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» VISIT US ONLINE @ DSNEWS.COM 69 DATA & RESE ARCH M ARKET PUL SE the only concerns facing community banks, credit unions, and mid-sized investors. ere is growing discomfort about endangering client retention as a by-product of loan sales and MSR transfers. ese institutions make loans to build customer relationships and create assets that can be sold for fees. But when they sell loans to replenish capital, or sell MSRs to increase their profitability, are they putting their client relationships at risk? If the buyers are direct competitors, the answer is most likely "yes." After investing millions in their brands supported by brick-and-mortar locations to originate these loans, large money-center banks are now sending bank account, CD, credit card, and home equity offers to their customers. SUB-PAR SUBSERVICING? Subservicing, even private-label subservic- ing, has been an option for decades. And for decades there has been from many institutions a resistance to the outsourcing of self-servicing operations. Why? It may have been fear that their borrowers would be lost in giant subservicing organizations, or that they were giving up con- trol of the customer relationship. Today, there are roughly 25 major subservicers of which the 11 largest are each handling more than 100,000 accounts. A stray credit union with only 2,000 accounts is cautious in today's industry about letting its members fall into that sea of loans. It's has been historically unlikely that the customer's experience would improve if their loan were outsourced. It's also possible that investors didn't believe the promised cost savings would ever material- ize. Outsourcing was, of course, "going to cap per-loan costs" at $X per loan, but what about all the extras? Some subservicers have clearly borrowed a page from the technology providers' playbook when it comes to a la carte fees. Private label costs extra. Reports and data extracts cost extra. Small lenders can't even send basic mail without incurring two-cent handling charges, per envelope, on top of postage and material costs. No wonder banks report that their subser- vicing fees can fluctuate wildly month-to-month in an industry where six-page invoices and two- cent charges aren't unusual. Years ago, McKinsey identified a cogni- tive bias that gives rise to what is called "the phenomenon-limited repertoire." is was a fancy way of stating that clients tend to remem- ber what didn't work in the past, and therefore rule out those strategies in future dealings without considering that those strategies may have changed or improved. is may be the case with subservicing. SHARING RISKS, NOT CUSTOMERS Private-label subservicing, with the right partner, can address a number of the challenges facing credit unions, small- and mid-sized banks, and investors. Specialized outsourcers can afford to invest in the infrastructure, expertise, and technology needed to stay abreast of this highly-regulated environment that smaller shops have more difficulty in justifying the costs of. For example, some of these subservicers have more than 25 resources specifically dedicated to monitoring compliance changes. Typical contracts provide reps and warrants, so that if the subservicer makes a mistake, and it results in a fine or penalty, the subservicer is the one absorbing the cost. From a compliance perspective, outsourcing effectively becomes a risk-sharing arrangement. Other investors are looking to non-compet- itive "Correspondent Lending" outsourcers who won't cross-sell to their customers. More impor- tantly, these shops are helping the mid-tier via co-branded servicing to promote the investor's brand, aid customer retention, and help market their consumer banking offerings. e most obvious and important task is finding the right partner in the range of choices. At one end of the spectrum are traditional, commoditized players who have difficulty providing high-quality, high-touch service for borrowers; at the other end are the smaller outsourcers that can provide high quality, high-touch customer service, but often have a single-threaded business model which can be dif- ficult to justify from a due diligence perspective. A good starting point is to run a true cost- benefit analysis between in-house and subservic- ing. e fixed, variable, and soft costs associated with making a switch — or even maintaining a hybrid of both models — should be priority number one. WHAT'S POSSIBLE CURRENTLY Ideally, the subservicer relationship should become a partner-based dynamic rather than vendor-based. In addition to an oversight component, it must offer the asset owner a more robust way of complying with the over-arching requirements that many regulatory agencies and GSEs now require. e bar can be raised in both the areas of relationship management and oversight capabilities. Servicers should provide asset own- ers with turnkey options to manage and gain transparency into everything the servicer does. Some asset owners may want transaction-level involvement and oversight, whereas others may want data or to engage a third party to review servicer performance. Each of these options should be available. Managing borrowers effectively is very com- plex, and compliance and investor requirements are laid out by the Consumer Finance Protection Bureau regulations. is includes items such as specific timeline requirements in managing lender-placed insurance, foreclosure, and ARM adjustments. At the same time, a servicer should consider and be able to implement any requirements an individual asset owner may have regarding customer contact, cross-sales, escalation, loss mitigation programs, etc. Having a robust discovery process to capture owner requirements and also having the technol- ogy to accommodate the cross section of these specific needs against GSE requirements, and any other regulatory body's requirements, is paramount for success. With the technology that is available today, a servicer should be able to quickly and cost- effectively customize the following, among other factors: » Client relationship structure » Loan boarding and welcome process » Cash management and payment options » Reporting/data management and extraction » Customer contact strategies » IVR scripting » Decision oversight » Vendor choice and integration » Escalation » Loss mitigation » Partner/servicer oversight and surveillance As Steve Jobs knew, the best way to change something is to go ahead and do it. Show clients what they can have and then execute. e servicers that challenge the status quo and the way they've always done things appear to be the early leaders. It took a long time to get from the 8-track to iTunes — how quickly will this shift take place? "The bar can be raised in both the areas of relationship management and oversight capabilities. Servicers should provide asset owners with turnkey options to manage and gain transparency into everything the servicer does."

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