Mortgage servicing – planning ahead for your next regulatory review

Mortgage servicers have been in reaction mode since the onset of the pandemic more than three years ago. The general consensus is that servicers performed very admirably when reacting to pandemic policies by implementing procedures quickly to avoid servicing challenges for borrowers. The success of the industry’s response, however, is clouded by inconsistency in how servicers are performing. In addition, the current inflationary situation and economic indicators are pointing to the possibility that this difficult environment will persist into 2024.

Previously, regulatory agencies have lacked the resources to effectively monitor the behaviors of servicers. However, as Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra suggested at the Mortgage Bankers Association’s National Secondary Conference in May 2022, servicing has been the focus for agencies. The prospect of a regulatory audit for a servicing operation can be daunting. However, with a detailed action plan and sufficient planning to shore up identified areas of concern it can be managed effectively—especially if the performance gaps fall within the key observations of CFPB reports. Results of these CFPB servicing audits can be found in the CFPB’s Supervisory Highlights publication at Supervisory Highlights | Consumer Financial Protection Bureau (consumerfinance.gov).

Conducting thorough policy review

The first order of business is to conduct a thorough review of the policies and procedures that define requirements for how the servicing operation runs in accordance with all applicable regulatory, agency, and Government Sponsored Enterprise (GSE) guidelines. Next, a gap analysis must be performed evaluating what is codified in the document against expected applicable practices. In addition, an effective change management process provides an auditable trail of updates that demonstrates a proactive approach to servicing policy management. The dissemination of policy and procedural changes—coupled with the relevant associate training—within the servicing organization further bolsters the foundation of effective and compliant operations. Having current and detailed policies and procedures is a great base, but periodic QC (Quality Control) testing is critical to understanding how the servicing operation performs to those expectations. QC testing results can signal the need for course corrections or provide confidence during regulatory findings.

The good news is that the CFPB is being transparent in signaling what their specific focus will be in terms of the mortgage industry. The Mortgage Servicing COVID-19 Pandemic Response report, issued in May 2022, noted some key observations: