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41 » VISIT US ONLINE @ DSNEWS.COM Dave Vida has over 20 years of financial services experience, including 16 years in senior leadership roles in both mortgage servicing and loan origination. He currently serves as president of loan servicing and lending, as well as chief strategy officer at LenderLive Network, Inc. The CFPB recently issued a bulletin warning mortgage servicers of potential repercussions if consumers are harmed when servicing rights change hands. What practices should servicers have in place to stay in compliance during servicing transfers? Protecting consumers is CFPB's raison d'être. So it shouldn't be any surprise that they, along with state regulators, have focused on servicing transfers and the pos- sibility that these transactions and the change in ownership or servicers might disadvantage certain borrowers. CFPB wants to make sure that borrowers who are in the midst of a loan modification or other work out scenario don't fall through the cracks in these deals. In addition, consumers should not be adversely impacted by the transfer itself for payments applied or other nuances that can result from a servicing transfer. To be in compliance, a servicer will need to carefully review the way it conducts due diligence on MSR and whole loan deals, and make sure that its loan boarding procedures and processes identify loans in various stages of modification or workout. Depending on the volume of deals, servicers and investors may also want to consider loan boarding solutions, like our new one, that alert them to modifications as well as to missing and/or improperly executed docs. How have the layers of new regulation re- cently put in place changed the economics of servicing? For many smaller banks and credit unions, staying abreast with the plethora of new regulations and policies has become a daunting and expensive proposition. Earlier this year, it was estimated that the added expenses of new controls and oversight has tripled the cost of compliance for servicers in recent years. It is not only the cost of the compliance, but the extra expense of audit, controls, and checks and balances to ensure 100 percent compliance that adds a layer of costs. In other words, the expec- tation is zero defects, yet the compensation is not tied to or sufficient to ensure perfection. In addition, in-house servicers must also purchase, implement and/or continually update their servicing technology; select and manage third-party vendors, e.g. escrow, document custodians, valuation providers, etc.; and service delinquent accounts while maintaining GSE guidelines from initial borrower contact and loss mitigation to managing attorneys and timelines. With fixed costs rising and margins shrinking, many of these small and medium- sized shops will be hard pressed to justify the costs of running in-house operations. And larger servicers will need to invest in new technology and better workflow to manage their higher costs. However, the cost and time necessary to modify some of the legacy technology for larger servicers is significant. Defaults are down and prepayment speeds are very slow. Are these trends changing the dynamics of servicing from a staffing and tech- nology perspective? Yes, over time, these trends will change the dynamics of servicing. You're already seeing some larger servicers reduce headcounts in certain areas, such as loss mitiga- tion and REO management, as their portfolios improve. Were it not for all the new regulations and the new processes that have to be followed, there probably would have been even more downsizing. e quality and the generationally low interest rates of the newly originated business suggest that these loans will stay on the books much longer than has been the historical norm. Again, were it not for the new regulations, we'd probably be seeing servicers revert to the staffing ratios that were prevalent before the crash. However, there is belief that the effort to manage newly originated loans is low and that it is just an exercise in posting payments. is is in fact not true. e effort and level of service now far exceed any time before this cycle. e GSE's have set higher standards for call center metrics, delinquency is expected to be zero, yet the calling effort and letters to produce this result is significant. Borrowers are confused and need help and the inbound call volume has only increased. e cost to ensure perfection and deliver great service is higher than ever for newly originated high-quality loans. The old rule of thumb used to be that you need- ed to be servicing at least 10,000 loans to justify servicing loans in-house. Is that still a good benchmark? at depends. I think the number is much higher in today's environment. Every financial institution needs to do its own true cost-benefit analysis between in-house and sub- servicing. If you compare increasing costs and risks due to ever-tightening compliance rules versus a desire to protect customer relationships and the way technology providers charge for services, you may find that it doesn't make sense to service in-house. Unlike mega servicers and small special servicers, some mid-size servicers, like LenderLive, offer a private-label, variable fee-for-service model, so clients pay for services as they need them, converting fixed costs into variable expenses and improving their clients' bottom lines. is eliminates clients' need to invest in technology, infrastructure, and compli- ance expertise. A true in-house servicer that does not provide third-party sub-servicing will certainly have a lower cost of service. ese in-house solutions may not have to support any client management functions or robust analysis/client reporting, for example. e support functions such as compliance, accounting, legal, audit/QC, document management, etc. can be significant and should not be overlooked if evaluating a build vs. rent scenario. Between the traditional mega servicers and the smaller special servicers, what's the opportu- nity for mid-sized servicers, like LenderLive? Many mid-size banks, community banks, and credit unions are still servicing their loans in house, despite rising costs, and a constant barrage of new regulations. With their staffers wearing multiple hats and no dedicated compli- ance resources to keep up with the ever-chang- ing guidelines, these smaller shops are much more exposed to compensatory fine risks. at's where mid-sized servicers, like LenderLive, can come in and be the right partner. We can ad- dress a number of the challenges facing smaller banks, credit unions and investors because we can afford to invest in the infrastructure, ex- pertise and technology needed to stay abreast of this highly regulated environment that smaller shops have more difficulty in cost-justifying. We can also offer more customized servicing op- tions. In addition, smaller banks know that we won't market to their customers and that they can opt to co-brand their servicing with us. Finally, there may also be a potential to serve investors that are no longer large enough to get the attention of the mega servicers. So there is still plenty of room and opportunity for mid- sized players, like us.

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