will be another bubble that will start driving the servicing business, though I don't think the mortgage market will ever get to the level it was before the [Dodd-Frank and similar] regulations."