As we move into the height of the 2012 presidential election cycle, issues of consumer protection in the financial services industry are front and center on the political agenda, as can be seen in the recent controversy involving the president’s recess appointment of Richard Cordray as director of the Consumer Financial Protection Bureau (CFPB).
Central to the discussion of consumer protection and the role of the CFPB is the mortgage servicing industry and its role in the foreclosure crisis. In the wake of the “robo-signing” scandal, the largest and most sophisticated mortgage lenders and servicers continue to work with their prudential regulators on resolving the vast implications of a presumption of systemic failure and the public perception that banks have once again proven to be unsuccessful in protecting the rights of consumers. This perception was central to the Dodd-Frank financial reform act signed into law on July 21, 2010, which provided the legislative foundation of the CFPB.
Banks overwhelmed by the broad implications of oversight by the newly empowered CFPB and other aspects of Dodd-Frank continue to direct significant resources to managing and responding to lingering effects of the foreclosure crisis without knowing how aggressively the CFPB will exercise its authority in the servicing industry and precisely which standards will form the basis of the Bureau’s approach. Although the CFPB has issued supervision and examination guidelines for both mortgage origination and mortgage servicing exams, it is not yet clear the impact that the ongoing remediation and ultimate results of the April 2011 foreclosure Consent Orders will have on the Bureau’s approach to supervision and enforcement in mortgage servicing. Meanwhile, Congressional committees also continue to look into the situation.
Some mortgage servicers fear that the influence of this intense scrutiny coupled with the results of the consent order remediation efforts will provide a road map for regulators to identify technical compliance violations in traditional areas of consumer compliance such as Truth-in-Lending, RESPA, and fair lending. This creates additional cause for all mortgage servicers to work proactively to identify and correct deficiencies in mortgage servicing operations – throughout the entire life cycle of the servicing activities. This includes minor exceptions that don’t directly impact borrowers all the way up to especially egregious errors such as failing to afford the required protections for our nation’s active duty military members.
All banks with mortgage servicing operations should recognize the significance of this emerging risk and be proactive in assessing the effectiveness and sustainability of controls, policies, and procedures governing mortgage servicing functions. As with other types of risk management, the foundation lies within an effective risk assessment program, which should encompass all aspects of the loan servicing, loss mitigation, and foreclosure activities, with particular emphasis on activities performed by third parties on behalf of the bank. This risk assessment should also reflect the relationship of concepts such as fair lending, which is consistent with regulator’s approach of now including loan servicing and loss mitigation activities in fair lending examinations.
The results of the comprehensive risk assessment should be used to identify risks and to direct resources to making appropriate enhancements to mortgage servicing risk assessment programs based on evolving industry standards and best practices. Utilize risk assessment results to develop specific action plans for program improvements prior to internal audits and external examinations. Continue to refine the risk assessment standards as expectations change and as regulator’s approach to mortgage servicing supervision and examination progress. By performing a robust risk assessment and adopting a continuous improvement model in mortgage servicing operations, your bank will be better positioned to avoid regulatory and reputation risk, and most critically to protect the rights and interests of borrowers.
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