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The Approach From an audit perspective, servicers should receive on-site field reviews on a rotating basis, generally every 12 to 15 months. These reviews are usually initiated with a formal request for information (RFI) to obtain data on items such as delinquencies, volumes, cash flow, organizational structure, staffing, turnover statistics, management biographies, and critical policies and procedures. Auditors should also request recent reports by internal and external audit teams, regulatory agencies, and other critical third parties with corrective action plans provided as appropriate. When issues are identified, more frequent field reviews may be warranted. The results of these evaluations should be documented with formal reports issued that summarize findings and recommendations; these reports, along with formal follow-up regimens to monitor the status of corrective actions, should be shared and discussed with servicing management. This in-depth field audit approach is critical in order to get a "hands-on" feel for the servicing organization, its staff and culture, and the servicer's ability to work with borrowers to preserve homeownership. Collectively, this approach may provide alternatives to servicers that will curtail loan delinquencies and minimize loss severities. Surveillance professionals who are knowledgeable in different sub-specialties within each of the default management and servicing operations disciplines should perform the reviews. External vendors with specific subject-matter expertise in certain defined areas (such as property valuation or property inspection) may be utilized as appropriate and deemed necessary in order to supplement staff knowledge and experience levels. Key Performance Indicators In addition to this in-depth approach, metrics—which drive servicer performance— should be analyzed on a regular basis to identify existing issues and related trends. If a servicer has not developed an appropriate and robust set of metrics and key performance indicators (KPIs), it becomes challenging for them to control, manage, and improve the business effectively. Default management and other key operational data should be collected monthly and reviewed regularly to identify emerging trends and proactive corrective measures, as appropriate, to help improve performance. It is critical that surveillance professionals periodically validate the metrics and information provided. In some cases, surveillance professionals will need to partner with servicers to develop and expand key metrics. 62 While actual field audit reviews provide a solid "point-in-time" assessment of a servicer's performance, the ongoing review and analysis of metrics and KPIs offer a consistent view into how well a servicer performs. Leading indicators designed to identify process improvement opportunities should comprise many of the metrics utilized. Critical trends—such as delinquency roll-rates, cash flow velocities, loan modification and foreclosure timelines, recidivism rates, and REO disposition timelines—can be identified early with corrective measures taken proactively that may help curtail delinquencies and reduce losses. For certain metrics, some servicers have begun to establish standards against which they measure performance and progress, such as cash flow velocities, REO turn-times, and customer service call abandonment rates. Where standards did not previously exist, many servicers now collaborate with surveillance professionals and implement benchmarks and self-surveillance routines; these self-monitoring routines help servicers continuously optimize performance as well as provide bond holders (wherein serviced assets are the underlying collateral) with added assurances that appropriate steps are taken to maximize collateral performance. An analysis of KPIs and the identification of certain adverse trends should lead to the root causes of performance. For example, excessive customer service inquiries, customer disputes, and aged payment applications may mask a true underlying problem (i.e., untimely follow-up relating to loan modification processing and other loss mitigation activities, borrower confusion over payment transmittals caused by servicing transfer issues, or false delinquencies due to the improper and untimely application of borrower payments). All these factors may inhibit asset performance and lead to increased loan-level losses and loss severities. Servicing surveillance professionals should work closely with servicers to analyze root causes and identify and implement corrective actions where necessary. Loan Boarding, Critical Processes Most asset performance problems begin up-front with incomplete or incorrect boarding, either from new originations or from servicing transfers, so loan boarding should be a major focus. Servicing surveillance organizations should have a resource intimately familiar with and knowledgeable about the loan boarding process. Specific areas of focus should include timing and completeness of data received; the completeness of data, such as borrower contact numbers, entered into the servicing system; and the amount of time it takes to board new loans to the underlying servicing system. Loan boarding is often overlooked when analyzing the cause behind loan delinquencies, yet gathering information correctly at the beginning of the process is critical in helping minimize problems that occur later and may potentially lead to losses. Other critical servicing processes that should be reviewed include primary mortgage insurance processing, customer service, customer disputes, lien release and satisfaction processing, tax administration, flood insurance processing, hazard insurance processing, force-placed insurance, and other processing routines relating to escrow. Best Practices Prior experience and interactions with a variety of servicing organizations make it clear that surveillance professionals should be well versed in a variety of best-practice servicing standards. These standards should be shared openly with servicers, so processing routines can be enhanced with an end goal of optimizing asset performance. These practices should identify the most effective processes and strategies across the industry and should be continually updated and revised, so they remain state of the art. Best practices should cover a wide variety of key servicing functions including, but not limited to: » Loan boarding (standards around welcome calls, hello letters, data integrity and data completeness, loan activation timelines, adjustable-rate mortgage data sampling requirements, and formalization of a feedback loop to origination and underwriting personnel regarding deficiency trends and specific issues identified) » Customer service (abandonment rates, average speed of answer, and response timeliness associated with written borrower complaints and disputes) » Billing (timeliness of statement transmittals along with content and clarity of borrower statements) » Investor reporting (standards for posting cash, reconciliation standards, and associated timeliness) » Collections (call frequency stratified by product and borrower credit rating, use of the auto-dialer vs. manual calling campaigns, and use of language line services) » Delinquency (cash flow velocity, delinquency roll-rates, and transfer process to loss mitigation staff) » Borrower contact (performance of door knocks, use of skip tracing, and right party contact)

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