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35 » VISIT US ONLINE @ DSNEWS.COM FIVE MINUTES WITH Get to Know Industry Executives Beyond the Boardroom As a principal for Ernst & Young, Paul Nagai is familiar with the regula- tory landscape affecting mortgage servicers. For more than three years, Nagai has worked in the financial services office, with previous positions at JPMorgan and Bear Stearns. He discusses how compliance rules are going to affect mortgage servicers of all sizes and how to handle the myriad new rules and regulations. How would you describe the regulatory environment today, and what's your assessment of how well mortgage servicers and their industry partners are adjusting? The regulatory environment is stabilizing—moving from rulemaking to implementation and enforcement. A significant effort has been expended, which has strained the profit model but resulted in more consistent execution and customer experience. Many institutions faced the perfect storm of concurrent market downturn, mergers and acquisition integration, regulatory and policy intervention, and an unprecedented growth of servicing portfolios. The industry is making great strides but still has some work to do. What do you see as the biggest compliance challenge for mortgage servicers as they implement the myriad new rules and regulations? Strategically, the challenge is to remain in business, and for those that do, how they will make money in the new environment. Operating models will evolve as a result of the changes, and servicers will re-evaluate what capabilities they outsource to others versus operate themselves. Data integrity, third-party management, and tighter timelines will be significant challenges. As rules are evaluated and applied, the integration across product lines and lines of business will create significant complexity and are likely to require investment in operations and technology to ensure consistent customer interactions. Many of the new rules and standards are squeezing smaller servicers, even pushing some very near the point of insolvency. What will it take to survive in this new environment? I see specialization and consolidation continuing. Increased regulation and capital charges on servicing will cause institutions to rethink the profit model, including an evaluation of the cost to service different strata of the portfolio and the associated services sourcing model. There will be opportunities for specialized, high-touch servicers that support specific types of assets and strategies where the cost of service supports an elevated level of effort. For small or mid-tier servicers, the cost of compliance will continue to favor some level of consolidation. How do you see servicers' operating models adapting to the changing environment? A rationalization of how services are sourced is imminent. Servicers will need to determine which portions of their portfolio can be effectively delivered internally and which are candidates for specialized service providers. A simplification of overall servicing and origination operations will become more pressing. This is likely to include the rationalization of physical sites, use of vendors, integration of acquired platforms, elimination of duplicate technologies, evaluation and balance between variable and fixed cost structures, and selective automation of manual processes. What regulations or government initiatives should industry professionals be keeping an eye on over the next 12 months? FHFA and Federal Reserve policy, and emerging CFPB regulations are near the top of my list. A policy focused more on affordable housing could lead to increased volumes in the origination space or more aggressive restructuring of non-performing servicing portfolios. Similarly, the quantitative easing policies of the Federal Reserve, and recent tapering, will continue to affect the availability of credit in the retail sector. As the CFPB continues to roll out its standards, there is likely to be a significant amount of both organizational and operational change. This will be particularly evident in non-bank institutions that may not have worked with direct regulatory oversight in the past. PRINCIPAL OF ERNST & YOUNG Paul Nagai