Being scrutinized is nothing new for servicers: The Consumer Financial Protection Bureau (CFPB) and state regulators have been doing it for years. But it was noteworthy that at year-end 20 state attorneys general took an additional step of sending a letter to servicers warning them that they are being closely observed as forbearance rules expire and loss mitigation activities, including foreclosures, recommence. The letter followed an earlier pronouncement by CFPB that “being unprepared was unacceptable.”
Based on our discussions with clients, servicers have heard these messages and are passing it on down the line. Clients are telling their vendors that they must remain diligent of all applicable regulations and that they will be held accountable for non-compliance when it comes to loss mitigation activities.
Complaints drive scrutiny, and when there is an unusual uptick that will likely be viewed as a red flag for possible non-compliant activities. Servicers should prepare to address the increase in consumer complaints and develop strategies to manage escalations.
There are specific steps servicers should take to make sure they are in compliance with federal, state, local and investor COVID-19 guidelines as they try to assist delinquent borrowers. Servicers need to have the structures in place to quickly implement new guidelines, which means identifying the impact of new requirements and being able to operationalize them by the given deadlines.
Our sister group, Covius Compliance Services, tracks servicing-related legislation and regulation well before it is enacted. This provides us and our clients maximum lead time to implement changes compliantly. It also enables us to quickly update and modify our template libraries, so servicers can be assured they are using compliant documents.
In activist states, like New York and California, we’re seeing servicers engage with outside counsel to augment internal Iegal and compliance resources. Clients are also sharing their insights with peers at compliance-focused events, such as our monthly compliance webinars.
Of course, some borrowers are not going to be a good candidate for modification and will unfortunately move into foreclosure status. That’s why developing best practices for loss mitigation and foreclosure activities in the new post-COVID era is imperative.
There are currently more than 940,000 seriously delinquent borrowers. These borrowers, like all impacted customers, will require clear and documented information so they know what options are and are not applicable to their specific situation.
Prior to undertaking more serious default actions, servicers need to make sure their policies, procedures and vendors are compliant and will withstand scrutiny. Our group, Clayton’s Servicing Oversight Group, routinely reviews and stress-tests servicer readiness in these areas.
Normally we start with an operational assessment involving an in-depth review of the servicer’s policies and procedures, followed by a discussion with all necessary parties to make sure that the policies and procedures are in line with investor specific guidelines, regulations and best practices. We look at all aspects of the servicer’s business with a focus on the default department of each servicer, making sure to target their loss mitigation and foreclosure processes with the goal of mitigating risk in every aspect.
After operational assessments are completed, we typically suggest more in-depth loan-level testing regarding any area we see potential issues. This allows us to make sure the execution of the previously reviewed policies and procedures are indeed being correctly executed.
If servicers find they are having issues keeping up with the amount of loss mitigation reviews with the recent increase in loss mitigation application volumes, our Servicing Oversight group can help them clear out any backlogs and stay caught up by conducting loss mitigation underwriting reviews and rendering a final decision.