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37 » VISIT US ONLINE @ DSNEWS.COM FIVE MINUTES WITH Get to Know Industry Executives Beyond the Boardroom As the SVP of operational risk assessments for Morningstar Credit Ratings, Richard Koch is well-versed in evaluating and ranking residential mortgage servicers and originators. The first to author evaluations in Australia and India, Koch has 15-plus years of experience in the servicer ranking industry. Koch offers his thoughts on the challenges of directing a large group of servicers and what the new Consumer Financial Protection Bureau (CFPB) rules mean for organizations. What challenges come with being an analyst of such a wide and diverse group of servicers? The basis of every Morningstar operational risk assessment is our core criteria, applicable to a diverse universe of servicers and vendors. The criteria is based on a number of fundamentals, including the strength and tenure of the management team, audit and risk management methodology, accounting practices, vendor oversight, and disaster recovery and business continuity. Historically, we have collected extensive performance metrics encompassing management and staff tenure and turnover, customer service, accounting, and delinquency management. The challenge, and the reward, is to develop a relevant and consistent set of data metrics that we can use to effectively assess a diverse group of servicers. You recently performed an offshore review of a vendor in India. How has the experience travelling affected your work? Years ago, I performed the first servicer reviews ever done in Australia. I've been involved in servicer reviews in Canada, Japan, the U.K., and most recently in India. The starting point is our core criteria developed in the U.S. Then, we develop customized performance metrics that are relevant and consistent with that country's business practices. I immerse myself in the country's regulatory framework, business culture, financial markets, political climate, technology, and education systems, which is then reflected in our reports. When you rank service providers, what are some key metrics you look for to determine a provider's rank? Although we collect hundreds of metrics, key metrics often consist of payment processing and accounting metrics that illustrate cash handling efficiencies, as well as the ability to remit funds, report to investors, and reconcile bank accounts in a timely manner. Customer relationship metrics, such as the average speed of answer and abandonment rate, illustrate the level of service to customers. Loss mitigation results are measured, such as loan modification success rates and loan modification recidivism rates over time. Foreclosure timeline compliance is monitored to ensure proper management of attorneys. Lastly, data on REO dispositions is collected, such as monthly inventory turn rates, the net sales-to-market value ratio, and loss severity to measure a servicer's ability to minimize loss to the investor. With the implementation of the new CFPB rules, what opportunities or hardships will arise from the new regulations? The CFPB rules represent unprecedented change to the servicing industry. The rules can present a hardship to organizations that have not historically embraced an enterprise-wide compliance culture. Although the CFPB implementation timeline has given servicers ample time for compliance, it is labor-intensive and costly for many organizations. Some servicers have exited the business, preferring to offload the compliance risk and retain a third-party servicer that is well-versed in the CFPB requirements. Opportunities certainly exist for those servicers with the requisite compliance infrastructure to obtain additional third-party business. At Morningstar, CFPB rules are fully incorporated into our assessment approach, where applicable. During 2013, we began to monitor the industry's preparedness and implementation of the new rules, and we will continue to do so during 2014 now that the rules are effective. SVP OF OPERATIONAL RISK ASSESSMENTS FOR MORNINGSTAR CREDIT RATINGS Richard Koch

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