THE CHANGING FACE OF VENDOR MANAGEMENT AND RISK ASSESSMENT

Transcription

1 THE CHANGING FACE OF VENDOR MANAGEMENT AND RISK ASSESSMENT Brian Levy Katten & Temple, LLP 262/ Presented October13, 2012 at ACMA Annual Meeting Kohler, Wisconsin

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3 Residential mortgage loan servicing was a sleepy department (escrows and coupon books). Highly local and fragmented business (no one with even 5% of the market). RE value declines were largely regional events (e.g. CA, TX) and not too severe. Servicers knew their markets and their vendors well. Generally rising RE prices nationally and stricter underwriting standards meant relatively few foreclosures and manageable workloads for loss mit groups and their vendors. Vendors (e.g., foreclosure attorneys, title companies and realtors) were local people well known to the servicers (Rotary clubs, golfing buds, etc.) Loss mit groups could follow same procedure with each borrower to realize on collateral when defaults occurred with little exposure for loss beyond MI recoveries.

4 Servicing functions increasingly handled with technology. Larger players sought to reduce unit costs by increasing scale. Through 90 s and 2000 s servicing was consolidated into very large national servicers reaping lower unit costs through technology and volume. MERS was universally implemented to save on record-keeping, recording fees and assignment costs. Growth created massive demand to replenish servicing base during refinance periods. Growth in lending spurred by relaxed underwriting led to further increase in housing rates and servicing portfolios. By 2011, the top 5 servicers held over 60% of all mortgage loan servicing (per Interagency Foreclosure Review). Large servicers required large, efficient vendors to support national operations.

5 Rapid decline in home values coupled with massive job losses led to loss mit groups being overwhelmed with defaults with high loss severity. Initially huge spotlight on origination practices as the source of the nation s economic woes. Politicians and regulators scrambled to place blame and offer modification programs to help with no concern for servicer capabilities. Loss mit teams and vendors were unable to scale up fast enough to accommodate growth in borrower needs or to facilitate orderly collateral liquidation. REO and other distressed asset transactions/can account for up to 50% of the transactions in a given market today.

6 Govt. relief programs demanded massive servicing team reallocation of resources and skills, but needs outstrip capacity. Govt. requirements and borrower situations in constant flux. Technology based servicing model proved incapable of handling the unique issues of loan modifications, foreclosures and REO sales. Complaints grow/troubled borrowers were dual tracked and/or bounced around without getting help, military servicemen had their rights violated and consumer attorneys found lots of documentation errors (real and imagined). Large servicers and their vendors, including some foreclosure counsel, cut corners on legal documentation angering sympathetic judges. Large servicers now have Consent Orders, $Multi-Billion state AG settlement, new State laws (e.g. CA) and the general ire (and lawsuits) of their borrowers and shareholders. CFPB (and California) publish servicing rule applying many of the requirements in the Consent/Settlement Agreements to all but the smallest of servicers.

7 NEW DEFAULT MANAGEMENT EXPECTATIONS ON SERVICERS. SCOPE OF IMPACT VENDOR MANAGEMENT HIGHLIGHTED.

8 Single point of contact. No dual track (foreclosure and modification). Servicing Compliance governance. Incorporate servicing into QC/compliance program Include board reporting and oversight Make no mistakes on the legal and documentation requirements. Record retention is key Affidavits must be accurate Assignments must evidence ownership-custody trail on original Notes Monitor statutory notice, filing and redemption time frames Monitor evolving state law on MERS, assignments and pre-fc management Vendor Management (Discussed in detail later) Mostly arising from publicized F/C counsel problems No more Fannie/Freddie F/C counsel panels How do you know if a lawyer is qualified or has done a good job? Can foreclosure counsel handle tricky borrower defenses? Before seeing a lawyer, see a lawyer first? Title Companies, Realtors, Property Preservation cos. roped in too

9 Compliance is an all hands on deck project for those with Consent Orders and AG Settlements. (Top 14 servicers-over 2/3 of market) Completely redesigning servicing and loss mit processes. Personnel are being retrained. New technologies are being designed and purchased. Vendors scrutinized in ways never before examined Comprehensive prescriptive nature of consent orders prevents other creative initiatives from being implemented. Independently audited for compliance by third parties Other Servicers Recent CFPB Rulemaking imposes same foreclosure prevention requirements as AG settlements and Consent Orders-exempts only those with <1,000 customers. CA and other states with their own similar rules Many wondering, Is this worth it? How will we address any noted deficiencies?. Also wondering, how will I explain my operation to avoid (more) regulatory criticism in my next exam?. GSE Alignment Initiative - changes to servicing guides Lesson: Losses are driven by poor servicing as much as poor underwriting. Lots of Other Servicing Responsibilities Beyond Default Management Periodic Statements Payment Posting

10 Despite the heightened focus, really no new concepts. Expectation to properly oversee and manage vendors, including: A risk assessment to identify the needs and requirements; Proper due diligence to identify and select vendors; Written contracts that outline duties, obligations, and responsibilities of the parties involved; and Ongoing oversight of the third parties and third-party activities. Each risk profile is unique, requires a tailored risk mitigation approach appropriate for the scale of the particular third-party relationships, the materiality of the risks present, and the ability to manage those risks.

11 Law Firms and Trustees SAMPLE SERVICER VENDOR CHART Property Preservation Property Management Loss Mitigation and Loan Modification MIS Foreclosure Inspections Inspections Credit Reports Servicing Platform Bankruptcy Tax Service Valuations LM Doc Review FC and BK Mgmt Eviction Insurance Monitoring REO Call Center and QRPC Loss Mit Solution REO Closings Escrow Accounts Customer Service Peripheral Systems Related Litigation Lender- Placed Insurance Payment Processing

12 Third-party vendors involved in default servicing AND the vendors of the third-party vendors. Servicer shall adopt policies and processes to oversee and manage foreclosure firms, law firms, foreclosure trustees, subservicers and other agents, independent contractors, entities and third parties (including subsidiaries and affiliates) [OCC Consent Orders] The CFPB issued Bulletin Service Providers on April 13, 2012 where the framework for similar third-party vendor rules and regulations will go into affect on the residential mortgage origination side of the business as well.

13 Understand the new expectations on servicers Get ahead of servicer questions/audits by being prepared with self-reviews: Document procedures (and follow them) Obtain a risk assessment and/or audit of your client s business Risk Assessment is the roadmap for the servicer to follow in its review. Using an attorney to conduct the assessment Attorney client privilege issues for sensitive businesses Regulators and consumer lawyers love to read critical internal audit reports-always be careful what is put in writing. Audit (internal or external) staff may lack technical skills to properly assess legal risks. Consider a SAS-70 Audit to demonstrate adequate controls over data and other information. Benchmark performance against industry standards. Take action in response to negative findings.

14 BRIAN S LEVY blevy@kattentemple.com 262/ (Wisconsin Office) 312/ (Chicago Office) 414/ (Cell) KATTEN & TEMPLE, LLP 520 S. DEARBORN ST. SUITE 1060 CHICAGO, IL 60605