In the eight years since the financial crisis, a good deal has changed in the mortgage business. The industry has seen some of the biggest changes in the area of quality control, which has moved to the forefront of most lending institutions, Regulators are looking for banks and other lenders to have comprehensive and detailed quality control plans in place. Investors are likewise focused on the quality of mortgages. [paragraph] The government-sponsored enterprises (GSEs) seem to be moving toward requiring seller/servicers to be responsible for independent quality oversight. The GSE repurchase framework was overhauled in late 2014, and in October 2015 the agencies released another revised representation and warranty framework. The GSEs appear to be looking for lenders to get it right the first time rather than face the risk of repurchases. [paragraph] Some companies are taking a broader approach and implementing overall quality-management plans, which encompass not only quality control, but quality planning, quality assurance and quality improvement.
The four components of quality management are defined as:
* Quality planning--This step identifies requirements, sets criteria, and outlines proper processes and procedures.
* Quality assurance--This helps ensure that consistent results are provided. Quality assurance helps organizations avoid defects and mistakes in the mortgage loan process.
* Quality control--The quality of products or services are reviewed. This component includes testing to identify problems or issues that need correction.
* Quality improvement--Through quality improvement, the results can be measured and improvements in processes or procedures are made.
Even with all the efforts under way, there's still progress to be made. Many companies are taking piecemeal, reactive approaches to testing, monitoring and managing loan quality. Additionally, communication between departments is lacking and the result can be a fragmented and largely ineffective quality-control program.
Servicing quality is improving
It's certainly no news flash that mortgage servicing is being scrutinized heavily by regulators. The Consumer Financial Protection Bureau (CFPB), investors, the GSEs and Department of Housing and Urban Development (HUD) all require servicers to continually monitor and audit their servicing departments.
With investors and regulators requiring increased clarity on how loans are serviced, mortgage servicers have been obligated to make drastic changes in the way they do business. Mortgage servicers have had to develop new processes, and in some cases build new servicing organizations.
Managing the quality of servicing has become extremely important in the wake of new regulations and directives over the past several years.
Chief among those is the National Mortgage Settlement (NMS) agreed upon in 2012, which created new servicing standards for the banks covered under the settlement--five of the largest servicers in the country. The NMS established nationwide reforms to servicing standards, which required better communication with borrowers, a single point of contact (SPOC), adequate staffing levels, training and appropriate standards for executing documents in foreclosure cases. Today the settlement covers seven of the nation's largest servicers.
The settlement struck a powerful blow to the top banks, which have spent significant money to comply with the terms of the settlement. But banks are realizing that certain mandates of the settlement are providing real value to their organizations. For example, the internal review group (IRG) model appears to be working and will likely continue in some form well past the settlement end date (see sidebar, "The IRG Model Is Here for the Long Term").
Perhaps the most significant consequence of the reforms to mortgage servicing standards are the organizational habits servicers have created following three years--or 12 quarters--of oversight to ensure the implementation and ongoing monitoring of the end-to-end servicing process.
In particular, the NMS and regulators have focused on servicers' unfair and deceptive interaction with borrowers. For example, in the CFPB's summer 2015 issue of Supervisory Highlights, examiners found at least one servicer that sent notices of intent to foreclose to borrowers already approved for a trial modification.
Then, in its fall 2015 issue of Supervisory Highlights, the CFPB outlined several ways that examiners found servicers had violated Regulation X, which implements the Real Estate Settlement Procedures Act (RESPA) of 1974. Effective January 2014, the CFPB amended Regulation X to modify and streamline certain servicing-related provisions. The violations reported in the fall of 2015 included:
* Upon the death of a borrower, one or more servicers lacked any policies and procedures for identifying and facilitating communication with successors in interest.