DS News - Digital Archives

» VISIT US ONLINE @ DSNEWS.COM BEST PRACTICES The Era of Audits By Robert H. Hosch Jr. and Thomasina Moore J ust more than a year ago, 14 of the nation's largest mortgage servicers entered into consent orders with the Office of the Comptroller of the Currency (OCC) and the Federal Reserve— orders intended improve servicers' foreclosure governance processes, with clearly defined mandates that ushered in a new era of audits. Article V of the consent orders requires enhanced management by servicers of third parties involved in the foreclosure process, including law firms that serve as local counsel retained to represent the interests of mortgage owners in foreclosure or bankruptcy proceedings. The OCC released a bulletin in June 2011 communicating regulators' expectations for servicers' oversight and management of mortgage foreclosure activities, which encompasses managing third-party law firms and other vendors: Management should properly structure, carefully conduct and prudently manage relationships with third-party vendors, including outside law firms assisting in the foreclosure process. Management should ensure that thirdparty vendors have the skills necessary to perform the assigned functions. Roles and responsibilities should be clearly defined and performance should be monitored. Refer to OCC Bulletin 2001-47, "Third-Party Relationships: Risk Management Principles," for additional guidance on expectations for managing third-party relationships. Lawyers may forever debate whether law firms should be included within the "third-party vendor" category. However, like it or not, law firms are considered "vendors" for purposes of applying the provisions of the 2001 bulletin referenced in the OCC's statement above, which delineates third-party relationships. The new application of its old rule has permanently changed the relationship between servicers and the law firms representing them. With the signing of the consent orders in April 2011, a new era of auditing was born. As noted in the OCC's interim status report issued on November 22 of last year, the individual consent orders vary, but generally: The plans establish processes for appropriate due diligence in evaluating the qualifications of potential thirdparty service providers before entering into new contractual arrangements. The plans also provide for regular, periodic reviews of third-party service providers and assessment of their performance based on qualitative standards for competence, completeness, and legal compliance rather than standards based solely on the volume of foreclosures processed or the speed of processing. Additionally, the plans provide for the secure custody and accuracy of records transferred to these third parties during the foreclosure process. Third-party vendors must establish a plan in order to be in compliance with the signed consent orders. Specific actions to implement the plans required by the consent orders vary. Most plans include scheduling and conducting on-site audits and ongoing quality assurance checks of third-party vendors' processes. While on-site audits are both time consuming and expensive, these inspections, if conducted properly, can benefit both the servicer and the law firm. Audits can provide insight into the law firm's and servicer's processes, reduce risk, and improve communication and information security. The audit process can be broken down into three phases: pre-audit preparation, audit, and post-audit review. To best conduct the audit, consideration must be given to all three phases of the process. Pre-Audit Preparation Careful planning prior to the audit will help ensure the best results possible for both the servicer and the law firm being audited. A 55

• Cover