Drawing Up a Response to the AG Settlement April 02, 2012
As if today's changing regulatory environment was not enough for the industry to contend with, the recent federal government and state attorneys general settlement for $25 billion with the country's top servicers has added a new wrinkle. However, there is hope for servicers to learn from this challenge, and by effectively using technology the mortgage industry can create the transparency and accountability needed to prevent history from repeating itself.
Yes, we knew the settlement was coming following investigations that showed servicers violated state and federal laws. The now infamous “robo-signing” phenomena ran rampant as some servicers struggled with huge volumes of nonperforming loans. No one knew that the monetary penalties would be as significant as the settlement, announced in February, indicated. While the amount is spread among the industry's five largest servicers, it still requires them to adjust various internal processes to make the obligated payments within the allotted three years as well as to ensure other homeowners are protected from being negatively effected by wrongful foreclosure.
A significant amount of the settlement, $10 billion, will go toward the principal reduction for borrowers who are either delinquent or are underwater in their mortgages and at imminent risk of default at the date of the settlement. In addition, $3 billion will go toward refinancing loans for borrowers who are current on their mortgage but presently owe more on their mortgages than their homes are worth.
Another $7 billion will be used to provide other forms of relief, including forbearance of principal for unemployed borrowers, short sales and transitional assistance, benefits for service members who were forced to sell their homes at a loss as a result of a Permanent Change in Station order, anti-blight programs and other efforts. Furthermore, $1.5 billion will be put in a Borrower Payment Fund that will provide cash payments to borrowers whose homes were sold or taken into foreclosure between Jan. 1, 2008 and Dec. 31, 2011 and who meet other criteria.
The settlement really addresses how servicers approach the entire default management lifecycle and the foreclosure processes. The goal is to ensure consumers' homes are not wrongfully or unjustly foreclosed upon and that servicers effectively control their processes internally, as well as with third-party business partners, to meet the emerging set of new servicing standards. Technology is absolutely imperative to aid servicers in the proper management of their internal processes and the tasks assigned to third parties.
The idea that a servicer is being held accountable for a third-party business partner's efforts is not new. However, with the massive wave of loans that are now in trouble, it is virtually impossible to manage internal operations, let alone an outside vendor, without the assistance of technology. While single point of contact conversations have been proposed as a way to effectively manage a servicer's challenges, the standards created by the settlement reinforce the importance of having a solid plan in place and following that plan consistently.
Until now, the industry has been more reactive in addressing the challenges and concerns surrounding default management. The settlement will undoubtedly encourage more servicers to take a proactive approach to their default management efforts and increase their scrutiny of all activities, both internally and externally. They now understand that while a company cannot work in isolation, they need to know exactly what their business partners are doing on their behalf and be able to substantiate that information.
The question now is-how quickly will the industry incorporate better management of their internal processes and external relationships? While this settlement creates new standards, which the industry has desperately needed, servicers have ultimate control over the decision to implement technology that will improve the quality of their processes. However, the sooner servicers make the choice to add automation, the sooner they will be able to drive increased borrower satisfaction while mitigating credit losses for both investors and insurers. And, most importantly the use of technology will allow servicers to manage more consistently and efficiently the increased workload as well as expedite customer dispute resolution processes.
Servicers can revamp their operating environments and comply with the new standards by using a platform that encompasses the following key building blocks:
a rules-based engine, which creates a structured process to manage regulatory changes at the federal, state, and/or county level and how they intersect with investor and/or insurer requirements;
a controlled business process, which allows both internal and external business partners to handle the communication requirements and adhere to strict timelines associated with regulations;
support for single point of contact, which provides real time decisions, data and documents to ensure consistent and fair treatment of borrowers and uses of borrower and counselor portals, such as Hope LoanPort, to improve the communication process; and
A detailed audit trail, which verifies that required tasks were performed in a timely and efficient manner, detailing all actions taken by multiple parties to ensure that all laws, regulations and investor requirements were considered.
In reality, the industry should have been working toward gaining more transparency and greater accountability long before the settlement. But it is not too late. By investing in technology, servicers can manage all information and relationships and uphold these standards. With a proactive approach to modifying business processes and technology platforms, there is hope on the other side of this storm that the industry can surely recover.