Author: Graham, Susan
Date published: May 1, 2010
Compliance is often thought of as the domain of originators and closers, with the reasoning that if the loan is compliant at underwriting, the servicing department should have little to worry about. Unfortunately, this is not necessarily the case.
The reality is that servicers have always had to comply with regulations and investor guidelines in their day-today operations. Everything a servicer does - posting pay merits, performing escrow analysis, reporting mortgage interest and loss-mitigation efforts - must be performed within the established regulations and guidelines.
Performing these functions with an efficient mortgage loan servicing system can ease the compliance burden. With the high volume of defaults leading to foreclosure and the pressure to modify more loans, servicers are now running into compii ance issues that have traditionally been the responsibility of originators.
Servicers today have the added responsibility of knowing and complying with regulations and guidelines that are changing daily due to the government's efforts to reduce foreclosures and keep borrowers in their homes. The primary purpose of compliance is the one most people are familiar with - the use of procedures and requirements to ensure all rules and regulations are being followed. The second purpose of compliance is to reduce opera tional risk and ensure business continuity. ? close partnership between servicers and their mortgage servicing technology provider ensures they can work together to achieve compliance goals.
The most significant compliance challenge for servicers in today's marketplace is the frequency with which regulatory changes are being pushed out. Compounding the challenge is the fact that servicing departments are often given little to no time to implement new policies and procedures.
For example, when the O bam a administration announced the Home Affordable Modification Program (HAMP) in March 2009, servicers were expected to begin working with the program immediately and implement changes to their processes. Making matters more confus ing, the agencies were still preparing the documentation for servicers when the program was announced, leaving many companies struggling to implement the modification program with few resources.
The good news is that servicers do have resources and tools available to them to assist in managing compliance on the servicing side. The first step is to understand which agencies and rules apply to each institution. Banks, credit unions, third-party servicers and mortgage lenders all have different requirements and agencies to report to.
The second step is to know what auditors are looking for and the consequences of failure to comply with the rules and regulations. Finally, servicers should implement internal procedures and look to in house mortgage loan servicing systems to help comply with existing regulations and to keep updated on new regulations.
The servicing compliance landscape
When an agency conducts a review or audit, the audit can take on several different forms. One of the most compre hensive reviews is an audit to review safety and sound ness. These audits are often more subjective and require servicers to outline the policies, technologies and safe guards in place to ensure the institution is operating in as low risk an environment as possible.
Other audits are more of a check on whether the loans are being serviced within established guidelines. These exams are usually conducted in person, however; written correspondence may be utilized if a servicer has had high ratings for previous reviews and no reconciliation issues.
When it comes to who will conduct regulatory reviews, there are a variety of agencies that oversee various institutions or loan types. Generally, these agencies fall into two general categories:
* Investor agencies- These agencies are the ones pur chasing loans on the secondary market. These agencies will conduct reviews to ensure all loans they purchase meet the standards set out by each organization and are serviced within the established guidelines. Exam pies include private investors as well as the govern ment sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.
* Federal regulatory agencies - These agencies are responsible for the overall safety and soundness of institutions that fall under their purview. They are not only looking at loan-specific compliance but accounting standards and compliance procedures. The Office of Thrift Supervision (OTS), the Department of Housing and Urban Development (HUD) and the Federal Deposit Insurance Corporation (FDIC) are examples of this group.
Studying for the exam
Once an exam has begun, what are regulators looking for? While the specifics may vary, regulators are generally looking for a few primary things, all of which may be found in a comprehensive mortgage loan servicing system. First: Is the reconciliation of accounts to ensure revenue and losses booked accurately with supporting documentation? Appropriate reporting to investors and other agencies may be reviewed for accuracy and timeliness.
Next: Is all customer data up-to-date, and have borrowers been provided all disclosure notices and statements as specified by their loan notes and state requirements? During the life of a mortgage loan, a borrower will receive many types of disclosures and statements, such as rate or payment change disclosures, loan activity statements and delinquency notices, and these must comply with applicable regulations.
Another area of a compliance review is on delinquency and loss mitigation. Typically, the delinquency rate was indicative of how well servicers were doing in their collec tion efforts. The economic downturn has changed this, and now reviews are more focused on loss-mitigation efforts, including loan modifications, forbearances, deedsin-lieu, short sales, etc. For servicers of Federal Housing Administration (FHA) loans, the HUD Tier Ranking System (TRS) is used to measure a servicer's loss-mitigation utilization.
Finally, examiners are also looking to confirm that servicing departments have implemented all new programs and regulations as well as maintained existing ones with knowledgeable staff. Anyone who has responsibility for aspects of compliance should know the regulations they oversee and be able to explain the procedures used to ensure compliance.
Although it is essential for servicers to use mortgage loan servicing technology that will help automate compii ance and reduce errors, examiners still expect staff to possess the knowledge to audit the calculations performed within their servicing systems. The staff in charge of compliance can vary, but most companies include compliance officers, the servicing department management and the accounting department management in compliance work. Some institutions will also engage internal or external auditors to assist in preparing for compliance reviews.
The consequences of failing compliance exams can vary, and in most cases reach far beyond the fines or sanctions outlined by the regulations themselves. Loans sold to investors that did not meet the underwriting requirements risk having to be repurchased.
In some cases, servicers may be forced to sell off their entire portfolio for a particular agency, such as HUD, Fannie Mae or Freddie Mac. This can result in a loss of business and income from new and existing customers, and can negatively impact a financial institution such as a bank or credit union. Servicers also risk receiving low ratings from the various agencies (such as the GSEs, FDIC and National Credit Union Association |NCUA|). Low ratings can affect future business, and the burden of additional reporting requirements and close supervision.
Setting up compliance procedures
One of the keys to compliance and avoiding issues in regulatory and investor reviews is to have a mortgage loan servicing software system in place for accurate reporting. Servicing departments also need to establish a knowledge base so they are aware when regulations are changing. Once the knowledge is in place, servicers need to have procedures to update and implement changed processes.
How can servicers keep current on regulations and other requirements? Many resources exist for servici rig departments, including compliance-update subscriptions or attorney briefings. Servicers can also subscribe to emails from regulatory agencies, state banking agencies or trade associations, such as the Mortgage Bankers Association (MBA).
Servicers should also carefully select their mortgage technology provider, working with those that are focused on compliance. The best systems are updated to meet regulatory and investor changes, and can provide the necessary reporting to borrowers, investors, regulatory agencies and auditors.
Servicers should hold regular compliance meetings to review recent changes, devise an implementation plan for new requirements and address possible issues. In addi tion, the institutions should have written guidelines on compliance policies and procedures.
Compliance is a daily effort. Servicers should regularly audit their processes and data as well as perform random calculation checks within their systems. Audit confirmations sent to borrowers are also a good tool to help prevent fraud and identify any potential accounting issues.
The good news is that servicers do not have to attempt compliance alone. Educational resources, mortgage loan servicing software partners and peer companies can all provide the insight, expertise and practical advice needed to keep up with a rapidly changing compliance landscape.
Susan Graham is president of Financial Industry Computer Systems Inc. (FICS). Dallas, a mortgage technology specialist that provides cost-effective, inhouse mortgage loan origination, residential mortgage servicing and commercial mortgage servicing technology to mortgage lenders, midsized banks and credit unions She can be reached at fics@loanware com.