• Evaluate the assumptions used to derive the FMV* paid for the marketing services performed.
• Ensure the mortgage company is receiving the services set forth in the MSA.
• Provide documentation for regulators of periodic testing and compliance with RESPA (Reg. X) and TILA (Reg. Z).

Economic Indicators and Impact on the Mortgage Market
The Chief Economist of the MBA, Mike Fratantoni, Ph. D. believes that the industry is facing serious headwinds from low employment growth, and an elevated unemployment rate stemming from the recession of 2008. The MBA believes that the bulk of new originations in the next two years will be from purchase mortgages.

Servicers will have to adapt to an environment where compliance and control over defaulted mortgages will be the driver of servicing costs. Because unemployment remains elevated, the market remains under pressure from defaulted loans.

CFPB Final Mortgage Servicing Rules Effective January 10, 2014: The Current Servicing Environment
The CFPB, according the Steve Antonakes, is concerned with consumer complaints as it relates to mortgage servicing. The new servicing rules have changed how loans are serviced. Some examples are:

• Single point of contact
• ARM adjustment notifications
• Updates to the Qualified Written Request rule
• Prohibition of “dual tracking”
• Periodic billing statements

The CFPB has broad authority to oversee and rule upon 19 federal regulations, which SQC believes the most important being Reg X, Reg Z and UDAAP. A servicer will be tested by the CFPB through a servicing mortgage exam administered by the CFPB. It is of critical importance that servicers are familiar with and have implemented the mortgage serving rules. The CFPB did not reveal how they select servicers for examination. They intimated that servicers are selected for examination based upon;

• “Current Events” – Areas of high risk that arise from social pressures
• Consumer Complaints
• Arbitrary CFPB selection

Servicers should have already prepared for the final mortgage servicing rules by:

• Implementing policies and procedures that follow the CFPB’s mortgage servicing rules
• Engaging an independent party to audit and review the servicing platform on a loan level basis.

It is important to prepare for the mortgage servicing rules that went into effect in 2013. The CFPB has issued its 2013 Supervisory Highlights that focuses on a group of five servicing aspects and will be important Areas of Interest for the CFPB in 2014:

• Loss Mitigation
• Servicing Transfer of delinquent and performing loans
• Credit Reporting in line with FCRA requirements
• Data Integrity of documents from and sent to the borrower
• UDAAP as a “catch all” for any items that can be construed as a misrepresentation of servicing

Regulatory Oversight
The OCC, the FDIC, the Federal Reserve, the FFIEC, and the CFPB have expanded their enforcement activity targeting vendor management. This is important to mortgage servicing due to the amount of vendors that mortgage servicers utilize to service loans. These regulatory agencies will expect servicers to:

• Maintain adequate risk assessments of their vendors
• Complete due diligence reports
• Maintain current and appropriate contracts
• Monitor performance and financial conditions
• Maintain contingency plans in the event the relationship with the vendor ends

The CFPB emphasized that if the consumer can be harmed in any way, the degree of oversight must be of the highest level.

During the servicing conference Calvin Hagins of the CFPB stressed the need to have adequate internal controls and independent oversight of vendors. The risk of failing to properly oversee vendors could lead to civil and criminal penalties.

Servicing Business Costs and Needs
The current compliance environment is placing a lot of downward pressure on servicing revenues. However, MSRs are being priced competitively due to a surge of new bidders. This is creating a very liquid environment for MSRs. There is a strong focus on the cash flows that performing MSRs can provide. This is partially a byproduct of a reduction in many of the ancillary fees (such as pay by phone and modification fees) that servicers historically could attain additional revenue sources. Compliance costs and costs associated with loan delinquencies have driven up direct servicing costs on a per loan basis.

Despite the spike in servicing costs, we expect MSRs to be an attractive investment because interest rates still remain at a generational low, thus prepayments should remain very low. As a result, some professionals at the Servicing Conference believe that loan duration could extend to 10 years.

Conclusion
It’s important for servicers to provide continual oversight of their sub servicer or internal servicing department. The conference sessions made it clear that consumer complaints, servicing/sub-servicing oversight, and vendor management will be a focus for 2014.  If you’re interested in learning more about common servicing/sub-servicing findings or setting up an oversight program please contact SQC at info@subsequentqc.com or (818) 304-8392.