Magazine article Mortgage Banking

Despite Rising Costs, Servicing Could Be Profitable Again

Magazine article Mortgage Banking

Despite Rising Costs, Servicing Could Be Profitable Again

Article excerpt

FOR THE LAST COUPLE OF DECADES, the mortgage industry overall has been very lucrative for lenders and servicers, especially if you ask the Center for Public Integrity, Washington, D.C. However, the 2008 financial crisis changed the industry landscape and the cost of doing business forever.

Regulatory bodies such as the Consumer Financial Protection Bureau (CFPB) are now requiring servicers to be more mindful of business practices as well as how consumers are treated. In turn, companies are hiring compliance officers and installing compliance systems to help in their efforts.

The cost savings once gained by the use of technology have been decimated by the cost of compliance. And while the high level of profitability may be a thing of the past, it is possible for servicers to regain some of their profitability.

New regulations adopted during the last five years have exponentially changed the servicing industry more so than the origination industry, as it was not as highly regulated. To put further constraints on servicing, the National Mortgage Settlement (NMS) was endorsed by most state attorneys general, federal agencies and the nation's top five lenders and servicers. This was the first step toward addressing unscrupulous business practices engaged in by some in the servicing industry.

As per the Office of Mortgage Settlement Oversight, a total settlement of $25 billion was agreed to by the five affected servicers, with some of it paid in fines and some of it provided in mortgage relief for affected borrowers.

The NMS also established a set of servicing standards that requires communication with borrowers, single point of contact, adequate staffing levels and appropriate standards for executing documents in foreclosure cases. These requirements also increased the cost of doing business for servicers, not to mention the fines leveraged against them if they did not meet them.

Government agencies have increased regulatory oversight for the sole purpose of protecting consumers. According to the CFPB, 82 percent of all mortgage complaints from consumers based on complaints filed on the CFPB's site relate to mortgage servicing. This will undoubtedly mean more scrutiny by the bureau of mortgage servicing.

In an October 2015 CNBC article ("Misbehaving Banks have Now Paid $205 billion in Fines"), mortgage lenders and servicers had paid more than $200 billion to regulators in fines and settlements.

Unfortunately, the regulatory agencies have given little, if any, thought to who would pay for those extra compliance efforts. This now leaves servicers in the position of having to serve clients effectively and maintain compliance, all while trying to stay in business.

Being prepared for an audit and being fully able to defend business practices adds a new and costly dynamic to servicing. One of the most important aspects of passing an audit is showing there is commitment from the top of an organization and the desire to be compliant.

Servicers must spend money on compliance management systems (CMSes) and/or compliance officers.

With new regulations such as the Truth in Lending Act (TILA)-Real Estate Settlement Procedures Act (RESPA) Integrated Disclosure rule (TRID) and updates to existing regulations such as the Home Mortgage Disclosure Act (HMDA), CMSes will prove far less expensive in the long run than the possibility of imposed fines.

Small and medium-sized servicers are partnering with compliance vendors that provide products delivered under a Software as a Service (SaaS) pricing model. …

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