Author: Fitzgerald, George
Date published: November 1, 2011
In April 2011, the Interagency Review of Foreclosure Policies and Practices, a report from the Federal Reserve System, Office of the Comptroller of the Currency (OCC) and Office of Thrift Supervision (OTS), was released following on-site reviews of foreclosure-processing operations at 14 federally regulated mortgage servicers during the fourth quarter of 2010. The report recounted the findings of the interagency review process, including concerns associated with the foreclosure governance processes, foreclosure document-preparation processes, and oversight and monitoring of third-party vendors. * To address these areas and ensure compliance with programs such as the Home Affordable Modification Program (HAMP), the Servicemembers Civil Relief Act of 2003 (SCRA) and the Fair Credit Reporting Act (FCRA), the agencies identified industry reforms that they believe will help improve the oversight of mortgage servicing and foreclosure-processing activities. * To enact these changes, the agencies sent 14 of the nation's largest servicers consent orders, each comprised of 13 very similar articles. 4? These consent orders were very significant, carrying
with them a broad range of requirements and provisions. To comply, servicers had to act very quickly to meet the aggressive timelines while simultaneously preparing for the sweeping impact the reforms would have on their servicing operations.
Servicers were first charged with the development and submission of a comprehensive action plan for addressing compliance with the consent order requirements. This plan had to be submitted to the appropriate federal agencies within 60 days of the April issuance of the consent orders.
To develop the plan, servicers first had to familiarize themselves with all the provisions of the consent orders, and then conduct initial assessments of the operational and technical modifications that would be required to ensure compliance.
Within this plan, servicers were required to develop detailed plans to address specific areas of concern reflected in the consent orders:
* Audit methodology plan - The consent orders require servicers to hire an independent auditor to review loans foreclosed on between January 2009 and December 2010 to ensure no loans were foreclosed upon unjustly. Before doing so, however, servicers were required to develop and submit an audit methodology plan for approval.
* Remediation plan - Following the aforementioned audit, servicers are required to evaluate the results of the audit and submit a remediation plan to address any areas that need attention.
* Management information system (MIS) plan - The sweeping changes that are required to ensure compliance with the consent orders cannot occur without heavy reliance on technology. Servicers must evaluate how they intend to rely on MIS solutions to help them respond to the consent order requirements and explain it in this plan.
* Mortgage Electronic Registration System (MERS) control plan - Servicers must also create a MERS control plan to lay out how they will address any potential dataintegrity issues and to explain how they will perform monthly audits to determine that all mortgage data is in sync between the servicing system and MERS.
* Risk management plan - Servicers are also required to conduct an overall risk assessment of their operations and to establish a plan to manage/remediate any risks that are identified.
Of course, as difficult as this intensive planning process is, the execution of these plans not only requires robust change management practices and professional resources from a wide range of practice areas, but it also requires technology innovation and a deep understanding of the mortgage servicing operation to successfully adapt.
In order to achieve compliance, servicers must make sweeping process and technology changes on a very aggressive timeline. In many cases, even simple process changes or new tracking requirements, for example, can be very difficult to accommodate because the technology that servicers have long relied upon was designed to meet the requirements of a pre-consent order environment. However, it is clear that technology is the critical linchpin that can enable servicers to successfully implement their plans and comply with the consent orders.
There are literally thousands of technology innovations and enhancements that have already been implemented; are in the process of coming online; are in beta testing or are still in the development stages. However, here is an overview of just some of the more important provisions of the consent orders that must be enabled through technology.
Access to information
The servicing system of record maintains a tremendous amount of information and thousands of data points on mortgage loans, the borrowers who hold them and the properties that are collateral assets for these loans. Access to this information has always been very tightly controlled, with user-specific, permission-based parameters in place to ensure that users only see the information they need in the normal conduct of their jobs. In all cases, sensitive consumer information must be protected and held in confidence.
However, the consent orders require servicers to hire an independent third party to conduct a "look back" audit of mortgage loans to make sure borrowers were not wrongly put into foreclosure and to identify other problems that may need remediation.
To conduct the audit, loan transaction information must be made available to the third-party contractors and presented in a format that they can understand. Because these auditors may not be well-versed mortgage bankers, raw data from the servicing system would be difficult to understand and properly evaluate, so an auditorfriendly view of these historical data must be generated.
Auditors will be looking at whether eligible borrowers were offered modifications, and this requires the servicing system to store loan-modification eligibility review data and the results of those reviews, including loan-modification offers. In addition, auditors must have access to bankruptcy information to determine whether homeowners were in bankruptcy at the time of a foreclosure, and if so, to analyze the transaction to ensure that appropriate processes were followed prior to foreclosure.
In addition to the "look back" third-party audit, servicing systems must also be able to accommodate the requirement to reconcile data and ensure data is synced with MERS. The servicing system must be enhanced to ensure that data can pass between the servicer's system and MERS in order to complete the regular auditing that MERS will conduct to ensure that data reconciliation can occur.
Servicing systems must also be enhanced to accommodate a variety of new tracking requirements associated with the consent orders, including "dual-tracking" functionality.
Dual tracking helps ensure that a homeowner who is delinquent on his or her mortgage and applies for a loan modification will not face foreclosure while waiting for a decision on the modification. The dual-tracking functionality allows servicers to essentially place a hold on the foreclosure process until a final decision is reached on the modification.
Servicers also have a series of important responsibilities to America's men and women in the military under the SCRA. They must be able to properly identify SCRA borrowers as mortgage loans are boarded onto the servicing system, and ensure that these borrowers are handled according to the provisions of the act.
This means that the servicing system must flag borrowers as military personnel, then help ensure that other requirements are met by applying business rules and alerts to ensure that the mortgage interest rate is appropriately reduced while the borrower is deployed; that no late fee charges are appiied; that foreclosure is not initiated; and that no derogatory credit information is reported.
Other tracking requirements that must now be accommodated include the tracking of all pre- and post-petition payment information on bankruptcies; charge-off information on second mortgages; and tracking the specific steps and processes associated with the foreclosure process.
Single point of contact for delinquent borrowers
After the consent orders were jointly issued by the Federal Reserve System, OCC and OTS, the Treasury Department released a Supplemental Directive 11-04 for tne Making Home Affordable (MHA) program requiring the servicers to provide delinquent borrowers with a single point of contact (SPOC) or "relationship manager" throughout their loss-mitigation and loanmodification evaluation period. Fannie Mae and Freddie Mac also issued guidance encouraging servicers to implement SPOC.
This is a sea change for servicers in terms of the way they manage their loss-mitigation efforts and the way their technology is set up to handle borrower interactions.
When calls come in, most servicers are set up to route the caller to the specific department that has the expertise and access to information that is required to handle the call. In addition, the processes, timelines and documentation that are associated with the loss-mitigation area - from payment plans, loan-modification applications, foreclosure actions, bankruptcy and so on - are not typically accessible or necessarily even understood across departments.
Technology is essential to the successful implementation of a SPOC customer service model, but servicers will have to redesign the way their technology works - and likely incorporate new technology into their infrastructure - in order to accommodate the relationship manager operation.
This is not simply a matter of call routing, but a comprehensive overhaul of the entire system so it will immediately identify and route calls to the assigned relationship manager or back-up alternate; enable appropriate access to all the information that is necessary to be responsive to the customer; ensure that the SPOC assignee information is integrated into all communications with the borrower, including printed content and voice response units; and incorporate the SPOC assignment information into all records such as billing files.
Ongoing reporting requirements
Servicers will continue to have greatly expanded reporting requirements, including ongoing auditing and analysis as well as monthly reports to federal agencies detailing steps they are taking to remain in compliance. These reporting requirements must be supported by technology enhancements that will enhance the ability for servicers and auditors to easily pull ad hoc reports and queries from the servicing data while ensuring that the integrity of those data is carefully protected.
Compliance and oversight
The consent orders require servicers to establish oversight and reporting practices to help ensure that there is independence, transparency and compliance with their provisions.
Establishment of a compliance committee: Servicers have been asked to create a compliance committee of at least three directors, two of which are non-employees, who are responsible for determining if the firm has adequately initiated the practices, technology and procedures that are required to comply with the requirements of the consent orders.
This committee will provide an important objectivity to servicers to help them gain an accurate perspective on their progress. The committee is also required to submit a quarterly progress report to the appropriate federal agencies.
Creation of third-party compliance program: Servicers are required to ensure that any third parties they partner with are also in compliance with the provisions of the consent orders. In order to accomplish this, servicers must be certain to institute robust due-diligence processes during the partnerselection process, and then to continue with regular operating reviews to ensure that partners remain in compliance with the consent orders.
A lasting impact - and a lasting legacy
The consent orders have set in motion a tremendous range of changes that will have a lasting impact on the way servicing operations are structured, how technology is utilized to automate and support changes, the way customers are serviced, how partners are selected and evaluated, and the policies and procedures that are established to form the foundation for ongoing compliance.
Certainly, there is little to point to in terms of easy fixes - most of what is required will lead to comprehensive and often complex re-engineering of the servicing operation, from top to bottom, for all servicers.
The 14 servicers that were issued the consent orders are well down the road in terms of planning and charting their way forward, and are determined to do what is required to align their operations with the provisions, but it is likely that all servicers will be required to review and perhaps make changes to their processes.
The industry has been through some very tough years, and there are probably a few tough years ahead. But the work that is being done today to comply with the consent orders will leave a lasting legacy of more personalized customer service, a stronger focus on compliance certainty, and greater institutional expertise in change management and innovation.
George FitzGerald serves as senior vice president of product strategy for Lender Processing Services' (LPS') Mortgage Servicing division in Jacksonville, Florida.