DS News

60 costly. Nevertheless, the cost of compliance does not end with the servicers. e cost grows as it trickles down from the servicer to third parties and their vendors. e ultimate cost could easily exceed the percentages outlined in the previously- mentioned study. Each requirement dictated to the servicers regarding the default process has a corresponding impact on their foreclosure law firm and, in many cases, an additional impact on vendors that service the firms. e cost of compliance is realized in several areas of the organizations impacted by the new regulations. INCREASED LABOR COSTS e salaries and benefits expenses have seen a major uptick due to the need for new roles, such as positions dedicated specifically to implementing and enforcing the new requirements. New positions include quality-control staff, internal auditors, dedicated compliance experts, and external-audit staff to handle vendor oversight. Due to updated diversification policies in place, servicers now have many more vendor law firms to oversee, resulting in significant increased expense in the area of attorney oversight. Many law firms have also found it necessary to add staff to handle the increased number of military status checks; increased communication checkpoints with the servicers; additional documentation requirements from the servicers; and increased reporting requirements of both servicers and investors. Outsourcing is a lower- cost alternative for many of those functions, but it is still an expense that did not exist five years ago, and many firms are struggling to adapt their business models to balance the increased expense while achieving their profit objectives. INCREASED TECHNOLOGY EXPENSES Servicers have had to make investments in modifications and enhancements to their platforms to comply with the new regulations. Law firms have had to make substantial capital investments in an effort to bring their infrastructures up to levels far beyond past technological expectations. e expectation in today's environment is that law firm's systems, no matter how small the firm may be, are as secure as those of the large servicer; are tested regularly to ensure compliance; have detailed security policies; and have detailed disaster-recovery and business-continuity plans that are tested annually. ird-party vendors for law firms (e.g., process of server organizations) are expected to comply with these requirements as well. is area has the potential to create a major hardship for many small- to mid-size firms. Fortunately, there are options the small to mid-size firms can take advantage of, such as utilization of co- location facilities for data centers and outsourcing IT management. Even though said options can offset some of the added costs, the firms must accept and account for the new net expenses that impact their bottom line. LOST-OPPORTUNITY COST For many law firms, there is a "cost of compliance" that is unrelated to the increased operating expenses but, nonetheless, extremely relevant. e cost is derived from lost revenue as a result of the diversification policy that has been implemented among servicers. e diversification was put in place to mitigate risk, but the result is that revenue for many firms has drastically decreased at a time when expenses are rising due to increased compliance requirements. is could potentially add a different risk factor, should a firm fail financially. A lost-opportunity expense exists for firms that simply cannot make the investment necessary to compete, so they opt out of the default practice area altogether. When this occurs, and files are in their pipeline, it results in file transfers, which translates to additional effort and expenses for the servicer. COMPOUNDING COST OF COMPLIANCE It is without question that the requirements included in the regulations are reasonable and essential for ensuring protection of the borrower as it relates to the mortgage default process. Nevertheless, what appears to be missing is a consistent, practical approach to applying and monitoring the requirements. e approach must ensure the organizations responsible for following and enforcing regulations are able to do so while continuing to focus on core competencies and earn a profit. e true cost of compliance with the latest regulations is difficult to quantify at this point due to the fact many regulations are relatively new and continue to evolve. Similar to the CFPB study, a formal study is sure to be performed at some date in the future, which will reveal the concrete numbers. Nevertheless, it is certainly clear it affects more than one area of the default industry. As a result, the cost is compounded and will ultimately have an impact on the consumer—the consumer that the regulations were developed to protect. Servicers can apply many practices to survive in the current environment, but the most important attribute for any organization to have is agility. Doing business the same way it has always been done will no longer obtain the results you may have gotten in the past. Be prepared to adapt new ideas and encourage innovation because although change can be difficult, without change, there is no progress. "True cost of compliance with the latest regulations is difficult to quantify at this point due to the fact many regulations are relatively new and continue to evolve."

• Cover