Despite the fact that Mortgage Electronic Registration Systems Inc. (MERS) extended its delivery deadline for submission of the Annual Report of Quality Assurance Standards Compliance into late January and made several announcements of its intent to hold servicers to the task, there were still many companies that were scrambling to comply at the deadline. Our own conversations with servicers indicate that many were not aware of the annual report deadline or the requirement for the quality assurance plan, which may have prompted MERS to extend its deadline.
It's unlikely to happen again.
In the future, we suspect MERS will avail itself of the powers it has to punish those firms that are not diligent in meeting its changing requirements through sanctions or other forms of disciplinary action – but it may not come to that. We see a number of reasons servicers should take these requirements quite seriously.
Through our analysis of a number of servicing portfolios, it is clear that many servicers – even some of the largest – found themselves unprepared to file their annual reports and their quality assurance standards compliance reports because they simply did not have access to the data they needed.
It appears that some servicers were not taking action on the MERS announcements, and the servicing staff may not have been using MERS to its fullest potential. In some cases, servicers missed the opportunity to archive the Portfolio Analysis Report, which would have allowed them to perform a monthly reconciliation. Rule 7 of the MERS Rules of Membership requires a servicer to file the annual report and comply with the assertions made within the report.
If they were not performing a monthly data reconciliation throughout the year, servicers would not have easy access to the data needed to complete the report. Of course, many others simply did not have a current MERS quality assurance plan in place, which may explain why they didn't have those monthly reports.
Smaller servicers were particularly ill-equipped to deal with these new requirements. Unlike the nation's largest servicers with their sophisticated servicing platforms, smaller companies with simpler systems were unable to upload data electronically from the loan origination software into the servicing system, opening them up to rekeying errors and other problems that only a detailed audit would have caught. Sadly, the smaller servicers are the least likely to have access to a good internal auditing team.
Having made it past this first deadline, the industry now knows the resources it takes to comply with the MERS requirements.
There is an old saying that if you look for a problem hard enough, you're bound to find one. Servicers were looking at their data very hard as they worked toward meeting the first MERS reporting deadline. And, true to conventional wisdom, they found problems.
Most of the issues uncovered in the MERS reporting process were data-integrity problems that, taken individually, may not have been very serious. Taken together, though, they were enough to prompt some servicers to look at upgrading or overhauling their internal quality control processes. This will serve them well in the future, but not when it comes to future MERS audits.
For annual reports starting this year, MERS requires that the audit be performed by an independent third party. This could be seen as a positive development – any time quality control practices are examined and strengthened, companies benefit.
In that respect, the hard work servicers have been forced to do over the past few months in order to comply with the MERS requirements will not be in vain. But the next time these reports are filed, they will be handled by a third party. That will lead to more disclosures that servicers are only now beginning to understand.
In our conversations with servicers, we have found some surprise on their part when they realized how their records will be audited in order to meet the MERS requirements. While auditing a particular loan file to MERS' satisfaction may be a small matter of insignificant cost, when an entire portfolio is put to the same test, the costs can become higher than most servicers expect.
The good news is that the servicing community can come to grips now with the real costs associated with MERS compliance this year. While excellent third parties stand ready to support servicers in this work, the total costs to servicers will not be insignificant.
Tommy A. Duncan is president of Quality Mortgage Services LLC, based in Brentwood, Tenn. He can be reached at firstname.lastname@example.org.