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» VISIT US ONLINE @ DSNEWS.COM COVER STORY BEST PRACTICES A key component critical to the success of a servicing surveillance organization is proper staffing. It is recommended that staff have significant mortgage banking experience with exposure to a variety of servicers and best practices. Generally, the experience of professional staff should encompass two main areas: (1) default management (debt collection, loss mitigation, foreclosure processing, bankruptcy, and REO administration) and (2) servicing operations (loan boarding, servicing transfers, cash applications, investor reporting, escrow administration, mortgage insurance processing, customer service, and dispute management). Because both default management and servicing operations house functions critical to driving successful asset performance, they represent the foundation of a successful servicing surveillance function. Absent such a structure, the surveillance function may not perform optimally. Additionally, the most effective servicing surveillance organization operates best when it can draw upon past experiences and best practices followed by other servicers. Such experience allows surveillance personnel to expediently identify problems, recommend potential areas for improvement, and provide appropriate remedies to servicers in order to optimize collateral performance. Independence is also critical, so servicer surveillance personnel maintain an "arms-length" stature at all times and are not influenced by investors, issuers, rating agencies, asset managers, or others. REGIONAL SPOTLIGHT The most effective strategies for optimizing servicer performance incorporate collaborative interactions between investors and servicers, including on-site audit reviews and ongoing performance feedback. By applying a consistent set of performance-based metrics to a portfolio, opportunities can be identified and recommendations made that enable servicers to keep pace with the market while still improving performance. Reviewing and analyzing servicing data on a consistent basis allows for the identification of performance patterns, underlying gaps in procedural requirements, and overall process effectiveness. Servicing surveillance professionals can assist servicers in achieving optimal performance by: » Emphasizing the importance of maintaining a consistent and simple process. » Ensuring a robust control environment exists for compliance with CFPB and other regulatory guidelines and that maximum borrower transparency is maintained. » Ensuring proper staffing is in place and robust training is provided. » Focusing on asset performance and key processing metrics to drive continuous process improvements. The Organization POINT— COUNTERPOINT A servicer's overall compliance with regulatory standards is a critical area to review. Clearly, compliance with guidelines established by the Fair Credit Reporting Act (FCRA), the Real Estate Settlement Procedures Act (RESPA), the TruthIn-Lending Act (TILA), and the Fair Debt Collection Practices Act (FDCPA)—to name only a few—is essential; failure to do so potentially inhibits the borrower's ability to pay and adversely impacts a servicer's reputation (as well as its bottom line due to the potential imposition of fines and penalties). Newly issued servicing standards from the Consumer Financial Protection Bureau (CFPB) touch on a variety of servicing functions including, but not limited to, key areas such as loan transfers, Surveillance Strategies Consistent management of servicer performance in accordance with this criterion may result in material improvements in collateral performance. The benefit to firms embracing this methodology is that not only will process throughput likely increase but also: (1) investor confidence will grow, (2) cash flow velocity should improve, (3) defaulted loans and loss severities should decrease, and (4) the overall borrower experience may be further enhanced. BEST PRACTICES CFPB Compliance foreclosure processing, payment processing, fee assessments and billing statement processing, proper and timely handling of borrower complaints and disputes, escrow administration, early intervention with delinquent borrowers, loss mitigation practices, bankruptcy administration, and force-placed insurance. The goal of the CFPB in issuing these guidelines is to prevent borrowers from receiving unwelcome surprises and run-arounds from their mortgage servicers—to put the "service" back into mortgage servicing, essentially. More important, the guidelines are written to assist borrowers with maintaining homeownership, preserving their ability to pay, and ultimately averting losses. Limiting losses is "near-and-dear" to an investor's heart; as such, establishing and executing a sound mortgage loan surveillance function that incorporates CFPB compliance is critical. THE BIG PICTURE Investors who incurred losses now look at the role residential mortgage servicers play in helping manage loans and curtail or minimize defaults. Prior to the start of this decade, investors seeking recourse for damages incurred focused primarily on loan origination and underwriting malfeasance in order to identify fraud or representation and warranty breaches related to defaulted loans. Most recently, however, the burden associated with loan origination fraud and underwriting malfeasance has shifted with greater focus now placed on loan servicing and corrective measures servicers can take to address shortfalls and, ultimately, reduce loss severities. Aside from keeping with sound and prudent business practices, the rising number of defaults in today's environment necessitates the need for increased servicer vigilance across collections, loss mitigation, default management, and asset maintenance and disposition. Best practices for servicing surveillance start with a proactive program to monitor servicer performance. Investors and other third parties want to ensure a formal servicing surveillance function exists with a primary goal of maximizing cash flows, mitigating loss severities, and ensuring proper liquidity is maintained over servicing assets. And in today's increasingly complex and rigorous regulatory environment, it is essential to actively monitor servicer performance and ensure complete transparency is consistently maintained with the borrower. » Emphasizing areas most important to the servicing business, such as homeownership preservation, robust and timely loss mitigation and foreclosure alternatives, strong internal controls, seamless loan transfers, and cost containment. » Tailoring an approach to the individual needs of each servicer. INDUSTRY INSIGHTS T hroughout the last several years, the industry has become increasingly aware of the need for sound and prudent residential mortgage loan servicing practices to help manage risk, maximize cash flows, and minimize defaults. Investors, banks, monoline insurers, private mortgage insurers, GSEs, rating agencies, and other regulatory bodies and pertinent third parties all recognize the critical role loan servicing plays in helping maintain and improve residential mortgage performance. 61

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