DS News

68 "People don't know what they want until you show it to them." at's how Steve Jobs explained his strategy of skipping focus groups and forging ahead with iTunes — a decision that transformed both the dynamics and economics of the music business. His point: consumers and industry insiders are too often focused on the way things have always been done in the past to see how they could be done differently in the future. A strong case could be made that this is ex- actly what's happening in the servicing business. Servicing appears to be on the verge of a tectonic shift. e driving force, naturally, is economics: costs are rising and risk is increasing thanks to ever-tightening compliance rules. But the desire to protect customer relationships, and a growing discontent over the way technology providers charge for services, all factor into the conclusion: there must be better options for servicers. e question is, what will it take for banks and other investors to make a fundamental shift away from how things have always been done in servicing? IS COMPLIANCE THE FINAL STRAW? e servicing landscape is shifting; the most dramatic change has probably been the rapid growth of the new mega-servicers bulking up on MSR trades and portfolio sales. Of course, the flipside of this trade is the retreat by money- center banks as they reassess their appetite for servicing in light of reputational woes and in anticipation of the upcoming Basel III capital requirements. Where there has been significantly less movement, however, is in the mid-tier space. Many of the community banks, mid-size banks, and credit unions are still servicing their loans in-house, despite rising costs and a constant bar- rage of new regulations. Staffers in those smaller servicing shops — who often wear multiple hats — are now facing an ever-increasing burden of compli- ance, particularly from the Consumer Financial Protection Bureau (CFPB). By typically running without dedicated compliance resources to keep up with changing guidelines, these in-house shops are much more exposed to compensatory fine risks. ere are a plethora of new regulations and policies affecting financial institutions servicing in- house. For many smaller banks and credit unions, staying abreast with these changes has become a daunting and expensive proposition. Panelists at the recent Mortgage Bankers Association Servic- ing Conference estimated that the added cost of new controls and oversight has tripled the cost of compliance for servicers in recent years. In addition to compliance and human re- sources challenges, in-house servicers face other costs and risk considerations as well, including: Purchasing, implementing and/or continually updating in-house servicing technology. Selecting and managing third-party vendors, e.g. escrow, document custodians, valuation providers, etc. Debt collection, servicing and SAFE Act/ FDCPA licensing, training, and borrower claims. Servicing delinquent accounts and maintain- ing GSE guidelines from initial borrower con- tact to loss mitigation to managing foreclosure/ bankruptcy attorneys and timelines. With fixed costs rising, and margins shrink- ing, can these small shops afford to invest in the expertise and technology needed to stay compliant, and demonstrate compliance, when the CFPB pays a visit? is, in turn, has reopened the age-old debate: what's the right number of loans needed to achieve worthwhile economies of scale while minimizing servicing risk? Is it 20,000 loans, as a long-time industry executive recently sug- gested? And if so, what does this portend for average community banks and credit unions that self-service significantly fewer loans? e economics and compliance alone aren't M A R K E T P U L S E / C H R I S S A B B E TECTONIC SHIFTS IN THE WORLD OF SERVICING: CAN WE SEE THEM YET?

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