You may not have heard the terms “dual pathing” or “single point of contact” lately, but just wait. COVID-era forbearances are ending and odds are some borrowers won’t be able to come current on their loans without help. HousingWire recently spoke to Amanda Phillips, executive vice president of compliance at ACES Quality Management, about getting servicing staff and technology ready to meet upcoming regulatory requirements while ensuring quality throughout the life of the loan.
HousingWire: As financial institutions plan for 2023, what is their best line of defense in maintaining loan quality and mitigating risk?
Amanda Phillips: We agree with other market players that 2023 will be a challenging origination environment. Fannie Mae projects that single-family mortgage origination volume for 2023 will decline 20% from $1.66 trillion to $1.33 trillion along with a 20% decline in home sales. As a result, margins will be tight as origination activity slows and lenders earn less per loan.
Many lenders will look to servicing revenue to carry them through this slow originations market. To confidently rely on that revenue, however, servicers must assess the integrity of their servicing portfolios and staff to ensure compliance with all relevant servicing rules, guidelines and regulations. These teams will need to rely on updated technology not only to stay on top of regulatory changes but to communicate effectively and efficiently with other internal stakeholders.
Ultimately, there are inherent risks in the servicing process. Ideally, risk management teams have already identified those risks and internal audit is making sure the proper processes and procedures are in place to address those risks. From a transactional standpoint, it is then up to the QC team to ensure that the organization is following those policies and procedures and are mitigating the risks. Without technology, this will be an overwhelming burden. So, I would say one essential line of defense is to make sure your technology and staff are up to the challenges ahead.
HW: How can lenders keep up with evolving servicing regulations, and what trends do you expect to see this year from a servicing perspective?
AP: With recent and upcoming regulatory requirements, servicers are gearing up to deal with borrowers exiting COVID-era forbearance programs. Servicers haven’t faced this much regulatory oversight since 2012. However, as cyclicality is a hallmark of the mortgage industry, the fact that regulatory focus has once again turned to servicing should be no surprise, especially given the looming fears of another foreclosure crisis.
Inevitably there will be homeowners unable to bring their mortgage current as they exit forbearance, which means mortgage servicers will need to engage in loss mitigation processes and options for those consumers. If the servicer is ultimately unable to find a successful loss mitigation option for these borrowers, then the servicer may ultimately enter the foreclosure process, with its own requirements, timelines and potential costs.
Servicers will need to comply with requirements from CFPB, the GSEs (or other investors), as well as state and local regulators – and that’s going to take technology that can be quickly adapted as new requirements emerge. For example, to ensure our clients could prepare and audit up-to-date guidelines, ACES Quality Management was the first to incorporate Fannie Mae’s updated guidelines into ACES Quality Management & Control software and publish on our Compliance NewsHub.
In addition, servicers need to stay abreast what’s happening from a regulatory perspective. ACES hosted a webinar on Feb. 8 titled “Hot Topics on Mortgage Servicing & Originations Compliance,” where we covered the current outlook, for mortgage servicing compliance, regulatory trends related to redlining/digital redlining/appraisal bias and fair lending/servicing regulatory activity and trends.
HW: How can servicers set their departments up for success regardless of the current market trend?
AP: Servicers should be examining their existing policies and procedures to ensure compliance. If adjustments need to be made to align with current rules and regulations, those changes need to be prioritized and documented. This way, come exam time, the servicer can show evidence of self-identification, correction, and remediation.
It is not enough to ensure the documented policies and procedures reflect what is required. Financial institutions should also audit employee activities against their documented policies and procedures, identify any areas where policies and procedures are not being followed and document both the corrective action taken and plans for follow-up to ensure compliance going forward.
One of the items from the CFPB’s servicing guidance that has received less attention is limited English proficiency, or LEP. In addition to ensuring servicers are providing good customer service to borrowers and adhering to all loss mitigation regulatory requirements, the CFPB will also be examining how servicers are communicating with borrowers for whom English is not their primary language. This has been a recurring topic over the past several years, most recently with Fannie Mae and Freddie Mac, but now, it’s popping back up from the CFPB. So, servicers will need to take a closer look at how they are handling both written and verbal communications for non-English-speaking borrowers.
By paying close attention to signals from the CFPB and engaging in proactive self-examination, servicers can be ready to defend their business practices.
HW: What is your top advice for lenders that have neglected quality control?
AP: Servicers are always going to have to deal with the fallout from loans that were not originated properly or were originated using poor underwriting standards, especially those originated during high volume years. We saw this in the past with a lot of the FHA Streamline Refinances and some other, similar products – invariably, you’re going to see increases in delinquencies, more issues regarding straw buyers, etc. That’s always going to be there.
Lapses in control on the origination side inevitably make their way down to servicing, forcing servicers to deal with problem loans because of one or more failures upstream. Of course, it’s one thing if the loans are servicing-released, but if you are servicing your own originations or have a sub-servicer, then your servicing group needs to make sure they are informed and following QC findings on the lending side and conducting what I consider risk-based testing (because testing 10% of your loans just randomly is not going to give you everything that you need) to ensure that any risk or lack of controls are being shored up.
Servicers need to make sure to identify those pockets of risk, and if that comes from the origination side, then so be it. You’re constantly going to be re-evaluating where those risks are, but then you need to have the data and the audit steps in place to make sure that you are covering those things.
It really should be a constant re-evaluation and recalibration.
