Pursuing Compliance and Efficiency Hand in Hand
Batte, Mary Bruce, Ulsch, Janis, Mortgage Banking
COMPLIANCE AND PROFITABILITY ARE the issues most on servicers' minds today, judging from the calls our firm has been receiving. Servicers say they will be spending far more money on compliance and improving efficiency over the next 24 months. The Sarbanes-Oxley Act of 2002, the Gramm-Leach-Bliley Act of 1999, predatory servicing publicity and the response of regulators and investors are driving the compliance emphasis. Improving efficiency to boost profits is the impetus for operations reviews. In our firm's opinion, a successful endeavor in either compliance or operations improvement will be predicated on undertaking both initiatives in concert, because the answers to problems in both areas are complementary.
Given the pressures facing servicers today, my colleagues and I have been considering how compliance and efficiency can be improved through an integrated initiative. Without such an approach, servicers leave themselves open to problems as predatory servicing continues to sizzle in the courts, press and regulatory agencies.
Servicing compliance has been given little attention in most companies. While the Department of Housing and Urban Development (HUD) dictates servicing compliance for HUD-approved lenders, and the government-sponsored enterprises (GSEs) encourage servicing compliance reviews, there is no requirement for conventional loan servicing compliance monitoring. All too frequently, compliance departments and outside parties are testing areas far less frequently than monthly, and their auditors may have familiarity but lack depth in the areas they are testing. Their focus is on statistics, and the responses to findings are either defensive or fail to result in meaningful changes to procedures or controls.
In the emerging environment, lenders need far more meaningful servicing compliance monitoring. They must not only track compliance with specific regulations and investor requirements. Servicers need to examine areas of their operations where their regulators, GSEs and other investors are silent, with a critical eye to establishing customer service standards and fairness, then develop policies and procedures as well as performance standards to cover them. Compliance needs to track these areas as well, and in partnership with servicing management, develop meaningful solutions when problems are found.
The need to invest dollars in meaningful compliance comes at a time when mortgage banking profits will be squeezed by the drop in production and servicers are seeking ways to reduce their costs. We submit that compliance should be an integral part of any meaningful operations improvement effort. Improving compliance needs to be one measure and goal of improving operational efficiency. An operations review to improve efficiency must include compliance testing.
Operational changes should be a high priority in functional areas where compliance issues are uncovered in the reviews. Servicing compliance experts and servicing operations experts need to work together to craft policies and procedures, performance standards and best practices. They also need to agree on what compliance testing will be done, by whom, how frequently, and how adverse findings will be addressed.
Second, compliance departments--regardless of where they report--need re-engineering skills to help business units make changes that will dramatically and efficiently reduce the number of compliance exceptions that not only pose risks, but also consume valuable resources to redress. Strong business re-engineering skills are needed to help operations managers identify solutions to avoid the most serious problems going forward. The scope of compliance monitoring can be expanded to monitor how successfully individuals meet certain performance goals designed to protect consumers or to provide better customer service.
The pressures driving the necessity for improvements in operations and compliance are the same, in many respects. …