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"There's now a real strong emphasis on who the consumer is, what makes them tick, and what kind of servicing fits their needs. ... Everybody wants homeownership to succeed." —Colleen Hernandez, Homeownership Preservation Foundation today's zero-tolerance environment, Ellie Mae says compliance has moved from the back-office to become an essential mission-critical function. Encasing this mission-critical function, though, is a great deal of potentially marketcrippling uncertainty. Adam Codilis, an attorney with Codilis & Associates, P.C., in Illinois, says much of that uncertainty stems from the language of the regulations themselves. "A lot of those new rules are vague and uncertain … and may lead to additional litigation," Codilis said. His colleague Adam Wilde also points to the exorbitant involvement of officials at every level. "Before you just had to be familiar with your state's foreclosure laws; now you have to be an expert in everything," Wilde said. Mike Rawls, EVP of default servicing for Nationstar Mortgage, echoes that sentiment. "Quite frankly, I think a single set of practical rules would be great. … We welcome that," he said. "The questions is, how far in line are the GSEs and these other regulatory bodies going to fall" with the national standards the CFPB has proposed? The amount of oversight and regulations that have been placed on the servicing side of the business is overwhelming—at the federal level, the state level, and even at the city level, Rawls says, and the complexity and sheer volume of rules to abide by are only going to continue to increase, he expects. "They all seem well-intentioned … it's just that there are so many bodies acting independently that it's making it very difficult from a servicer perspective," Rawls said. Taken together, there are approximately 350 different federal, state, and local rules that could apply to any one specific loan, depending on where it is originated, according to Cheryl Hemingway, compliance solution specialist at Ellie Mae. Public Perception The volumes of new rules, procedures, and protocols are top-of-mind but they're only part of the challenge. Housing finance and real estate professionals are also dealing with a different kind of complication—this one from their agency and investor partners, lawmakers, consumers, and regulatory officials altogether. "The greatest impact from the industry's downturn is a complete change of mindset related 84 to what a financial contractual obligation is," according to Mike Newell, president of Resolve Solution Services Corporation, a firm specializing in borrower outreach. "It used to be, if you sign a contract for X payments and X dollars, and you agree to maintain the insurance and taxes, then you understand that's what you have to do." Newell says the current housing crisis has forced changes to that discipline. Modifications, forbearance plans, loan rewrites, and other foreclosure prevention options have become the norm. Historically, that didn't happen very often. "You had to really have strong, compelling reasons not to pay your obligations per the contract," he said. "Today, it seems the money lending industry has completely changed." Now, Newell went on to explain, even though there's a contract in place, if the borrower experiences a hardship—real or perceived—the first response is to adjust the terms of the contract. "Nothing has impacted our industry as much as that change of mindset," Newell said. "Now, it's a matter of customer service, and that's become more critical than ever. Open borrower communication has never been so critical." Some say the concept of loss mitigation is a lost concept. Loss mitigation within the mortgage industry has conventionally referred to actions a lender takes to mitigate its losses when a borrower stops paying. Now, it has come to signify the many borrower-centric mortgage assistance programs lenders and servicers have developed and refined in the wake of the housing downturn. Mediation, modifications, and other workout solutions clearly play a more prominent role in today's marketplace than they did six or seven years ago, according to Codilis. "Foreclosure is a last alternative," he said. "Investors would rather work it out with loss mitigation." But is the change in mindset that's permeated the American public taking its toll on market recovery? Does the "foreclosure-as-a-last resort" mentality now only serve to delay the healing process and prolong the negative conditions that have mired so many markets for so long? Newell says consumers have figured out that they can stretch time and remain in their home longer but with no mortgage payment and no threat of eviction—for well over two years in some case-laden judicial states. Codilis notes, "A lot of non-judicial states have seen significantly more recovery than we have in Illinois. It's probably the same in other judicial states, too," With new t's to cross, new i's to dot, procedural delays, elongated timelines, and a number of other delaying factors, there are more steps and more checklists than ever before when working with struggling homeowners or distressed assets. On top of that, Ellie Mae says like the change in mindset, the very definition of compliance is shifting. "The test for compliance no longer will be: Was this act legal or illegal, but rather was it fair?" the company wrote in a recent paper examining the hidden costs of compliance. Manning Regulatory Requirements Rawls points to the amount of staff, time, and effort that's being put into quality control initiatives and "additional checkers to make sure everything is perfect, and the number of people and effort it takes to keep up with changing laws and the pace all that is coming at us—it's a major challenge," he said. "The margins in this business aren't huge" to begin with, Rawls notes, so the amount of time and operational expense associated with staying on top of all the new regulations, maintaining compliance, and documenting an audit trail to prove you've followed the rules is straining the business model of default servicing. The House Financial Services Committee tallies reform-related costs with what it calls the "Dodd-Frank Burden Tracker" posted on the committee website. The tracker indicates the U.S. financial sector is already spending more than 24 million man hours per year to comply with the 224 Dodd-Frank requirements that have been put into place thus far (out of nearly 400 rules outlined in the legislation). That's 4 million more man hours than it took to build the entire Panama Canal. All the new regulations, as well as the time and costs associated with compliance, are trickling down, hitting almost every link in the default servicing chain. Rothfuss said probably 50 percent of his firm's focus now "is in the area of compliance with regulations, including audits, security, and a lot of things that don't have a lot to do with the substantive practice of law. It's difficult because we're spending enormous amounts of time in areas that typically are not in the mainstream practice of law." With compliance requiring half of the firm's attention, it's easy to understand the burden new regulatory requirements are placing on those working with defaulted loans, especially considering Rothfuss estimates that number was 10 percent prior to the crisis, and he says that assessment is "aggressive" because seven years ago his firm was doing a lot of things they

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