The environment for lenders and servicers is very different than it was a decade ago. The default crisis and the resulting conservatorship of the government-sponsored enterprises (GSEs) created a significant change in thinking for regulators, policymakers and investors. Regardless of whether you believe that additional regulation was warranted or not it is here to stay; and it doesn’t appear that the election in 2016 will change much of what is driving the primary markets, at least not in the short run. Therefore, the market will face challenges in the foreseeable future. Without a smart way to face these challenges, lenders and servicers may find themselves lost. In fact, they may be lost at “C”.”
This article illustrates four “Cs” that create enormous pressure on the market participants. Next, we discuss two “Cs” that can alleviate pressure and position companies for success. The result should be the final “C” which differentiates them from the rest of the marketplace and results in smooth sailing.
The challenges all roll up to one obvious conclusion. The lenders and servicers must perform all of the basic functions that they did before the crisis, but now they must do even more. It isn’t a little bit more … it is a lot more. Compliance is the most significant challenge in the marketplace today. The Consumer Financial Protection Bureau (CFPB) was launched as an advocate for the consumer and wields a heavy hand. Servicers must follow timelines and communication protocol to the letter when dealing with borrowers. Starting with the establishment of communications and at the onset of delinquency, all the way through a positive or negative resolution there are dozens of steps, forms and business rules to navigate through assuming a cooperative borrower.
For lenders, there hasn’t been a change like TILA-RESPA Integrated Disclosure (TRID) in recent memory. Again, the big change that TRID requires is in the process and standardization of the steps and sequences. The forms themselves are complex, as is the regulation, but it is the process changes that impact the technologies that are the real challenge.
The GSEs are also mandating changes much of which results in more data transmissions being required. In 2016 or 2017, the GSEs will mandate delivery of yet another data set that maps to the TRID requirements and the Closing Disclosure Form. If you want to do business with the GSEs, you will have to comply, and right now there aren’t a lot of options in the primary markets. Let’s not forget MERS, who has required proof of data quality against data in their registry for the last several years. The final area of compliance that I want to discuss is in the area of Cybersecurity and Information Security specifically. Although these aren’t unique to the mortgage industry, they are significant, and required new and different skill sets in many instances. Varieties of regulators are concerned with this type of security risk and are looking for proof of a well-managed operation.
The second “C” is Counterparty Management. The importance of managing your vendors and service providers should be obvious. In engaging in counterparties to manage portions of your operations, you have essentially shifted risk to them. The risk doesn’t go away, and in fact, it may be more difficult to observe. Think about a simple example of outsourcing portions of your servicing business to a special servicer or service provider. Most likely the decision to outsource was based on internal competency or capacity and the ability to move operations to a company that is more efficient, less expensive, and hopefully more reliable and proficient in the specific operations or business function. This all makes sense, but let’s go back to the first “C.” Compliance cannot be avoided by outsourcing. The burden of proof for compliance remains with the lender or servicer. When the CFPB comes for an audit or review, it is critical that you are able to explain how you are managing the counterparty and how you prove compliance. A solid counterparty management program that starts with establishing Service Level Agreements (SLAs) in the contracting process, and continues with a rigorous oversight and audit function that ensures compliance with the lender or servicer requirements, in addition to all regulatory requirements.
The third “C” is Contraction. At least for the lenders we are in a down period in terms of production volume. It doesn’t appear that a refi wave is anywhere in the immediate future. Companies who rapidly expanded during the mini boom period that ended a year ago geared up operationally for larger volumes and many have yet to downsize significantly or find additional revenue outlets. This also constrains the ability to invest in the changes needed to comply with the regulatory challenges.
The fourth “C” is Cost Pressure. Let’s review what we have discussed so far. Increased compliance results in the need for new staff positions and probably new technology tools. This isn’t a one size fits all model. The same skill sets and knowledge base for monitoring compliance against TRID can be very different than the skills needed to establish a Cybersecurity framework. The same is true for establishing a counterparty management function. Many companies either try to fit all of these functions under a compliance function, or choose to outsource these functions to service providers or consultants until they are established and stabilized. This can become expensive.
Not all is lost, however. Lenders and servicers can leverage two more “Cs” in order to stay afloat and move into calmer waters. The first is Continuing Education. Implementing an education program internal to your company provides the framework necessary to gain the knowledge required to keep up with the regulatory challenges. A strong education program should consist of a learning track for each domain area relevant to the core business performed, but should clearly cover current hot topics including TRID and other CFPB compliance requirements, compliance with GSEs, and Cybersecurity. If an education program already exists, then simply tailor the existing education tracks to include these newer areas of focus. If no education program exists, it may make sense to follow and evolutionary approach similar to what is described below.
►Identify key educational outlets offering courses in areas of focus. Ideas could include the Mortgage Bankers Association (MBA), Mortgage Industry Standards Maintenance Organization (MISMO), Mortgage Electronic Registration Systems (MERS), American Land Title Association (ALTA), American Bankers Association (ABA), and other groups and associations. Most lenders and servicers are already members of one or more.
►Identify key people in the company to focus on the specific domains and have them attend the courses. These individuals will be the trainers for the internal courses.
►Implement a “train the trainer” model whereby the trainer implements an internal curriculum tailored to the individual needs. This may be a combination of internal training and leveraging training through associations or other outlets.
►Align training with individual staff members who need the training and make it part of a performance management process.
Once you have your education program in place, you can move the sixth “C” which is Certification. Certification in specific domain areas is a natural progression from continuing education and provides immediate credibility internally and prepares any company for compliance audits. Another angle regarding certification relates to Counterparty Management. As a lender or servicer, it is important to require or suggest key certifications depending on the function of the vendor. It is imperative that they follow all Cybersecurity requirements regardless of vendor type. Additionally, consider compliance certifications for MERS, MISMO and perhaps TRID, via ALTA or another association. Certifications do not guarantee success, but having them is a key indicator of whether counterparty is focusing on the right things. As a vendor, having company or individual certifications will only make your company more attractive and will make audits friendlier.
So we have discussed six “Cs” and now we can discuss where it ends. If you are serious about facing the first four “Cs” and leverage the next two you will reach the seventh “C” which is Competitive Advantage. As a lender or servicer, you will have a staff that is well versed in important current topics. Your business functions can implement controls into processes and technologies that will prepare you for regulatory audits, but most importantly will give upper management confidence in the operations. Being proactive allows for better prediction of costs and prevents surprises resulting from regulatory audits which could result in putting all hands on deck or even bad press depending on the severity. Focusing on how you manage counterparties and requiring certifications gives you the upper hand in your oversight activities, and provides confidence that they are running your operations in a compliant manner.
In review, there are multiple challenges facing the mortgage market ranging from new compliance requirements and cost pressures to contraction in production volume. Implementing an education and certification program and requiring the same from counterparties will provide a stable base for operations and risk management, while gaining a competitive advantage. This is all attainable with focus and foresight. So shoot for the moon and maybe you will end up in the “C” of Tranquility.
This article originally appeared in the September 2015 print edition of National Mortgage Professional Magazine.