Are You Prepared for Your Next Audit? 
Operational Reviews Ensure Ongoing Mortgage Servicing Compliance

Zaira Rodriguez, Clayton Servicing Oversight Operations Manager

If there is one constant in the mortgage servicing industry, it’s that compliance is always a moving target, and that means operations teams are often required to evolve. Ongoing servicing updates due to regulatory compliance changes or shifts in company product strategies often lead to changes in operational servicing procedures, which means internal written policies and procedures should be reviewed and updated proactively. The primary objective of Operational Review assessments is to review mortgage servicing-related policies and procedures within each department and interview key servicing personnel to ensure ongoing servicing consistency and stability. Operational Reviews paired with loan-level quality control testing also help determine compliance with federal requirements, including CFPB fair lending, VA, FHA, MERS®, HUD, MPF®, OCC and GSE regulations. Clayton’s Servicing Oversight team works with mortgage servicers to evaluate or implement such Operational Reviews.

Regulatory audits can be invasive and time consuming. To prepare, institutions and mortgage servicers employ Operational Reviews to identify and assess key mortgage servicing operational risks that a financial institution may confront. These reviews also test the effectiveness of policies and procedures to ensure there are no gaps or discrepancies within a given process. Operational Reviews are customizable to client needs and mortgage servicing requirements, including a focus on performing servicing, default servicing and/or cybersecurity.

Review areas can include (but are not limited to):

  • Staffing, Training and Development
  • Systems and Information Technology/Cybersecurity
  • Quality Control and Assurance
  • Legal, Risk Management, Compliance and Internal Audit
  • Vendor Management and Oversight
  • Payoffs, Loan Boarding and Release
  • Document Preparation and Records Management
  • Special Loans (e.g., ARM Management, SCRA, HELOC)
  • Taxes, Insurance and Escrow Management
  • Customer Service and Research
  • Complaints and Disputes
  • Default Management (Day of Delinquency – Foreclosure)
  • Cash Management and Payment Processing
  • Accounting, Investor Reporting and Remittance
  • Claims (Investor and Mortgage Insurance)

While some institutions have lines of defense and internal audit committees that review post-closing/originations, pre-funding and investor repurchases, smaller financial institutions often do not have this luxury or bandwidth. Any lack of quality control plans can put them at risk for hefty legal fees and unwanted headlines if loans are not serviced correctly. The results of Operational Review assessments can streamline the life-of-loan process by strengthening the lines of defense that oversee day-to-day operations.

Operational risk extends into cybersecurity. With the emerging cybersecurity challenges facing our industry, Clayton has noted several risks within servicers’ third-party vendor management processes. In some cases, these risks have resulted in ransomware attacks leading to litigation, including class action lawsuits. One of Clayton’s recommendations: servicers need to review vendor management questionnaires and update processes for onboarding new vendors and reviewing high-risk partners.

In recent Operational Assessment engagements, the Clayton team has found single points of failure within servicers’ day-to-day operations. Often these failures begin with the lack of written policies and procedures that should be followed to eliminate gaps in processes. Our assessments not only find gaps, but they can also produce insights that lead to process improvements, as presented below.

Recent Clayton Servicing Operational Review Insights:

  •  In a recent finding, Clayton identified an opportunity for a small servicer to run bankruptcy filing scrubs on a weekly basis either in-house or through a third party to mitigate risk. This approach enabled the servicer to identify more borrowers in bankruptcy and to ensure the properties are accounted for even after discharge should a borrower become delinquent after the bankruptcy case.
  • Clayton has identified opportunities for several servicers to limit account functionality and the ability to make payments on the servicer’s website or mobile application for borrowers in active bankruptcy cases. When it comes to instances like these, lack of account restrictions or appropriate disclosures on the account may be construed as attempts to collect a debt which is against Federal Bankruptcy guidelines that limit collection activities while the borrower is protected under the automatic stay.
  • Clayton also recently identified an opportunity for a servicer to review and revise its 45-day Delinquency Notice to include the information as required by RESPA as the servicer’s 45-day notice letter template was missing required information, such as the servicer’s mailing address, and how the borrower could obtain more information about loss mitigation options and homeownership counseling.

The bottom line is this: don’t wait to become headline news or the target of a regulatory audit or consent order; be proactive, conduct operational reviews and create an operational review process that keeps your team ahead of the curve.

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