The notion that it may be a bit late to the party notwithstanding, the government is sharpening its focus on how mortgage lenders receive the information they use to manage pending and existing loans. The Consumer Financial Protection Bureau is targeting third-party documents and the Treasury Department is examining processing shortfalls that led to sketchy foreclosures based on incomplete documentation.
"I think a lot of this focus has to do with third parties in the robo-signing area, with the law firms considering foreclosures on behalf of financial institutions, whether they were maintaining and making sure that there was appropriate documentation and oversight," says Tim Burniston, vice president and senior director of Wolters Kluwer's risk and compliance consulting practice.
Wolters Kluwer (WKL) is among a handful of tech and consulting firms that provide tech and services that help mortgage lenders manage and automate documents, as well as ensure those documents include the proper disclosures and are compliant with federal, state and local laws.
As the dust settles on the real estate crisis and blame gets more firmly assigned, mortgage lenders will have to pay more attention to documentation and the activities of third-party providers of services such as collections, underwriting and legal assistance.
Pressure is coming in a couple of fronts. The CFPB, which was created by the Dodd-Frank Act, is requiring lenders to take more responsibility for documents provided by third parties, or including information supplied by third parties. And in a potentially damning development, foreclosure processing is being scrutinized, with a Treasury examiner contending the OCC failed to spot improper foreclosures. The Treasury’s report will likely lead to more scrutiny of how lenders use third party information as part the foreclosure process.
"Since the Treasury report and the news accounts we've seen an interest in the topic from clients, particularly those looking at vendor management products and looking to assess where their strengths and weaknesses are. They need to figure out the best practices," Burniston says.
The scandal surrounding incomplete or inaccurate foreclosures first came to light a couple of years ago, when it was found that some banks had engaged in what's commonly called "robo-signing," or non-compliant foreclosures executed by fraudulent or incomplete documents designed to shorten the lengthy, document-heavy foreclosure process. The nation's five largest banks paid the government $25 billion to settle robo-signing claims, but didn't admit wrongdoing.
Of interest to document management firms and bank compliance departments is the new Treasury report, which says the OCC did not initially identify foreclosure documentation as a significant risk, instead focusing on lender compliance with federal laws. That shortcoming signals an increase in focus on documentation and third parties in the future. The OCC says it plans to review foreclosure-related complaints as part of a 2013 update to the Mortgage Banking Handbook, a document that hasn't been updated in 14 years.
"The instances of robo-signing are a problem for loan servicers because they could not retrieve original documents signed off on by a borrower such as the mortgage contract," says Christine Pratt, a senior analyst at Aite Group.
Neither the OCC nor the CFPB have issued actual regulations with specified penalties for lenders if third-party information or documentation are out of compliance. But the momentum is toward more government scrutiny.
"Financial institutions need to treat third parties as if they are part of the organization rather than a black box, making them responsible and accountable," says Todd Cooper, an executive vice president and general manager at Wolters Kluwer's enterprise risk compliance line.
In addition to automating as much of the document prep and delivery as possible, Cooper suggests lenders actively query their vendor suppliers, asking about the suppliers' risk assessments, controls and how the vendors plan to abide by those controls. He also suggests independent testing of vendor controls.
"You have to tell vendors what you expect to see changed," says Cooper, who says new software can formalize document updates and use the web to push those updates from the lender out to the vendor's document delivery systems. "[Documentation] is an area where it's been tough for vendors to keep up. Dodd-Frank has a rolling impact on a variety of different transactions."
Pratt says the technology that's able to prevent robo-signing is in line with IBM's and Lexmark's business process and content management solutions, which she says should help with retrieving the compliant original documents.