The Nickel and Dime Impact of Financial Reform on Mortgage Servicing

“There are a whole lot of bankers who want to do right — and do right — by their customers…And unless your business model depends on cutting corners or bilking your customers, you’ve got nothing to fear from reform” — President Barack Obama, right before signing financial reform. The deal is done. Dodd-Frank is now law. Much is made of the coming impact on the new financial reform law will have on consumer protections, mortgage originations, Wall Street and the secondary markets, etc…but little mention has been made, so far, on the impact to the mortgage servicing industry. Perhaps because the industry is largely left out of financial reform. After all, if your business is sound, you have nothing to worry about, right? Or at least this is what we are being led to believe: that Dodd-Frank marginally impacts mortgage servicing. In reality, there are several aspects that directly apply to the mortgage servicing industry, and this is mainly due to several minor points through out the reform that add up to one big problem: COST. Considering that the entire bill is drafted as a systemic de-risking manifesto, these changes may actually streamline operations, not work against it. So it’s likely margins will improve, right? No, the biggest impact of the financial reform will be to nickel and dime servicers. As a research note from Deloitte says, “it is no exaggeration to suggest that Dodd-Frank will trigger a realignment that is set to challenge financial firms in fundamental ways. They will likely have to reexamine their business models.” Translation: Servicers are already pulled in a thousand directions + growing need to appease regulator = hire an ambassador to lobby how great you are to the government. Or maybe contract a team of consultants who can plead with the new consumer protection bureau that your mortgage servicing ducks are in a row. Add that on top of housing customer data in one unique place, with each borrower identified with their own code. Please standardize this across systems. Then coordinate that contract data (I mean, integrate) with other borrower obligations, loan-level information and performance matrices. Now summarize it all in one location. Most importantly, give full access to the consumer protection bureau. Too busy? Outsource, outsource, outsource. And that’s not all. Considering that time is money, Dodd-Frank will also cost you both. For example, under Dodd-Frank, the Real Estate Settlement Procedures Act (RESPA) is amended to require servicers to acknowledge receipt of a Qualified Written Request (QWR) from a consumer within 5 days rather than 20 days. Also, the servicer now has only 30 days rather than 60 to resolve the consumer’s inquiry. Responding to inquiries is part of the mortgage servicer’s job, though it also provides some peace of mind to borrowers who are trying to stave off foreclosure. Nonetheless, this means more staff will be needed in order to fulfill the quickened timeframe mandated by the new law — without any promise of an improved bottom line. “On top of that, the fines for noncompliance have increased,” adds Phillip Schulman a lawyer for K&L Gates. “At a time when servicers are already stretched to the max responding to anxious borrowers, these new accelerated responses could not have come at a worst time.” Those fines, by the way, are now $2,000 per noncompliance, up from $1,000. Plus, the cap is now $1m in total penalties, up from $500,000. “That said, if it’s the law, servicers will comply, but it will definitely add cost to the process and that means greater expense to consumers as well,” Schulman adds. In addition to requirements imposed on loan servicers regarding qualified written requests, there are also new restrictions on escrow accounts, placed insurance (now will be forced), periodic statements, crediting of payments, HAMP requirements, and tenant protections following foreclosure in the Dodd-Frank Act, explains a research note from Schulman’s firm. And, not following these changes could also open up loan servicers to a federal inquiry, as if the fines weren’t bad enough. This means more attorney fees, more time putting together a defense, and faced with a pro-consumer environment, a greater risk of borrower pay out. Indeed, in a measure of how topsy-turvy things are going to get in the next 18 months — if a mortgage servicer doesn’t follow the new rules to a tee, it could very well end up writing a check to the borrower — instead of the other way around. Jacob Gaffney is editor of HousingWire. Write to him.