As high-yielding assets, mortgage servicing rights (MSRs) make for attractive investments, but also pose a challenge that can be best viewed as a game of risk and reward. Maximizing investment returns often hinges upon how well transfers are executed. MSR buyers and sellers should do all they can to ensure quality throughout the transaction and protect themselves from the financial, legal and even reputational risk associated with poorly executed transfers.
Curing MSR transfer woes begins with establishing a quality management procedure that involves frequent auditing of all servicing processes. By conducting proactive public records research prior to the MSR transfer, servicers can identify and solve critical problems in lien position, assignment chain and collateral documentation to ensure delivery of a clean file.
Handoffs introduce risks for buyers and sellers
The Consumer Financial Protection Bureau’s (CFPB) servicing rules provide detailed expectations for establishing, maintaining and verifying the content of the collateral document file, especially when a servicer transfers the MSR or prepares to proceed to default action. But time constraints and variations in servicers’ systems can make it challenging for banks and non-banks alike to meet these expectations.
Because there are various ways to transfer data and images between servicers, there are no standard protocols, policies or procedures to ensure the accuracy and consistency of data exchange, nor is there a standardized post-transfer process for validating transferred data. Even with strong procedures in place, the net result can sometimes be incomplete or incorrect loan data. In certain instances, things as simple as borrower contact or property address information can be incompletely or incorrectly translated from system to system, causing downstream issues.
Take, for example, the case of a newly originated purchase loan in which the borrower’s address – as listed on the application – differs from the actual property address. In addition, the borrower’s work phone number appears in the home phone number field. Servicing rights are transferred to a new servicer, which inadvertently sends the welcome letter and monthly statement to the wrong address. The address mix-up ultimately sends the mortgage into collections, and worse yet, the servicer makes collection phone calls to the borrower’s place of employment, a particularly difficult issue with regulators and consumer groups.
These types of data issues expose MSR buyers and sellers to financial, legal and reputational risk. Even the smallest data issue related to a servicing transfer can lead to incorrect information (or worse, no information at all) reaching the borrower. If these issues cause missed or late payments, adding to borrower confusion during a default situation, servicers could be exposed to additional risk and be forced to delay or restart loss mitigation or foreclosure efforts, usually at great cost.
Data problems also have a direct impact on borrower satisfaction and servicer reputation. Some have criticized servicers for poor treatment of borrowers, in part because their responsibility toward the consumer often ends once the loan files have been transferred.
Establishing a quality control process
Given unlimited time and resources, practically all transfer issues are solvable, though perhaps due to changing industry requirements, this can be a challenge. A comprehensive oversight and quality control process can help pinpoint problems and allow for the efficient allocation of scarce resources to quickly triage time-sensitive issues.
Assigning an independent group to oversee key components of the MSR transfer is a particularly effective way to manage this process, in part because it allows the establishment of a consistent point of contact and builds rapport with the transferring servicer. Third-party certifications, such as ISO-9001, can provide external validation of a quality management system’s process approach, customer focus and commitment to continuing improvement.
If certain aspects of the transfer appear to be running smoothly, testing of those areas can confirm that perception, so servicers can move on to more problem-prone aspects. Where oversight and testing uncover problems, resources can immediately be allocated to the most mission-critical issues.
Resolving problems in the collateral document file
Problems in loan transfer quality may stem, in part, from the originations process. Top loan defects identified through Fannie Mae’s post-purchase review process were the topic of discussion at a Sept. 20, 2016, training session on effective quality control offered by the government-sponsored enterprise. Among the observations made during the training session was that one of the many issues related to file submission is incomplete, improper or missing documentation. Remaining defects at the time of transfer are primarily data issues that could be cured by conducting upfront public records research with property reports that deliver a variety of property information related to ownership and encumbrance. Research prior to an MSR transfer allows servicers to identify potential gaps that could have a negative impact on borrowers, thus drawing attention from CFPB regulators.
The most commonly used property report in the transfer due diligence process is the assignment verification report (AVR). An AVR is a cost-effective way to document a mortgage’s chain of assignment satisfying various regulatory requirements, where validation that the lien holder is the beneficiary of record is necessary to proceed. For example, U.S. Department of Justice settlements and CFPB mortgage servicing rules make clear the requirements for establishing, maintaining and verifying the contents of the collateral document file, especially as servicers sell and/or transfer MSRs and prepare to foreclose. An AVR will validate the current beneficiary and identify breaks in the chain of assignment, allowing the lender to rectify any issues prior to MSR transfer.
For instance, servicers looking to sell loan portfolios with missing documentation and inaccurate information in their servicing systems can engage our firm to identify and resolve any assignment chain issues prior to MSR transfer. Our firm can research the company’s extensive data repository, containing over 5.5 billion recorded land documents, and utilize our nationwide network of abstractors to retrieve copies of missing publicly recorded documents. This can help enable a servicer to perfect its collateral files, prepare and record assignments for the MSR sale correctly, and transfer accurate data to the new servicer. Not only do foreclosure actions require the lien holder to be the last beneficiary of public record, but lien releases also need chain of title perfection. Both processes can have direct consumer impact if not prepared timely and in accordance with regulatory guidelines.
The AVR also has potential advantages to the acquiring servicer. The assignment chain provides insight into potential risk in payment processing issues and other irregularities based on the disposition of the previous servicers. Having insight into which servicer had possession of the servicing rights will help the receiver assess the due diligence needed when boarding the loan into its system based on the prior servicer’s reputation for an accurate and competent process.
When the mortgage servicing transfer process does not include proper due diligence that the transferer or seller has provided the transferee with a clean loan file, the deleterious impact to the borrower may result in missed loan payments, improper foreclosure action, credit reporting errors and, ultimately, CFPB punitive action. A thorough quality control process is one of the key steps in the mortgage servicing transfer process. If property reports, such as AVRs, are not utilized to validate that the loan file is defect-free, assignments may be recorded incorrectly and inaccurate data will be transferred to the new servicer, potentially exposing both servicers to financial and reputational risk.
It’s worth protecting yourself
MSR transfers have been a necessary and lucrative part of the servicing process. However, given the regulatory changes that servicers will continue to experience and the increased scrutiny by regulatory agencies, it will become more difficult to protect all parties engaging in these transactions. This difficult aspect of the servicing process will require all sides to be extremely vigilant in providing complete, correct and detailed data so that all parties can meet the required strict guidelines.
It is worth considering the intricacies of the new, enhanced requirements and also the quality of one’s internal transfer procedures. It has become necessary to either build safeguards to provide both complete and accurate data delivery or partner with a vendor that will provide the necessary quality control processes and delivery safeguards to help eliminate the common and costly errors in the industry today. Whatever approach is taken, either internal operations or external vendor partnership agreements, these safeguards are necessary at all levels of the loan servicing process to ensure a full, complete and compliant MSR transfer.
Pam Forrester is vice president and division operations manager for First American Mortgage Solutions. She can be reached at firstname.lastname@example.org.