Loan servicers have to navigate a continuously changing mortgage landscape. New regulatory requirements, turnover of experienced talent and other factors are all making the mortgage servicing business more turbulent than ever. But perhaps the biggest challenge, especially for small, growing and non-bank servicers, is ensuring that quality control is maintained even when new demands emerge.
In the decade since the financial crisis, costly delinquencies have fallen from their historic highs and refinancings have increased as homeowners take advantage of lower interest rates. However, even with more solid underwriting the cost of servicing a loan has not experienced a decline. According to the Mortgage Bankers Association, the cost of servicing a loan doubled between 2009 and 2013 and has held steady at about $160/loan since then.
The regulatory environment has become more demanding in the wake of the crisis and new regulations that go on the books could mean higher costs for servicers associated with development and implementation to fulfill those requirements. An example of that is the Consumer Financial Protection Bureau’s new amended rule requiring servicers to send out billing statements to borrowers who are entering or exiting bankruptcy.
While this rule can be helpful for property owners, there are still many questions to be answered: Where does the information for the statements come from? Who will prepare the statements? What is the cost of sending out the statements? These are all questions that servicers must answer with time and resources to develop the means of acting on the regulations.
As a result of these new rules, the increased cost of compliance, including maintaining both compliance and audit staff, has reduced servicing margins. For those servicers that want to maintain the highest level of quality while they take on new tasks, outsourcing some servicing functions to a skilled third-party may be the most attractive solution.
The same applies to servicers that want to grow their portfolios by expanding into different loan types they might not be as familiar with. Outsourcing quality control can help them comply with program requirements and add expertise they may not currently have in-house.
For example, a servicer may want to start servicing FHA loans but may lack the depth of experience to feel confident that they are meeting all the HUD requirements or that they have the capability to perform quality control testing, at least initially. Outsourcing quality control allows them to bridge the skills gap by giving them access to seasoned professionals who are well-versed in FHA servicing and who can provide valuable feedback through the testing.
With the continually changing regulatory environment, outsourcing also allows servicers the flexibility to modify their QC testing as needed. They can specify the frequency, volume, and areas of testing, which gives them control over costs and allows them to avoid the inefficiencies they might encounter while trying to meet the changing testing criteria on their own.
Experience is another issue. The average tenure of servicing staff is a little more than four years according to the MBA. Such a short tenure may make it difficult to build proficiency in the requirements of a specific loan type, let alone a multitude of loans. By using a third-party vendor whose expertise is quality control testing, the servicer gains access to industry trends and best practices that they might not have otherwise. In the course of their work with servicers, vendors accumulate deep experience with loan types and special situations that an in-house team might never be exposed to.
Third-party specialists can also tailor their QC testing to a servicer’s particular needs. For instance, if you only need to look at the big risk areas, the vendor can test at a higher level and if you need to look at full compliance the vendor can test in great detail with multiple bankruptcy tests and specific tests for FHA and HUD compliance.
Over the past decade, the housing market has experienced enormous changes. Institutions of all sizes have struggled to keep up by relying on their in-house talent alone. But there’s a better way. Vendors offering expertise-on-demand give servicers flexibility and consistency at a reasonable cost. And in a complex and constantly changing operating environment, those can be the keys to success.
