DEERFIELD BEACH, Fla.-With many credit unions contemplating outsourcing their mortgage servicing in the wake of potentially complex new rules from the Consumer Financial Protection Bureau (CFPB), one person is warning CUs still can be found liable for mistakes servicers make.
Becky Walzak, president of Walzak Consulting and a specialist in mortgage regulation and compliance, and identifying and addressing operational risks, told Credit Union Journal she is concerned credit unions might think outsourcing their servicing means outsourcing the risk.
"Regulators, particularly the CFPB, look at the servicer and the sub-servicer as one and the same," she said. "The credit union has to pick a very good sub-servicer, and it has to have strong standards in place for expectations."
In cases where there are delinquencies Walzak said a credit union really needs to examine how well the sub-servicer follows procedures to remain in compliance.
One example is collection call protocol, another is outreach to borrowers. According to Walzak, the bureau will be closely monitoring what outreach efforts a sub-servicer implements when a borrower gets behind.
"CFPB really wants to see positive outreach to get these cured, not just wait until it gets to 90 days delinquent and start foreclosure," she said. "CFPB says once a borrower indicates he/she is having trouble making payments, the servicer/sub-servicer must respond promptly."
Under the new protocol, Walzak explained, the entity handling servicing first must determine why the borrower is having trouble. If it is a temporary situation, perhaps the borrower can miss one payment and make up for it over the course of the following three months. If a borrower has lost his/her job and has used up reserves and will not be able to make a payment soon, that is a different situation from a borrower who has a new job starting the following month. In the latter, she said, the CFPB expects the lender to set up a modification program.
Financial institutions have several options with mortgage servicing, Walzak noted, including keeping the loan, selling it, using sub-servicing or obtaining a servicing release. The latter pays the originating lender a fee to compensate for losing income. "There are positives and negatives for all."
"Most credit unions are focused on their members and what they can do for them, and when servicing is sold the credit union name is no longer on it. With sub-servicing there is better control of costs, but the same operational risks are still there."
In the case of short sales, it used to be a servicer typically did not respond to borrowers' calls for a "long time," Walzak continued. With the new regulation, however, the servicer has to respond in 30 days. She said "dual tracking" has been eliminated-meaning no longer can the servicer work with the borrower on a modification while simultaneously following steps to prepare to foreclose.
The 'Do No Harm' Concept
The concept of a "single point of contact" is a "big issue" with the new rules, Walzak said, adding the concept is being treated in a variety of ways. Some servicers give one number and a contact name, while other lenders say any of their employees can pull up the loan information in the system.
"I have not seen any audits come out of CFPB saying which method is preferred, the key is how it is handled," she advised. "Credit unions need to make sure the person who answers the phone has enough knowledge to at least address the immediate issue and then either follow up or transfer the call to someone else. It is all about 'do no harm' to the consumer. The borrower cannot call day after day and not get a response. This means the servicer will have to pay a lot more money."
Force Placed Insurance
Yet another issue addressed in the 1,800-page mortgage servicing rules is force placed insurance. Walzak said either the borrower has to prove he/she has current homeowner's insurance on the property or the lender will put it in.
"Force placed insurance has always been very expensive," she said. "The new rules have put in a lot of steps the servicer has to take. It used to be the day the insurance policy expired the lender force placed a new one. Now, the lender has to inform the borrower about costs, and has to give the borrower time to get a revised/updated policy to the lender. And, there are limits on charges."
The Soldiers and Sailors Relief Act, which applies to servicemembers on active duty, says lenders/servicers must provide options if the servicemember gets behind on payments.
"These requirements have always been there, but this makes sure they are enforced," she said. "Sub-servicers are being watched very closely, including all fees. Servicers used to charge a lot of fees, now they are very limited. The amount of a late fee often is determined by the state. It is difficult to keep track of fee rules."
Fair lending opportunities also have been addressed by the new rules. According to Walzak, some servicers used to speed up foreclosure on certain classes or for mortgages in certain areas, but now such actions are expressly prohibited.
The biggest concern for a credit union, Walzak explained, is it has become responsible for the sub-servicer. She said the sub-servicer used to "just make sure investors got paid," but now the CFPB has said consumers are equally as critical as investors.
"If something comes up that has potential to do harm to consumers, the CFPB wants to see management has discussed the issue and made a conscious decision," she said. "I advise my clients, whether servicing or sub-servicing, to make sure there is a well-focused monitoring program. They must be able to demonstrate time frames and how the credit union is monitoring."
If Walzak were running a credit union and sub-servicing to a third party, she said every month she would want to talk to the manager of the servicing group and make sure all of the issues are discussed. "That way when an examiner comes in the credit union can demonstrate all the right things are being done."
The result of the new rules will be an increase in expenses for servicing, Walzak assessed, adding most current servicing systems do not have the data fields to handle all of the issues addressed by the new rules. Instead, the companies used to rely on notes, which she said is "very cumbersome. This means CUs and servicers need to make sure they are collecting all the data that is needed to demonstrate compliance."
Declining Income
The value of servicing rights, the dollar amount the servicer gets, is declining, Walzak observed, adding that even if a credit union retains servicing rights on a mortgage it will not be getting as much money as before, or it will be paying more to the sub-servicer. As a result, "People are questioning why they are still in the business. There is a need for greater efficiency to reduce costs, which some companies see as an opportunity.
"Credit unions need to examine everything-from the relationship with the consumer to the cross-sell opportunities," she continued. "It is a balancing act. Will a mortgage be a loss-leader to bring people in the door? It definitely can be done, but the top task is really analyzing sub-servicers. Make sure they have systems in place that can handle the new standards. The way to tell is by monitoring and reporting."
