MORNING COMMUTE: CFPB Seeks Feedback On Mortgage Servicing Rules

Written by Patrick Barnard
on May 09, 2017 No Comments
Categories : Blog View, Featured

MORNING COMMUTE: Morning Commute makes its triumphant return after a four-week hiatus.

And the music this morning was Allan Holdsworth’s “Road Games,” a fabulous jazz fusion record from 1983 and Holdsworth’s only release on a major label (Warner Brothers).

On April 18, the progressive rock/jazz fusion world lost a fantastic and very unique guitarist. The late Allan Holdsworth played with some of the most popular progressive rock groups of the 1970s, including Soft Machine, Gong and U.K. – but he was also well known for his solo works, which were generally in the jazz-fusion realm.

There is a lot I could say about how unique Holdsworth’s playing was. A “guitarist’s guitarist,” he was so highly skilled that he had won the attention and adoration of many other guitar gods, including Eddie Van Halen, John McGlaughlin and Alex Lifeson (although it could be argued that his work was so very complex that for most people, it was not very “accessible”). I started listening to Holdsworth’s material in the late 1970s, but it wasn’t until I took music theory classes at Berklee College of Music in the early 1980s that it dawned on me what he was doing with scales and how complex his playing was. He was a remarkable musician – I imagine him now gloriously jamming with the late John Wetton, Keith Emerson, Greg Lake and all of the other fantastic progressive rock musicians we’ve lost in the past couple of years. Thank you, Allan!

Now, on to the mortgage scene.

In obligatory fashion, the Consumer Financial Protection Bureau (CFPB) is seeking feedback on the effectiveness of its mortgage servicing rules that took effect in 2013.

More specifically, the bureau is seeking feedback on its “plans for assessing this rule, as well as certain recommendations and information that may be useful in conducting the planned assessment,” according to a bureau press release. Not sure exactly what that means, but to me, it sounds like the CFPB is asking people to tell it how to go about assessing the effectiveness of its own rules – which, if you think about it, is kind of a strange thing to ask. To me, it’s almost like asking the public, “I’m going to perform brain surgery now – can you give me some advice on how to proceed?”

Why, you might ask, is the bureau doing this now? Under the Dodd-Frank Act – which is still intact for now – the bureau is mandated to review each of its rules every five years from implementation.

The bureau’s miserable, onerous servicing rule has seen numerous updates based on industry feedback since first being introduced in 2013, including a major set of updates that came in 2014 and another major set last year that resulted in the “final rule,” which is slated to take effect on Oct. 19.

But as most people in the mortgage servicing space will tell you, the rule is still far from perfect. In fact, the industry has a ton of unanswered questions, mainly because some sections of the current final rule are somewhat open to interpretation.

One thing that caught my attention as I was reading the CFPB’s press release was the description of what a mortgage servicer does. As I looked down the list, it made me realize how many pieces of the mortgage servicing process are now automated – or are at least “ripe” for automation.

What follows is the CFPB’s bullet list – but the parts in parentheses are my comments. Mortgage servicers, the bureau says, are typically responsible for the following activities:

  • Processing loan payments (More than 90% of borrowers are now on “auto-pay.”);
  • Responding to borrower inquiries (This function is now primarily handled by interactive voice response systems. In addition, servicers are increasingly automating borrower interactions online using automated assistants, chat, etc. Thus, the need for live support continues to decrease.);
  • Keeping track of principal and interest paid (This is now fully automated in most servicers’ core systems.);
  • Managing escrow accounts (also now possible to fully automate);
  • Reporting to investors (also now possible to fully automate);
  • Pursuing collection and loss mitigation activities (including foreclosures and loan modifications) under certain circumstances (This is perhaps the only piece left that requires manual intervention. But even in default, certain things can now be automated, such as notifications. And it would appear that the servicing industry is moving toward even more automation in default: For example, during the Mortgage Bankers Association’s mortgage servicing conference held in February, the idea of automating the loan modification process by creating something akin to “Rocket Mod” was discussed.).

My point here is that the mortgage servicing industry is more reliant on technology than it has ever been. This raises a really important question: With so much of the servicing process now being handled by technology, who, then, is ultimately responsible when things go wrong? The CFPB has third-party oversight rules in place that put servicers squarely “on the hook” if systems fail and processes fall out of compliance – even if it is the fault of a technology provider. However, Richard Cordray, director of the CFPB, indicated last year that the bureau should probably also be looking into problems caused by software glitches – and further suggested that the bureau could end up holding vendors and service providers responsible for problems that lead to non-compliance, as well.

For me, the issue centers on culpability: If the people who build and program mortgage servicing software get it wrong, should the servicer be held responsible? With every piece of software out there that automates some part of the mortgage servicing process, someone, somewhere, had to program that software to perform that particular function. I think that if the error that caused the problem can be linked to human error, such as a programming error, then the party that caused it should be on the hook. But there are still many gray areas – for example, if it is an infrastructure or service-related problem resulting from an error on the part of one of the software provider’s partners (an ISP blackout due to a network hardware failure, for example), then I’m not sure who should be on the hook.

That’s what makes this a tricky thing. I guess the blame can only “beat on down the line” so far.

It will be interesting to see how the CFPB (or its successor) addresses this complex issue in the future. Considering how central software is to mortgage servicing (and all of banking, for that matter), I think it is going to have no choice. I also think it’s possible that there will be some other precedent case coming out of another industry or vertical, wherein suddenly, enterprise software makers are no longer as “immune” to regulatory action as they once were.

Let me know your thoughts on this below.

Meanwhile, if you are interested in submitting (more) feedback on the CFPB’s final mortgage servicing rule, now is your lucky chance – click here.

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