Compliance Blog

Posted by Anthony Demangone

Yesterday, the Federal Reserve, OTS, and the OCC all announced enforcement actions against the nation's largest mortgage loan services.  (65 percent of the market was covered by yesterday's enforcement actions.) Enforcement actions were also issued against MERS and LPS, two organizations that provide services to many mortgage services.  The FDIC piped in, as well, noting that while it didn't drop the hammer on any of its folks, it is monitoring things closely and it voiced support for reform of the mortgage servicing industry.  

• Read about the Fed's enforcement actions here.
• And the OCC's here.
• And the OTS's here.
• And the FDIC's statement. 

Now, each one of those links is worth reviewing.  But you may want to start here: The Interagency Review of Foreclosure Policies and Practices.   The Fed, OTS, and OCC co-authored this document that highlights what their investigations looked like, what they found, what they ordered these banks to do, and what they think must be done to fix the mortgage loan servicing industry in the future. They acknowledged that the "Review" document had to generalize findings, and that there were variances among the servicers.  But the fact that all three regulators agreed on this document and timed the release of enforcement actions speaks volumes. 

Yesterday, I wrote that I if I were a betting man, the State AG's mortgage servicing settlement offer would likely find its way into rule, regulation, or guidance.  This is pretty darn close.

In short, they found huge deficiencies in virtually every aspect of mortgage servicing related to foreclosure processes.  Internal controls were lacking.  Staffing was inadequate.  Documentation was weak. Vendor management was lacking. Quality control and audits were not strong enough. And risk management was weak.  

The enforcement actions now demand a strong compliance program over mortgage-servicing and foreclosure operations - including loss mitigation efforts. The banks must retain an independent firm to review residential foreclosures done in 2009 and 2010. I'm sure that won't be cheap. They must dedicate additional resources to communicate with borrowers related to foreclosures, loss mitigation, and loan modifications, including the creation of a "single point of contact." They must beef up overview of third party vendors.  They must improve and develop management information systems.  Finally, they must greatly improve their risk assessment capabilities.

While no fines were issued yesterday, they say that fines will be coming soon enough. And they indicated that these enforcement actions in no way prevent other state and federal regulators from trying to take their own pound of flesh. 

Finally, the "Review" document suggests three things to greatly improve the mortgage servicing industry. 

1. Better governance and oversight.
2. Better organizational structure, staffing and technology.
3. Better accountability and responsiveness with consumers.

It is a lot to digest.  I'll just offer these thoughts:

• While these enforcement actions do not directly affect credit unions, yesterday's events could eventually lead to a mortgage servicing code of conduct.  Three regulators signed off on the "Review" document, and one other regulator supported yesterday's efforts.  It doesn't take much more to form a inter-agency guidance document. Imagine if you will, an FFIEC Examination Guide on mortgage servicing, akin to the current BSA manual.   It could happen.
• Yesterday's events are a good reminder of what can happen when organizations get in over their head and do not allocate the necessary resources to adequately manage the risks (compliance, reputation, transaction) in a given area of operations. Look at page two of the "review" paper.  It lists the areas that regulators looked at when they examined the banks on the mortgage servicing issue.  Policies and procedures. Organizational structure and staffing. Management of third parties. Quality control and audits.  The list goes on.  But it could be a good template to judge how you are doing in any given area, be it credit cards, mortgage servicing, appraisals, share accounts, etc.  Look at the headings of the list as they pertain to a given area of your credit union and start asking yourself some questions.  Do I have adequate policies and procedures here?  Is the organizational chart and staff adequate?  Are we managing the third parties that help us here adequately?  You get the idea.
• This is an issue that we must continue to monitor.   Will it affect credit unions that do mortgage servicing?  I think that it will.  Eventually.  So stay tuned...