November 18, 2021|CFPB, Mortgage Industry, Professionalism, Servicing, Vendor Management
With Thanksgiving next week, it’s important to remember to be grateful for all that we have, such as our families, friends and work colleagues. Not just people though. We should also be grateful for the things that make our lives easier: like new hip joints[1], medicines and cars that are reliable. People often take many of those things for granted and fail to be grateful for so much that we have today. I was properly and rudely reminded of this last week when I arrived at the Phoenix airport just as power had gone out in Terminal 4’s C gates (see, news article with photos). Coincidentally, Rob Chrisman was there at the same time trying to catch a connection. It really is amazing how the loss of something as ubiquitous as electrical power can turn a modern metropolitan airport into pretty much a third world bus station in minutes.
Fortunately (and gratefully) I was able to reconnect with Rob later in the week in San Francisco at the Garrett McAuley client and friends appreciation dinner where I also was able to share time with Jeremy Potter and many other friends and new acquaintances. Along those particular lines[2], before dinner Mitch Kider[3]did a great compliance-focused stand-up comedy routine.[4] Speaking of stand-up comedy (and how things can be quickly changed), Mitch knows stand-up comedian and star of 90’s sitcom Mad About You, Paul Reiser from when they were teenagers at summer camp. Mitch claims that Reiser’s frumpy, older and heavier looking character (above) on the very funny Netflix series Kaminsky Method is all just makeup and protheses. For that I am grateful too.
Servicing on the hot seat
An easy segue from Thanksgiving, gratitude and comedians to a discussion about servicing and subservicing issues escapes me, so I apologize for the non-sequitor[5]. In any event, mortgage servicing has been a focal point of the CFPB since the agency was set up in 2012, but when the forbearance plans were initiated, that focus went into hyperdrive (in particular with respect to fair lending/equity concerns).
Now, however, the rest of the federal regulators are getting into the act. As noted by the MBA, the grace provided to servicers early in the pandemic in 2020 is no longer available and the CFPB’s mantra to servicers is “unprepared is unacceptable”. Meanwhile, one of the nation’s oldest and largest subservicers recently got hit with a regulatory consent order from the OCC related to inadequate risk management practices that one prominent industry observer called a “wake-up call for nonbanks”. The CFPB’s own headline reads CFPB Takes Action to Prevent Avoidable Foreclosures | Consumer Financial Protection Bureau (consumerfinance.gov). As recently noted by one compliance observer, “avoidable foreclosure” is the CFPB’s new word for “foreclosure”. Maybe CFPB thinks all foreclosure is “abusive”. Yikes.
I haven’t talked a lot about mortgage servicing in this blog other than last April when I wrote my floor wax/dessert topping comment letter/blog post on the CFPB’s proposed servicing rule. Frankly, I thought that was one of my better Musings, but it wasn’t as widely read as many others, and, even more disappointingly, I got zero feedback from the CFPB in their Final Rule.[6]That Final Rule, however, is causing all kinds of distress for servicers who claim, among other things, that they are challenged to comply with the Final Rule’s prohibitions on commencing foreclosure actions before 2022 in light of investor loss mitigation timeline requirements.
Why should you care?
Maybe you’re a mortgage banker who isn’t too concerned about this because you signed a contract with a subservicer who agreed to comply with all Applicable Laws[7] in handling the servicing duties for your company’s servicing portfolio. I discussed liability issues in owning the customer relationship in a recent blog post (also published in the October 2021 edition of Mortgage Banking Magazine). But, owning servicing is different because that downside liability can be passed onto a third party. Alternatively, maybe you don’t even know what a servicing portfolio is.[8]Either way, I urge you to keep reading, but the mortgage bankers familiar with servicing rights can skip the next few paragraphs where I explain about servicing to the uninitiated.
Servicing explained
Most people don’t understand mortgage servicing and mortgage servicing rights: even a lot of mortgage bankers. Frankly, it took me a couple years of being in the mortgage business to really get it and I’m sure there are people who will say I still don’t. Anyway, the easy part to understand is the work the servicer has to do in relation to consumers (collect payments, manage escrows, answer customer questions, deal with defaults, loss mitigation and foreclosure, etc.). That stuff makes sense to anyone who has ever had a loan. That part of servicing is generally easy to understand, but as noted with the headlines above, it can be very hard to do properly.
Conversely, the hard part to understand is how the obligation to service a consumer’s loan is something a mortgage lender can buy, sell and pay someone else to perform for them (subservicing). Whoever owns the servicing gets paid by the loan owner to do that consumer work. So, servicing is also a revenue stream that is separate from the ownership of the loan itself (that’s hard to understand!). That part can be very hard to understand, but the buying and selling part is easy to do because servicing is an asset that has a fairly liquid market.
As noted above, mortgage bankers can pay someone else (a subservicer) to do the consumer facing work (and investor reporting and compliance), so they really only have the liquid asset (and customer relationship upside) to worry about.[9]Subservicing is a solid idea that has been around for decades. Subservicers can usually do the work of servicing a lot more efficiently through systems and scale[10], enabling the mortgage banker to focus on origination while holding the servicing asset as a hedge to periods of lower originations.
Again, understanding that servicing is a revenue producing asset and not just a liability to perform work is the counterintuitive part. That’s as much as I am going to explain about that because I would lose too many readers. Just trust me; servicing is a liquid asset even though it’s coupled with the responsibility to collect and remit payments and otherwise service the consumer’s loan.
Worry about subservicing liability
Subservicing usually works pretty well and mortgage bankers tend to take that for granted[11], but occasionally[12] there can be issues arising from things being mishandled by the subservicer. For example, errors in application of payments by consumers and accounting mistakes with loan investors can frustrate and cause additional work for mortgage originator staff and customers. Mishandled consumer interactions in customer service can also create reputation risk and consumer complaints for the originator.
Significantly today, however, I have observed the desire of subservicers to limit their exposure to the downside risk of compliance. Yet, the intense regulatory scrutiny to servicing compliance right now (noted above) will be visited upon the servicing owners if the subservicer doesn’t perform as required. This is because the servicing owner is accountable for that compliance and will be held financially and regulatorily responsible if the subservicer doesn’t step up. Further to that issue, I have had a chance to review multiple subservicing agreements recently and have been surprised and dismayed to see limitations of liability in the subservicer’s form agreements suggesting that their agreement to comply with all Applicable Laws is extremely limited or hollow.[13]Specifically, many subservicers who are challenged by compliance with potential conflicts between the CFPB’s new Rule and investor loss mitigation requirements may look to those limitations on liability as an opportunity to limit their exposure to regulatory fines or class action damages arising from the challenges of compliance with the CFPB’s expectations. Along those particular lines[14], at least one prominent subservicer sent a notice to its clients essentially abdicating the responsibility for resolving those conflicts back to the client by forcing the client essentially to choose its poison.[15]If a subservicer won’t stand behind its work or is unable to do the job required by Dodd Frank and expected by the CFPB, unfortunately the servicer is going to be left holding the bag and that asset is going to carry a much greater liability than the accountants are currently booking[16].
[1] I just got a new hip myself on 11/16. I’m particularly grateful for Tylenol and Ibuprofen, but most of all, my patient and caring wife.
[2]One of Mitch Kider’s catch phrases is “along those particular lines”. In fact, some day I would like to play “Hi, Bob” on that at one of Mitch’s speeches (with drinks). I trust Mitch would have a sense of humor about that because, as noted infra, he’s a friend of Paul Reiser.
[3] Mitch’s firm, Weiner, Brodsky & Kider, was one of my top “go-to” mortgage banking firms when I was in-house from 1994-2009. Mitch says he taught me everything I know, but not everything he knows. I am, nonetheless, grateful for his counsel and tutelage.
[4]While Mitch was entertaining, substantively, mortgage compliance and the issues he discussed are no laughing matter.
[5]Maybe I’ll get there by the end of this Musing.
[6]Usually in a final rule, the regulator comments on unique comment letters in the preamble. I got nothing but crickets from CFPB. That was cold! If I was them, I would have said something like, “One commenter submitted a blog posting as a comment letter. We don’t think foreclosures are funny and we love Duncan Kennedy and the Crits. It appears that commenter was suffering from cognitive dissonance, so we rejected his comments summarily”…., or something like that.
[7]This is typically defined in a subservicing agreement to mean all state and federal servicing related compliance laws (such as RESPA) as well as all investor requirements from Fannie Mae, Freddie Mac and GNMA.
[8] Hi mom!
[9] That’s the plan, anyway, but read on.
[10]That is, until faced with massive foreclosures and loss mitigation work as was the case in the meltdown period.
[11] Did I just connect the gratitude and taking things for granted theme with servicing?
[12] Lately, it has been more than an occasional issue. I have been helping a lot of mortgage bankers over the past year and a half that are looking to find a different subservicer. Unfortunately, that trend is accelerating.
[13] Many subservicers will not like this footnote. If you are hiring a subservicer that wants to limit their liability for errors or the failure to comply with laws or the contract, you should be very worried about why they are doing that. This is a negotiable point for these agreements and highlights why it is important you have an attorney review all of your vendor agreements. When you hire someone to perform a professional service such as subservicing, they should stand behind their work. I stand behind my work in my legal practice and obtain professional liability insurance to cover my risks if I screw up. Subservicers should do the same. They are not selling software.
[14]Sorry, Mitch, I couldn’t resist.
[15]That attempt to unilaterally amend the subservicing agreement is contested.
[16]Again, I have been accused of wanting to be an accountant in the past (mostly by accountants). This is not a desire of mine, but I would definitely do some mortgage banking accounting things differently if I was “king” of the FASB.