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.
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.