You Deal With It

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cover story By Brian A. Lee D uring the economic downturn precipitated by the housing market crash, the devil seemed to be everywhere economically, from loose (or worse) lending standards to the losing job market. Now, several years later as mortgage servicers prepare for the January 10, 2014, effective date for complying with the Consumer Financial Protection Bureau's (CFPB) new rules for servicers, rest assured that the Dark One inhabits his usual sticky spot. "Interpretation of the fine points of the CFPB rules can be a challenge, and, as we all know, the devil is in the details," said Robert Shiller, SVP at Wingspan Portfolio Advisors. Pursuant to the Dodd– Frank Wall Street Reform and Consumer Protection Act of 2010, the CFPB released in January of this year its rules pertaining to underwriting standards for mortgage lenders and the "qualified mortgage" specification, which when achieved presumes that lenders have met the bureau's ability-to-repay loan requirements with their borrowers. "Setting the rules and boundaries for consumer mortgage loans is one of the first steps needed to encourage more private capital investment in the housing finance system," Faith Schwartz and Margarita Brose put forth in CoreLogic's October white paper, titled "ATR/ QM Standards: Foundation for a Sound Housing Market." "Uncertainty of investor appetite for credit risk and litigation risk under the new rules persists, but the new rules provide a foundation to build investor trust in the system over time." Jason Lobo, VP at Chase Mortgage Banking, said, "We believe the CFPB qualified mortgage rule is an important step in both supporting borrower access to credit and helping sustain the housing recovery." Investors, servicers, originators, and, of course, borrowers were hit hard by a system run amok. Transparency and accountability are two major goals of the CFPB in trying to prevent another cratering of the mortgage market like in 2008. The bureau's goals and principles are understood. It's just that some industry pros might be seeing red thanks to all the red tape. John Alkire of Carrington Mortgage Services LLC sides with Shiller. "One of the main issues is the sheer number and complexity of the new requirements," said the EVP of the California-based servicing company. "Servicers need better clarity and more advance notice regarding what the final versions of these rules will look like and how they will be enforced. Having a more complete understanding of these rules and being able to maintain the internal systems needed for compliance are major concerns among servicers and the organizations they serve." For example, loan servicing and compliance are affected by the many details involving escrows, periodic billing statements, and interest-rate adjustment notices for adjustable-rate mortgage loans. These things require hard-coded technology changes in order to meet the requirements. "Testing, mapping, and other tasks must be performed well in advance of the January deadline, which is a huge focus for all servicers," Shiller said. "In this challenging environment, loan servicing must partner with the compliance and legal teams to ensure that all new rules are implemented in the most accurate and timely manner." Another major challenge for services is the heightened cost of doing business in an era of increased regulation. The CFPB's rules tied to the Dodd-Frank Act come with very specific requirements that for most servicers will require a huge overhaul of systems, processes, and protocols or, as Alkire put it, "massive corporate and operational re-engineering." "For most traditional servicers—large enterprises, often with de-centralized and separate processing, collections, foreclosure, and loss-mitigation business units—assuring compliance, at a minimum, with the latest standards will require software updates, process revision, further training, additional documentation, specialized staff, and auditing resources," Alkire added. The mountain of new rules and regulations has forced all firms in the mortgage servicing industry to diligently review the way they do business, which insiders argue contributes to substantially extended processing times and increased costs. Fines and Fine Print T here appears to be no guideline aspect to the January deadline set by the CFPB. Servicers contacted by MReport are sure of this hardand-fast reality. Noncompliance could trigger civil penalties and/or regulatory enforcement actions. In addition, certain sections of the CFPB's regulations allow for private right of action for impacted consumers. "Servicers who are not prepared to implement these changes face a real risk of being penalized in a way that hurts their businesses," said Loren Morris, EVP and chief compliance officer at Chicago-based Fay Servicing. Judging from recent penalties and settlements, Shiller stated, servicers can assume punishment for rule violations "won't "Servicers who are not prepared to implement these changes face a real risk of being penalized." —Loren Morris, Fay Servicing The M Report | 17

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