DS News - Digital Archives

make sense for the size and risk of the particular servicing operation. Regardless of the sample sizes used, the rationale for determining the size should be documented in the plan. Executing the Plan Once a quality control plan has been developed, how is it implemented? Quality control is an audit function and should be performed by people independent of the servicing process. On the origination side of the business, most mortgage lenders have outsourced the quality control testing to third-party firms that specialize in performing quality control. A similar pattern is emerging with servicing quality control. While the use of a third-party firm may represent an additional expense, a third party brings independence and expertise while avoiding additional fixed costs that come with hiring internal staff to perform the function. Engaging an outside firm to perform servicing quality control may make the quality control process easier, but it does not relieve the servicer of responsibility for quality control. All of the typical third-party vendor management policies and procedures related to the required due diligence and ongoing monitoring of outside service providers should be applied to the quality control provider as well. Inquire as to how customizable their process and reporting is and review sample reports. If a third party is engaged, the servicer should review the vendor's work to ensure satisfactory execution of the quality control plan. Keep in mind that quality control is no longer a "check the box" process—if it ever was—but carries significant responsibility for ensuring quality and compliance with an ever-changing and increasing level of requirements and regulations. Loss Mit and Foreclosure Focus Among the most significant changes in the CFPB regulations are requirements for loss mitigation and subsequent limitations on the foreclosure process. Servicers are required to follow specified loss mitigation procedures for a mortgage loan secured by a borrower's principal residence. Servicers must establish or make good faith efforts to establish live contact with borrowers by the 36th day of delinquency and promptly inform such borrowers, where appropriate, that loss mitigation options may be available. In addition, a servicer must provide written notice with information about loss mitigation options by the 45th day of a borrower's delinquency. Servicers are required to maintain reasonable policies and procedures with respect to providing delinquent borrowers with access to personnel who can assist them with loss mitigation options. The policies and procedures must be reasonably 58 designed to ensure that a servicer assigns personnel to a delinquent borrower by the time the written notice required by the CFPB's early intervention rule is served on the 45th day of delinquency. If a borrower submits an application for a loss mitigation option, the servicer is generally required to acknowledge the receipt of the application in writing within five days and inform the borrower whether the application is complete and, if not, what information is needed to complete it. The servicer must exercise reasonable diligence in obtaining documents and information to complete the application. For a complete loss mitigation application received more than 37 days before a foreclosure sale, the servicer is required to evaluate the borrower, within 30 days, for all loss mitigation options the borrower may be eligible for in accordance with the investor's guidelines, including options that enable the borrower to retain the home (such as a loan modification) and non-retention options (such as a short sale). In June 2011, the Office of the Comptroller of the Currency (OCC) issued bulletin 2011-29 that provided additional guidance regarding foreclosure management to the financial institutions the agency regulates. This bulletin was a result of the significant foreclosure processing and documentation issues that surfaced during the financial crisis and led to the servicing consent orders issued by both the OCC and the Federal Reserve. In its bulletin, the OCC stated, "National banks should conduct a self-assessment of foreclosure management practices. Banks that identify weaknesses in their foreclosure processes through the self-assessment should take immediate corrective action. Banks should determine if the weaknesses resulted in any financial harm to borrowers and provide remediation where appropriate. Examiners will review the self-assessments, corrective actions, and any determinations of financial harm and related remediation in the next quarterly review or examination of the bank." Because foreclosure has such a significant impact on the consumer, the CFPB is also focused on foreclosure. Comprehensive foreclosure reviews should verify the loan was in default, that all disclosures and notices were made on a timely basis, and that the servicer had all required documents to foreclose. All fees charged should be reasonable and based on costs incurred. Due to the critical nature of the foreclosure process, many servicers are treating foreclosure reviews as separate from the normal quality control process. While the reviews may be performed independent of other aspects of servicing quality control, it is recommended that a comprehensive quality control plan include foreclosure reviews. Reporting Findings The quality control plan should also describe how the results of the quality control process are reported. Quality control findings must be reported to executive management, and as frequently as possible. That does not mean that management needs details on every exception noted, however. Instead, a summary report that covers exception rates by category and shows the trend of exception rates over time is recommended. Executive management needs to review these reports and understand remediation plans where exception rates indicate the need for process improvement. For this reason it is also important that servicing operations management receives and reviews the findings so that process improvements can be designed and implemented to address any shortcomings reported. Identifying systemic deficiencies in the process is a critical component to implementing the required corrective action. The deficiencies identified can be used to enhance training programs within the institution and ensure that all employees involved are informed and better prepared to perform their job responsibilities. The importance of the quality control reports cannot be overemphasized. Take the time to design useful reports. Little is gained if in-depth quality control reviews are conducted, but the results cannot be understood and acted upon because the final reports are either too detailed or not comprehensive enough to tell the story. The Bottom Line The business of mortgage servicing is substantially about limiting risk and maintaining profitability. Regulators and investors have enhanced their scrutiny of the servicing quality control process. A mortgage servicing operation that initiates periodic monitoring through a formalized quality control program decreases its risk that violations and weaknesses will go undetected for long periods of time, potentially avoiding multiple regulatory violations and consumer harm. In addition, deficiencies identified in the quality control process can provide opportunities to reinforce procedures and enhance training for employees. Proactive actions will benefit the organization and demonstrate to regulatory agencies and investors that the appropriate procedures are in place to assist in establishing a sound servicing control environment. Michael Forester is co-founder and managing director of CrossCheck Compliance, a regulatory compliance, audit, and loan review firm. He has more than 30 years' experience working in the mortgage and financial services industries.

• Cover