Today's servicers are being monitored and analyzed by a number of stakeholders and observers such as investors, federal and state regulators, consumer advocacy groups and media. This necessitates the need for stricter standards and focus on quality control regarding all aspects of servicing, with a special emphasis on default servicing.
The government-sponsored enterprises (GSEs), directed by the Federal Housing Finance Agency's Servicing Alignment Initiative, have created their own programs that function as servicer performance management directives. A key directive of these programs is the servicer's responsibility to develop and execute an effective internal quality assurance program. Private investors are following suit with their own set of quality guidelines and scorecards, which will in many cases be expanded and/or modified versions of the GSE directives.
Investors that previously took a somewhat passive approach to loan servicing performance and quality control are now interested in taking a more active approach toward the oversight of their assets. They would like to monitor the quality of servicing and be able to sanction non-compliant servicers with fines, or in extreme scenarios, terminate the servicing contracts for cause. Under this climate of increased scrutiny, the servicer should attempt to create a culture of ‘doing it right the first time’ by paying careful attention to quality and ensuring nothing falls through the cracks that can create undue downstream risk in the short or long term.
It seems that some new regulation, restriction, compliance or consent order is being placed on loan servicers on an almost daily basis. In addition, recently added processes are creating numerous sources of errors and omissions that need to be detected and mitigated.
If we look at the loan modification process, servicers are being challenged to act more as originators to run a production pipeline of modifications from borrower contact through closing. A large number of errors are cropping up due to immature processes and improper interpretation of guidelines.
Servicing quality control systems are challenged to remain relevant as these new process changes are implemented and to provide actionable information on the root causes of errors and exceptions in the underlying processes. An adaptable and flexible system that does not need onerous IT intervention and is under the full control of the quality department is essential.
The top three loan servicing systems used by the industry today – with more than an 80% market share – are monolithic mainframe-based applications written more than 30 years ago. That's an eternity in technology terms. To add to these problems, a plethora of loosely integrated, bolt-on solutions have been created primarily in the default arena to make up for the shortcomings of these increasingly antiquated servicing systems.
Getting a holistic view of servicing quality is extremely challenging in this environment of patchwork systems to construct a coherent ‘quality story’ across the organization. It is not surprising, therefore, that the quality control at most servicers today is mostly run on spreadsheets requiring a lot of manual data integration to get actionable results.
It is obvious that a new class of quality control systems is needed to tackle the challenges facing servicers today. The key features these systems need to provide include flexible integration, especially in order to allow the system ease of integration with third-party systems such as credit reporting agencies, valuation firms and fraud checks. They should also be template-based, thus allowing quality managers to start from a pre-defined library of templates and enhance or modify the systems for their needs.
If a quality control effort is unable to pinpoint the cause of a failure to an individual or group of individuals who performed the function, much of the benefit of finding the quality issue is lost. Agents who are being audited also need to be provided real-time scorecards on their performance and required to undertake remedial training to allow them to prevent committing such errors in the future. If the source of the errors is found to be due to ambiguous or incorrect policies and procedures, such issues should be corrected expeditiously. Auditors performing the audits should be similarly accountable for the work they have performed through detailed scorecards and reports.
Of course, the purpose of a quality control audit is to mitigate risks by ensuring adherence to documented policies and procedures. It is important that each audit checklist item reference the appropriate risk item and its corresponding policies and procedure entry that mitigate the risk. This reference is not only used by an auditor to perform the audit correctly, but also used by a regulator reviewing the results of the audit in the future to certify that the audit was performed per documented guidelines.
The quality system should have a flexible workflow engine that manages the audit queue and routes work to the participants of the system. Workflow steps should be timed so there isn't a scenario of a never-ending audit waiting on responses from agents or auditors and the audit can be ‘closed’ and definitive results obtained from the exercise.
And just performing an audit is a worthless exercise unless the results of the audit can be utilized to remediate the issues that were identified. A flexible and user-driven reporting engine is important, but the emphasis should be on drilling down to the root cause of an error or exception.
Servicing is changing dramatically, and the industry needs to reconsider how it operates. New and innovative ways of managing servicing quality enforced through the use of technology are needed to allow servicers to deliver a reliable and consistent service to their borrowers, investors and other stakeholders.
Souren Sarkar is CEO of Veritiq, based in Davie, Fla. He can be reached at firstname.lastname@example.org.