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52 to another entity that were not indexed into the servicing system. is will go a long way toward protecting investors from investing in securities where problems with the underlying assets erode the value of the security over time. In fact, it may become a critical issue for the industry long before the loans reach this stage. e Consumer Financial Protection Bureau (CFPB) recently gave the industry notice that it will require mortgage firms that engage in "significant servicing transfers" to prepare and submit detailed "informational plans" on how they will protect consumers who are engaged in loss mitigation help or trial loan modifications, according to a recently published report. A CFPB spokesman told the media that anything above 5,000 loans would be considered significant by the agency. e CFPB Compliance and Policy Guidance from August, on page 14 of Appendix A, specifically made it very clear that the timely and accurate transfer of data and images is a requirement of any transfer and makes both sides of the transfer— transferor and transferee—equally responsible to ensure that the data and documents are accurately transferred. e CFPB has correctly identified the servicing transfer, post-default servicing, as a source of potential risk, as there are many errors that can make their way into the collateral file during this process. e agency's new rules require processors to maintain accurate records, promptly credit payments, and correct errors on request. e hope is that these rules will allow servicers to mitigate the risk that documents and key financial information are not accurately transferred. By the time these loans get to the ratings agencies, they should easily meet their criteria. Unfortunately, since this work is being performed after the loans have been originated and pooled, it doesn't do much to protect the lender hoping to use the securitization to fund future lending efforts. In fact, it may be just another source of lender pain, unless the industry learns to perfect these files before the servicing rights are transferred or the loan pools ever get to the securitization stage. PROBLEMS THE RATINGS AGENCIES ARE LIKELY TO FIND While the fact that the rating agencies are updating their RMBS ratings criteria is good news for investors, the only way the industry can benefit is by making sure that loans all meet the agencies' criteria before they are ever reviewed for securitization. While it may sound like this is a loan origination issue, document handling from post closing in the mortgage loan servicing business is as important—or even more important—because handling this function poorly will allow risk to hide in the collateral file when loans are later securitized or servicing is transferred. A major source of risk and often where this risk originates is when a servicing file is not well managed post closing. More errors occur at this point than anywhere else in the process. When they occur, they create representation and warrantee risks. Specifically, there are a number of risks that spring directly from inadequate post closing and collateral file management: » e original note is lost or only a copy is in the file. » e loan was sold but there is no note endorsement or allonge present. » e title policy is missing or the insurance data does not match the servicing records. » Attorney-created assignments from a default action that are recorded but not present in the collateral file. » e chain of title on record at the county does not match the documents or images from the collateral file. ese are just a sample of the many errors that can cause problems when the pool makes it to the securitization phase. In fact, some clients have found, after a close inspection of the loans in the pool, that up to 50 to 60 percent of the loans have errors in the file that would prevent them from passing the quality assurance department. Some perspective is needed. In a sampling of more than 2 million records downloaded into our systems at NTC, when compared to the images in the collateral files, more than 25,000 documents had serious or fatal discrepancies when compared to the images. at is not to mention the additional errors discovered when land records were compared to the recorded documents in the files. Often these errors are the sole basis for borrower challenges to foreclosure actions taken by the servicers later. CATCHING THE PROBLEMS THAT CAN HAMPER SECURITIZATION So how can we catch these problems and mitigate the risk before it leaves the servicing shop? e answer is prevention. Prevention involves conducting a collateral documentation review and mortgage/assignment chain audit as part of the servicer's document preparation process. is is typically a two-part process that involves a research phase and an internal process for document review. In the research phase, the servicer searches the public record to ensure there are no breaks in the assignment chain that could compromise future assignments or a lender's lien position, right to foreclose, validity of documents, etc., and matches the data found to the actual collateral file. Before preparing the document for a new assignment, the servicer must determine whether or not the current loan beneficiary is clear on a property by reviewing land records to examine the entire assignment chain. It is likely that servicers will require the aid of expert researchers during this phase, as they have the skills to properly conduct a thorough review of land records to examine all documents that are of public record on the property, from the mortgage forward, to determine if the assignment chain is complete. e second part of prevention has to do with curative actions to remedy any of the exceptions found in the above research phase. Missing or unrecorded assignments or modifications can wreak havoc on a chain of title. Missing title policies occur far too often, with many title agents going out of business before getting the issued policy into the file. Very often, for one reason or another, the note is missing and appropriate documentation must be prepared in order to make the file complete. Whatever the exception, there are remedial actions to be taken. Our company has gone so far as to locate out-of-business (but still legally intact) third-party entities to prepare, execute, and record an assignment just to complete chain of title and mitigate the risk associated with the loan so it can be transferred. It is important that the servicer's signing executives are also trained to inspect every document they execute to ensure the forms are complete and compliant. Any supporting source documentation as well as any company research should be provided to verify accuracy. In cases where the problem already exists and the servicer is fortunate enough to have uncovered it before the loan is transferred or pooled for securitization, curative action must be taken. ere are many ways things can be done incorrectly, but generally only one way to do them correctly. When corrective actions must be taken, they may be more complex than doing the job right the first time. Ultimately, securitizations in the future will be safer for investors because the rating agencies' new criteria will provide for better ratings. For the industry to be safe, we can't wait for the loan to become part of a mortgage- backed security. e work of mitigating collateral file risks starts when the loan is originated and must then continue throughout the life of the mortgage.

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