Deborah J. Grissom and Stephen W. Pearlman
A portfolio servicing transfer is a time of challenge for any organization. When an institution is in the midst of a servicing transfer-whether as part of a portfolio acquisition, system change, or merger-operational, compliance, and data issues surface internally and must be rapidly addressed to keep the transfer on track. Like spring cleaning, it takes a diligent effort to prioritize and eradicate the many issues coming from all directions. Success requires a dedicated team with a strong, capable leader who acts deliberately along the lines described below.
Issues Management: Sort it Out
The issues surfaced by the team, often existing servicing problems, compliance weaknesses, data inconsistencies and other "skeletons in the closet," are likely to pile up if you don't get ahead of them. Without prompt attention, these issues can delay or even destroy your deal. Clearly, mergers and portfolio acquisitions won't close with unresolved compliance issues, but care should also be taken with any system migrations.
We recommend building a dedicated issues management process around the transaction in advance, to expedite the identification and resolution of problems as they arise. Think of it as triage, determining the severity of issues and taking the right steps, in the right order, to mitigate them. An effective process will not only enable such determinations, but also ensure that sufficient resources are assigned to remediation.
Put Together a Winning Team: Experience is Key
Leading such an issues management process is not an easy job (or one for the faint of heart). The project leader and team must have broad subject matter expertise to handle all three types of issues-operational, compliance, and data. The issues won't come neatly packaged by subject matter and will likely cross into multiple areas. It will be the job of the issues management team to coordinate the different subject matter experts to develop the right solution to the problem at hand.
In our experience, it is critically important that the team be laser-focused on transaction-related issues alone. They have to act fast-faster than the speed of business-as-usual. Otherwise, given the volume of issues and the timing requirements of any transaction, the team could become overwhelmed and the transaction derailed.
Regulatory Strategy: Consider Long-term Effects
Regulatory requirements around a mortgage portfolio transaction can make the difference between success and failure, requiring a well-developed regulatory strategy. Regardless of the financial success of a transaction, it will not be successful if the regulator concludes you haven't appropriately managed the risk. An outstanding rate of return won't look nearly as impressive if it also comes with a couple of "matters requiring attention" (MRAs).
Your strategy should address key regulatory requirements for a mortgage transaction, especially those that are related to borrower harm. There is significant borrower harm that can result from a mortgage portfolio transaction, as the Consumer Financial Protection Bureau (CFPB) has noted, including "weak customer support, lost paperwork, and mishandled accounts that can lead to many wrongful foreclosures and other serious harm." The CFPB specifically called out such risks during mortgage servicing transfers in CFPB Bulletin 2014-01
and again in a publication titled "Supervisory Highlights: Mortgage Servicing Edition."
Your strategy should contemplate the detailed requirements, the steps you will take to satisfy the requirements, and the evidence you will have to show that the requirement has been satisfied. Consider creating specific tools to document your compliance efforts. Examples might include checklists created from regulatory guidance such as CFPB Bulletin 2014-01 or examination guidelines.
Regulatory Success: Two-way Communications
A key component of a successful transaction is effectively communicating with regulators. There will be external pressure from regulators and investors, as well as internal pressure from your own corporate audit, compliance, and risk management executives, to understand how regulatory risks are being addressed. As a result, it is critical to plan out your regulatory communications. One approach is to use "reporter" questions (who, what, where, when, why, and how) to help develop your approach. Thinking through substantive answers to these questions before any conversation with regulators will help ensure a constructive dialog. Below are examples of how this might work in practice:
Which regulators and internal stakeholders will you communicate with regularly?
Which items should be communicated to the regulators and at what level of detail?
Does the issue require calling an examiner or can it wait for a normally scheduled meeting?
Data Transfer: Map Carefully
A basic data transfer, moving the data in a particular field from one system to another, sounds easy. But mapping data incorrectly can produce unintelligible results if mishandled. Understanding field definitions and field use on both sides of the transfer is essential to a smooth transition. Testing this understanding before going live provides further confidence that the transaction will go as intended.
Regulatory Relief: A Little Help from the Bureau
One of the most challenging compliance requirements for a mortgage servicing transfer has been the handling of borrowers that have started the loss mitigation process at the time of the transfer but have not finished the process. Completing these "in-flight" loss mitigation transactions within the regulatory timeframes has created challenges. Now, though, a recent CFPB provision is expected to provide some useful relief, in the context of amendments to the mortgage servicing rule that take effect October 19, 2019
Under the changes, a servicer acquiring servicing (transferee) will have 10 days from the transfer to provide a borrower with a letter acknowledging a loss mitigation application, compared to the current requirement to provide the letter within 5 days of the prior servicer's receipt of the application. In addition, the transferee will have 30 days from the transfer to make a decision on loss mitigation applications and appeals submitted to the previous servicer but not resolved.
The codification of these extensions of time for "in-flight" loss mitigation allows all parties to the transaction to strike an appropriate balance between the requirements to timely process loss mitigation requests and the challenges of transferring loans that are in the middle of a loss mitigation process.
Testing: Getting it Right
Testing is needed both pre- and post-transfer. Pre-transfer, to be sure any issues identified upfront have in fact been remediated before hand-off to the new servicer and to be sure that data mapping and IT development are working as intended. Post-transfer, to ensure that data was mapped and transferred correctly, regulatory timelines were met, and supporting documentation and loan history was received. In our experience, no matter how carefully data was mapped and tested before transfer, some challenge arises post-transfer that must be addressed. Your goal should be to find these issues through your testing, rather than through operational breakdowns, so that you can continue without any disruption to borrowers or problems with regulators.
Conclusion: A Clean Sweep
While not everyone enjoys spring cleaning, the value of dusting the attic and removing the skeletons in the closet is enormous. Similarly, the value of a thorough cleaning of your mortgage portfolio as part of a transaction can result in reduced issues and smoother servicing for years to come. A dedicated and well-staffed issue management team executing a well-planned regulatory and communications strategy can help you successfully navigate a mortgage servicing transaction and enjoy the future benefits of improved servicing.
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Treliant Risk Advisors
, Compliance, Risk Management, and Strategic Advisors to the Financial Services Industry, brings to you New Coordinates, a quarterly newsletter offering insights and information regarding pertinent issues affecting the financial services industry. This article appeared in its entirety in the Spring 2017 issue. To subscribe to our quarterly newsletter, please Contact Us