A dog-days look at default servicing: transparency is key to better performance in default servicing. True transparency requires having clarity around data, decisions and process.

Author:Dombrowski, Joe

In strange times, people do indeed make ill-informed decisions. So it seems fitting that, with so many watchdogs over loan servicing, the topic of transparency should be discussed in the infamous dog days of late summer. * Within the sphere of default servicing, the word "transparency" has taken on a whole new life. The application and practices of this new and improved transparency are heralded as the antidotes to behaviors of the strange but not-so-distant past. Enhanced transparency may very well help servicers of defaulted loans avoid doing things they may be sorry for after. * Historically, the processes of default servicing were considered transparent if participants in the default servicing supply chain could access loan status and updates when needed. * That has all changed, especially since the creation of the Consumer Financial Protection Bureau (CFPB), a rule-making body focusing much of its efforts on increasing transparency into financial transactions. In its proposed loan servicing rules, issued on Aug. 9, 2012, the CFPB clearly states: "The Dodd-Frank Wall Street Reform and Consumer Protection Act imposed new requirements on servicers and gave the CFPB the authority to help fix the market by writing additional rules. The CFPB is exercising that authority to address a lack of transparency and accountability in key parts of the market."

But let's level-set by defining transparency to fit the needs and requirements of the current regulatory environment and how it applies to today's loan servicing industry. Once we do that, a better definition may be that transparency means providing and having clarity around data, decisions and process.

For something to be clear, you have to understand it

Clarity is more than just being able to see the data and the documents, more than being able to have a 360-degree view, more than being able to see all aspects of default in one snapshot.

Clarity also implies having an up-to-date institutional understanding of loan status and loan history. It means being aware and understanding how a previous decision was reached, inclusive of the loan information at particular points in time--in short, it is being able to "show your math" for all the factors involved in every decision and action for literally every touch point on every loan.

The servicing institution must then be able to not only provide this level of clarity within its servicing operations, but also extend the information and understanding out to borrowers, investors and regulators as well

The interworkings of loan servicing and compliance are complex, involving countless handoffs and touch points. So, how can servicers keep their tales of default servicing from becoming shaggy dog tales? When broken down into components, loan servicers can see that establishing and maintaining clarity around data, decisions and processes is achievable through vigilant data governance and analysis.

Data changes and challenges

Historic delinquency volumes, new loss-mitigation programs and significantly increased foreclosure activity have all uncovered data-quality issues and the need for better data governance. By now, most servicing operations have dog-eared copies of the Sarbanes-Oxley Act, Basel II, consent orders and other recent mandates that speak to the need for data governance, both directly and indirectly.

Many servicers have adopted guidelines from organizations such as the International Organization for Standardization (ISO) and the International Electrotechnical Commission (IEC), and from the Control Objectives for Information and Related Technology (COBIT)--created by the ISACA for information technology (IT) management and IT governance. (ISACA is an international professional association that deals with IT...

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