Navigating new waters in servicing.

Author:Coleman, David

Mortgage servicers have faced a number of challenges in the last five years, particularly on the regulatory front. Technology can help servicers survive--and even thrive--in the new environment. But a "consumer-first" approach needs to become central to the industry's thinking.

The mortgage business has undergone a sea change in the last several years, and nowhere is that more evident than in the world of servicing. The servicing industry has weathered widespread criticism, expensive lawsuits and a host of regulatory mandates. Today we're starting to see a new, more consumer-focused servicing industry emerge, in part shaped by directives from federal and state regulators. [paragraph] Savvy lenders and servicers are realizing that focusing on the customer not only ensures compliance, but it makes good business sense. [paragraph] What steps can servicers take to ensure their position in the market, yet avoid regulatory potholes and maintain or grow market share? [paragraph] What will the servicing model of the future look like? [paragraph] For one thing, it's clear that going forward, successful servicing models need to be consumer-centric, following mandates set forth by regulatory bodies such as the Consumer Financial Protection Bureau (CFPB). [paragraph] While it's likely there will be increased costs involved in setting up a new servicing model, there's a silver lining to investing in new technology and putting the consumer first.

Big regulatory changes create a seismic shift

A number of key changes have taken place over the last several years on the servicing front, but nothing has had a greater impact on the business than the deluge of regulatory changes enacted since the mortgage meltdown of 2008. The Dodd-Frank Wall Street Reform and Consumer Protection Act signed into law in 2010 created the CFPB and set the agenda for regulatory reform.

In mid-April 2011, eight national bank mortgage servicers agreed to abide by Office of the Comptroller of the Currency (OCC) consent orders that instituted strict processes for communicating with borrowers, established strict processes for mortgage modifications, instituted oversight and controls over third-party service providers and established a plan for borrowers to be compensated for financial injury. Shortly after, in late April 2011, the Federal Housing Finance Agency (FHFA) announced the Servicing Alignment Initiative, creating government-sponsored enterprise-aligned (GSE-aligned) servicing standards that closely mirrored the OCC consent orders.

In January 2013, the CFPB issued its Mortgage Servicing Final Rules, which took effect on Jan. 10, 2014. Then, in December 2013, the Federal Reserve Board issued a final rule aligning its market risk capital rule with Basel III.

While any single one of these regulatory initiatives announced over the last three years would have been significant enough to result in considerable changes for servicers, the combination of all of them has served to create seismic shifts in the mortgage servicing landscape.

What options do servicers have?

Faced with the challenge of meeting numerous new compliance directives, many servicers have opted to sell some or all of their servicing. Some of the country's largest banks are selling the rights to service mortgages to less-regulated nonbanks (see sidebar, "Basel III Accelerates Shift to Non-Bank Servicers").

Setting up a servicing operation and retaining mortgage servicing is another option, but most of the movement in the retained servicing space has been with small to midsized lenders.

There are a number of reasons why retaining servicing is appealing today. Those reasons include high-quality loan originations, flat to rising property values and increasing mortgage servicing rights (MSR) valuations. Yet, the fact remains it's still expensive to set up a servicing operation.

The GSE and CFPB processes have added greater complexity to the business of servicing mortgages, and the technology available today is not easily adapted to conforming to those processes.

Instead, the industry is seeing an increase in the number of subservicers and other outsource servicing providers used by lenders that have decided they want to retain their servicing but don't want to set up their own servicing operation.

Or lenders may opt to just use a subservicer or special servicer for loans that have entered the loss-mitigation process, which require a much greater level of borrower interaction and outreach than performing loans.

While the servicing of performing loans has become much more complicated with the maze of new regulations, the complexity is even greater for loans that have entered the...

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