Business Process Services. White Paper. Improving Regulatory Compliance in the Mortgage Industry

Transcription

1 Business Process Services White Paper Improving Regulatory Compliance in the Mortgage Industry

2 About the Author Lovette Patrick D'Souza Lovette Patrick D'Souza has over 10 years of experience in Banking and Financial Services, of which six have been in the mortgage services domain. He is a Delivery Manager in the Business Process Services (BPS) unit at Tata Consultancy Services (TCS), and specializes in the centralized modi cations and default servicing line of business. He has extensive experience in process improvements, re-engineering, and transitions. Lovette is an integral part of the training team providing process trainings in loan modi cations across locations, and also helps in developing SOPs, quality grids, and checklists. He is a postgraduate in Business Administration and a certi ed Six Sigma Black Belt.

3 Abstract In the wake of the mortgage crisis, the government has implemented a number of programs to assist homeowners who are struggling with mortgage payments and are at risk of foreclosure, while minimizing losses for investors. The Home Affordable Modi cation Program (HAMP), for instance, incentivizes mortgage servicers to modify mortgage loans to help homeowners. Reports indicate that 1 only 22% of those who applied for HAMP were referred to foreclosure. However, since many homeowners do not qualify for HAMP, they are forced to look for alternative solutions to avoid delinquency. In addition to the government, there are several things service providers can do on their part by leveraging Making Home Affordable (MHA) programs to help homeowners navigate the aftermath of the crisis successfully. This paper highlights the impact of government implementations and some of the measures that mortgage servicers can take to address the issues facing the industry in a dynamic market and improve business outcomes. 1 Treasury, Making Home Affordable: Program Performance Report Through the First Quarter of 2015, nancial-stability/reports/documents/1q15_quarterly_mha_report_final.pdf, accessed July 2015

4 Contents Understanding the Foreclosure Process 5 Federal Program Preventing Foreclosures 5 Making System and Resource Improvements to Enhance Outcomes 6 Components of a Robust Compliance Framework 7 Ensuring Competitiveness and Better Outcomes 8

5 Understanding the Foreclosure Process Foreclosure entails the recovery of a loan through proceeds of the sale of the property in question. Both the borrower and the lender need to adhere to certain guidelines throughout the process. While the foreclosure process differs from state to state, typically a mortgage company can initiate foreclosure proceedings 3-6 months after the first missed payment. But the process may commence earlier, if borrowers do not respond to calls, stop communicating with the lender altogether, or fail to inform the bank about their reasons for default. Due to the sheer number of loans in default, foreclosure proceedings are typically delayed, causing huge losses to both mortgage companies and investors. Moreover, when properties are auctioned, mortgage companies incur costs such as legal, court, and auction house fees, which further increases the losses. While there are several options being offered to borrowers to avoid foreclosure, mortgage companies and servicers too need to be vigilant, well equipped, and adhere to compliance procedures. The consequent reduction in timelines in responding to customer requests, analyzing the borrowers' eligibility for various programs and completing the qualification process will enable borrowers to stay in their houses. At the same time, it will facilitate an inflow of funds for the mortgage company as well. In the following sections we look at HAMP, instituted by the federal government to help improve outcomes for the borrower as well as the lender. We will also discuss some of the measures that mortgage servicers can implement to further improve results. Federal Program Preventing Foreclosures Foreclosure activity across the United States dropped to its lowest in a decade during the first half of Between January and June 2015, a total of 597,589 properties were at some stage of the foreclosure proceedings. HAMP and loan modifications have had a significant impact on the completed foreclosure prevention actions till date (as shown in Table 1). Home Retention Actions YTD May 2015 Repayment Plans 142,615 85,386 51,481 18,693 Forbearance Plans 22,812 12,671 11,260 4,171 Charge-offs-in-lieu 1, , Loan Modifications 232, , ,975 69,975 Total 399, , ,094 93,280 Table 1: Number of completed foreclosure prevention actions 2 U.S. foreclosure activity in rst half of 2015 fell to 10-year low, July 16, 2015, accessed on November

6 Since the first full quarter in conservatorship (4Q08), the combined completed foreclosure prevention actions total 3,520,501. More than half of these actions are permanent loan modifications contributed by 3 HAMP. These figures demonstrate the powerful impact of this single federal program and its significance. Making System and Resource Improvements to Enhance Outcomes While the impact of the government programs is immense, the mortgage servicers can also make a huge difference to the industry and the homeowners. Customers are looking to them to provide sustainable solutions. However, implementing solutions to effect positive results can be challenging, and needs to be supported by expert systems and mechanisms, process improvements, efficient re-engineering, and constant monitoring of systems and resources. Here are some key measures that mortgage servicers can implement to improve business results. Enhancing Customer Experience Mortgage providers need to proactively engage with customers, focus on customer complaints, and understand behavioral preferences through advanced analytics. Based on the results of this analysis, enhancements can be made to existing systems or procedures to better suit customer needs. This imparts a personal touch, resulting in improved customer engagement and enhanced growth. In addition, mortgage companies need to ensure that service teams follow up with customers to ascertain the quality of service provided and determine whether their requirements have been met. Customer feedback on improving procedures can also help mortgage servicers to further streamline processes. Constant reassurance on the level of support available at every step enhances customer experience. Simplifying Processes and Enhancing Efficiencies Service providers should aim at building simpler processes by getting to know their customers and addressing their needs. The process should be lucid and capable of being easily understood even by the least knowledgeable customer. All customer segments, whether the tech-savvy younger generation or senior citizens who may be late adopters of new technologies, should be able to navigate the process equally well. In today's connected world, mortgage companies should work towards providing e-services that are simple to understand and easily accessible. For instance, an app that shows the steps involved, current status, details required from the customer, important contact information and estimated turnaround time can help alleviate the stress and confusion related to the application process. In addition to minimizing the need for repeated follow-ups, this reduces the call volumes for customer service representatives, allowing them to focus on getting the process completed. 3 Foreclosure Prevention Report: Federal Property Manager's Report, May 2015, accessed on Dec,

7 Building Efficient Systems and Reducing Redundancies While being user friendly is essential, systems also need to be equipped with built-in red flags that can alert the mortgage representatives in the event of occurrence of critical events. These events include maturity of loans, due dates, defaulted payments, pending tasks, and customer complaints. While cost is an important factor, mortgage companies should invest in systems that will pay for themselves by enhancing the quality of work and improving efficiencies. Process improvements and re-engineering should be encouraged. For instance, the customer service team that collects and indexes documents and the team that reviews them functions independently. This calls for additional communication, leading to inefficiency and delays. If the customer-facing group is trained on issues pertaining to documentation and a checklist is created, it will help simplify the next process of reviewing the package for completeness. Further, merging both the processes can help eliminate the time delay in reviewing the documents. Enabling Continuous Monitoring and Feedback Without a strong monitoring system and mid-course corrections, the entire mortgage lending process can disintegrate. Investing in a competent audit team and quality analysts can prove highly beneficial. Auditors and analysts can help identify gaps in the system. In addition, quality monitoring should be implemented and regular feedback must be provided to customer teams. Training should be conducted to rectify repeated errors. Training Need Analysis and Root Cause Analysis can also help identify risks. Regular reporting helps facilitate organizational change decisions and optimal resource utilization. While every mortgage company strives to deploy a strong audit and quality control team, it is recommended that external auditors be employed occasionally to highlight areas where improvements or corrections are needed. This helps reduce complacency. Components of a Robust Compliance Framework In addition to all the above-mentioned measures, a robust compliance framework needs to be instituted and a few basic but crucial elements are required to be ascertained while building it. Figure 1 shows how elements such as strong governance, quality checks and audits, staffing, supervision, and performance management can be included in a dynamic framework that ensures compliance in mortgage servicing. 7

8 Clear and regularly updated policies and procedures Regular training on changes Timely updates of SOPs, checklists, and training material Version control Certi cation tests and product knowledge tests at regular intervals Strong Governance and Practices Staffing and Supervision Accurate staffing to ensure timely completion of work Coordination between operations and on-boarding teams to ensure availability of trained staff Adequate supervisor-to-processor ratio to ensure timely feedback on errors and efficient work allocation Strong and knowledgeable quality team to perform regular checks and provide feedback on errors Regular audits on processes, SOPs, training material, staff knowledge checks, and agreements Regular audit meetings to check on open items and non-compliance issues, and discuss ways to eliminate loopholes Quality Checks and Audits Servicing Management and Performance Gauges Highly quali ed third-party vendor equipped with the required logistics and resources Requirements and signing contracts de ning the agreement and scope of work Conformance to Service Level Agreements Regular governance checks and timely meetings to discuss improvement areas and action plans Figure 1: Compliance framework for mortgage servicing Ensuring Competitiveness and Better Outcomes In a volatile economy, it becomes extremely important for mortgage servicers to follow streamlined processes in order to compete effectively and improve the overall industry and economy. Instituting effective mortgage practices and measures can help servicers significantly reduce regulatory risks, and also enhance and improve the quality of work. This will result in fewer customer complaints, and ensure superior audit results and better credit ratings. The sub-prime crisis brought the glaring gaps and inefficiencies in the industry to the fore. However, with the implementation of a regulatory compliance framework that constitutes better quality checks and governance measures, the industry is now better prepared to proactively identify and respond to any future adverse events. 8

9 About TCS Business Process Services Unit Enterprises seek to drive business growth and agility through innovation in an increasingly regulated, competitive, and global market. TCS helps clients achieve these goals by managing and executing their business operations effectively and efficiently. TCS' Business Process Services (BPS) include core industry-specific processes, analytics and insights, and enterprise services such as finance and accounting, HR, and supply chain management. TCS TM creates value through its FORE simplification and transformation methodology, backed by its deep TM domain expertise, extensive technology experience, and TRAPEZE suite of solution accelerators and governance enablers. TCS complements its experience and expertise with innovative delivery models such as using robotic automation and providing Business Processes as a Service (BPaaS). TCS BPS unit has been positioned in the leaders quadrant for various service lines by many leading analyst firms. With over four decades of global experience and a delivery footprint spanning six continents, TCS is one of the largest BPS providers today. Contact For more information about TCS Business Process Services Unit, visit: ( bps.connect@tcs.com Subscribe to TCS White Papers TCS.com RSS: Feedburner: About Tata Consultancy Services (TCS) Tata Consultancy Services is an IT services, consulting and business solutions organization that delivers real results to global business, ensuring a level of certainty no other firm can match. TCS offers a consulting-led, integrated portfolio of IT and IT-enabled infrastructure, engineering and TM assurance services. This is delivered through its unique Global Network Delivery Model, recognized as the benchmark of excellence in software development. A part of the Tata Group, India s largest industrial conglomerate, TCS has a global footprint and is listed on the National Stock Exchange and Bombay Stock Exchange in India. For more information, visit us at IT Services Business Solutions Consulting All content / information present here is the exclusive property of Tata Consultancy Services Limited (TCS). The content / information contained here is correct at the time of publishing. No material from here may be copied, modified, reproduced, republished, uploaded, transmitted, posted or distributed in any form without prior written permission from TCS. Unauthorized use of the content / information appearing here may violate copyright, trademark and other applicable laws, and could result in criminal or civil penalties. Copyright 2015 Tata Consultancy Services Limited TCS BPS Design Services I 12 I 15