REQUIRED READING: Laurence Platt, a prominent attorney with the Washington, D.C.-based law firm K&L Gates, recently told an audience of mortgage bankers, ‘You just paid $25 billion because you weren't nice to the consumer.’ Platt was referring, of course, to the state attorneys general and the federal government's $25 billion settlement with five of the biggest mortgage lenders over a list of improper practices that ranged from robo-signing foreclosure documents to failing to negotiate in good faith with homeowners over inflated fees that pushed the homeowners into default.
Looked at another way, $25 billion represents $500 for every mortgage serviced in the U.S. today. Even for servicers with a small portfolio of 10,000 mortgages, not being nice to consumers cost them $5 million. For an industry that is almost entirely focused on profit, is $5 million so miniscule an amount that they can ignore the underlying reason for this expense?Â Â
New requirements set forth by the Consumer Finance Protection Board (CFPB), the Office of the Comptroller of the Currency (OCC) and the Federal Reserve Board are designed to ensure that consumers are treated fairly. As the CFPB said in August, it is attempting to ‘put customer service back in mortgage servicing.’Â
The regulators' focus is clearly on how well the mortgage industry is managing consumers' needs. Yet, based on numerous discussions I have had with servicing managers and senior executives, I've gathered that servicers' primary focus isn't necessarily on treating consumers well and meeting their needs. Instead, servicers seem to be concentrating on questions such as, ‘What do we need to do to prove to auditors that we're doing what regulators say we should be doing?’
That's certainly evident in the number of classes, webinars and consultants offering services on ‘how to prepare for a CFPB audit.’ Is that what the industry took away from the collapse of the mortgage market and the Great Recession that followed?Â
It would be far more prudent for the industry to work on better managing consumers' needs and expectations, as well as ensuring we don't repeat the mistakes of the past. It would also be wise to recognize that monitoring what we do and how we do it is a much better way to ensure that there no unwelcome surprises. In the past, servicers did not recognize this need and tended to view it as an afterthought. We need to change that belief.
Consider the case of a midsized bank that was recently examined by the OCC. Based on the regulators' new standards, the OCC audit found multiple problems that were sufficient enough to have potentially shut down the bank's servicing operation.
However, the bank was given time to bring its program up to standard. In order for the bank to avoid disaster, the OCC required that it implement a monitoring program for all consumer-related activities. The bank immediately hired over 50 high-priced consultants to come in to write procedures and update its technology.Â
But when it came time to implement the monitoring of these changes to ensure the problems would not reoccur, the bank decided that they didn't need to do it right away. It would cost too much, the bank executives thought, so they decided to wait.Â
The bank will likely face a very nasty surprise when the auditors come back for a follow-up visit; and it will be a nasty surprise that could end up costing the bank a good deal more than the cost of implementing the program in the first place.
The fact that any bank would spend millions of dollars to create new procedures to pass an audit, but fail to spend a few thousand to ensure that consumers obtain the service required by the regulations, is mind-blowing. To those servicers, consumers are just the raw material thrown into the mix to create something to sell. It appears that the only thing learned over the past five years is how to prepare better, hide more and focus on making more money.Â
In my view, this example shows that some servicers have not learned their lesson: that treating consumers fairly is the ultimate goal. For years, the mortgage servicing business has undoubtedly been given the message that monitoring processes and managing operational risk is actually good business, yet that message continues to be ignored.Â
While other industries have succeeded beyond expectations in growth and profitability when implementing risk management programs, many in our industry see such programs as an unnecessary cost of doing business. But when you consider the huge value of saving consumers' homes, retirement accounts and the nation's economy, risk management programs that focus on treating consumers fairly are priceless.
Becky Walzak is president of the Indianapolis-based Looking Glass Group LLC, and is alsoÂ president of rjbWalzak Consulting, based in Boca Raton, Fla. She can be reached at (561) 459-7070.