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26 | TH E M R EP O RT FEATURE an initial data tape to the new servicer to load into its system. When the final data tape is sent closer to the transfer, the new ser- vicer makes a comparison for sig- nificant changes between the two tapes and may complete a limited comparison of certain key data points to origination documents. Flags are raised for discrepancies, but the data itself is not fully validated or verified. Thus, if the data remains incorrect in the first and second tape, the foundation for future problems is established. Now, new servicers will need to make sure the data received from the previous servicer is not only reasonable, but also accurate. Approaching the Future with Due Diligence C layton Fixed Income Ser- vices has been actively in- volved in data integrity reviews and reconciliations prior to MSR transfers, and is quite familiar with the challenges servicers currently face and how they're trying to solve them. One of the biggest challenges is that, absent robust report - ing and rules, a servicer cannot verify content and ensure data integrity, creating substantial servicer risk given the regulatory focus on borrower notification. For example, while it's relatively easy to capture the date a letter is sent, it's much harder to verify the accuracy of the letter's content. Thus, many servicers are building quality assurance processes into their workflows to verify that the content in the notices, not just the timing, is correct. Unfortunately, since certain actions can't be automated, they rely on a human touch to ensure accuracy and compliance, particularly after MSR transfers. The CFPB's published rules about billing statements include a template that contemplates the systematic population of notifica - tion letters sent to the borrower. While this template easily ac- commodates current loans, it is error prone when applied to de- linquent loans. In early usage of the template, Clayton saw issues where certain dates pulled from the system were misleading to the borrower (if not technically inaccurate) and could be deemed non-compliant by the CFPB. Another example of a re- curring error pertains to the field for the last payment date, which is obviously important in determining when a borrower becomes delinquent. Sometimes, Clayton's clients' systems would pull in post-payment adjustments to an account (e.g., an escrow disbursement), using the adjust- ment date instead of the date of the payment. By performing manual reviews, Clayton suc- cessfully worked with clients to address these automated errors. The Ghost of Servicing Yet to Come W hile Charles Dickens gave Ebenezer Scrooge the ability to foresee his future, the servicing industry lacks a written script showing a clear and defined path as to what lies ahead. One unknown is the impact of the National Mortgage Settlement, which formally ended October 4. Will those servicers involved continue the rigorous testing that was required in order to show compliance with that settlement? Or will they focus on the rules and guidance emanating from the CFPB, assuming its role and structure do not change? Another uncertain area is the servicing component in Regulation AB II's Asset Representations Review re - quirements. The Securities and Exchange Commission now requires issuers of publicly traded asset-backed securities to include Asset Representations Review provisions in their shelf offering documents. Issuers now need to define applicable delinquency and investor vote thresholds, which trigger Asset Representation Reviews, and document agreed-upon review procedures, as well as name a firm as its Asset Representations Reviewer (ARR). If certain delinquency triggers are met, the ARR must perform defined tests on all accounts and/or receivables that are 60+ days delinquent. If the ARR tests uncover breaches of representations and warran - ties, then a receivable repurchase demand may result. However, because mortgages are more complicated than other asset classes, reviewing only the initial representations and war - ranties related to the origination doesn't give issuers, servicers and investors the complete picture. Investors, in particular, may require more information about the servicer's performance and how it impacts investor returns, cash flow and losses to the trust. Another unknown is the ongo - ing Structured Finance Industry Group (SFIG) benchmark security initiative, designed to restart the private label securities (PLS) mar - ket. SFIG has assembled a group to explore the development of a template benchmark security to be used for future non-prime PLS deals. The initiative is consider - ing a new role—a deal agent or investor ombudsman—within the securitization transaction who would facilitate the alignment of the interests of the investors, servicers, and sponsors. While the scope of the deal agent's responsi - bilities remains under discussion, one thing is certain: this will be an additional source of scrutiny for servicers. So what will the future hold? A Christmas Carol teaches us that the future isn't set in stone. In the servicing industry, however, we know the future will be filled with more scrutiny, more costs, and more requirements to do things perfectly. SUSAN CONNALLY is director of surveillance at Clayton Fixed Income Services. She is responsible for designing and implementing processes for new client engagements related to servicer oversight and performance. Connally can be reached at SConnally@Clayton.com. 3MReport.indd While Charles Dickens gave Ebenezer Scrooge the ability to foresee his future, the servicing industry lacks a written script showing a clear and defined path as to what lies ahead.