With the recent announcement of the new Acting Director of the Consumer Financial Protection Bureau (“CFBP”), Dave Uejio, outlining his concentrated effort on mortgage servicers and their handling of COVID-related forbearance programs, servicers received a clear warning that inadequate policies and procedures will not suffice in the wake of COVID pandemic related delinquencies. Since the announcement, the CFPB has withdrawn from interagency statements allowing leniency on loan modifications and flexibilities on industry appraisal standards. Finally, on April 5, 2021, they released a notice of proposed rulemaking, which would amend Regulation X, prohibiting servicers from initiating foreclosures until 2022. It would also allow servicers to offer specific streamlined loan modification options for COVID-19 related hardships, while also requiring servicers to keep borrowers informed of their options. Servicer comments for the proposed rule was due May 11, 2021.
With the proposed changes in mind, we believe there are several areas of focus servicers need to take when assessing their internal processes in order to adapt to the changes adequately.
Delinquency Controls
Internal controls, as defined by accounting and auditing, are processes for assuring of an organization’s objectives in operational effectiveness and efficiency, reliable financial reporting, and compliance with laws, regulations and policies. Efficient controls within a servicing organization support key business functions and allow a servicer to timely and accurately assess borrowers behind on their mortgage. This process starts with early delinquency detection and outreach, ensuring controls are in place for your organization to efficiently solicit borrowers for retention options. Examples of those controls could be timeline management processes, including internal Loss Mitigation departments working closely with collections, reporting and correspondence departments to ensure outreach, handoff and borrower notifications are handled appropriately. When the borrower is aware of their options, contacts within the company and steps in the process, it is more likely that they will be able to respond to servicers requests. Clearly outlined and updated procedures will allow Loss Mitigation staff to be prepared for any issues arising during the delinquency period, while management should provide ongoing support with timely direction for staff and useful job-aides comprised of daily company-wide updates.
Systems of Record & Data
While efficient processes are top priority for a servicer to remain compliant, investing in data and systemic updates may prove to provide additional benefits. Whatever servicing system you are currently using, ensuring that it is set-up adequately, will provide additional confidence to your servicing organization. A key item to consider is the data provided within your system of record.
- Do you have processes in place to ensure the data is accurate and complete?
- How does your reporting team utilize the data to provide you with information needed to make decisions?
- Is your IT structure able to support all servicing functions as you originally intended?
These are some of the main questions leaders in the servicing space have to ask themselves when considering the potential upcoming changes in 2021. Especially with forbearances as related to COVID, systems and repositories need to be tested and ready for the upcoming onslaught of Loss Mitigation activity. A robust system will provide you with significant advantages in getting ahead of the curve, providing your customers with better servicing experiences when they do need your assistance.
Data Integrity as part of the system of record, especially for mortgage servicing is a key indicator of how you are able to accurately service loans on a daily basis. An advanced reporting structure, as it relates to Key Performance Indicators (“KPI’s”) shows where you perform and what areas may be a cause for concern. Longer term goals of each individual department should be to create and monitor KPI’s as they relate to their individual area of focus. However, for the shorter term and in order to prepare for upcoming changes for 2021 and beyond, teams need to implement and/or potentially upgrade their reporting in order to ensure accurate metrics are in place.
First Line/Second Line of Defense
Creating a targeted first line of defense within the default business line is one of the more important focal areas of any servicing organization. We recommend to have clearly outlined second level reviews for each department as preventative measures, including detailed quality assurance procedures that are results driven, ensuring high-risk areas of concern receive an additional set of eyes prior to completing the task. One example would be second level reviews of Loss Mitigation processes such as workout decisions and calculations since errors in this area cause delays and may increase reputational risk to your organization. While default related controls are important, other supporting functions within servicing should be treated with the precision to ensure customers receive notices and information about all available options, payments are applied accurately and timely, while investor related processes receive adequate attention.
While each individual department is responsible for their own quality assurance, having the support of the second line of defense is a key to a successful servicing organization. This responsibility falls onto the Compliance and Risk functions of the company and serves as the partner in the overall goal of regulatory and operational compliance. The second line of defense consists of Quality Control, Compliance, Risk and Legal in most servicing organizations. Utilizing the experience and knowledge of these departments by creating a framework of Quality Control reviews, regulatory audits and Risk Assessments is an important factor in the overall performance of a company.
How Cherry Bekaert Can Help
Cherry Bekaert’s Risk Advisory practice delivers targeted risk and compliance solutions to mortgage servicers. We specialize in co-source risk and internal audit solutions that cost effectively compliments your organization’s compliance initiatives.
