NAVIGATING THE POTENTIAL PITFALLS OF SERVICING TRANSFERS
By: George FitzGerald, EVP, Chief Operating Officer, Black Knight Servicing Technologies
Servicing transfers are essential to a healthy mortgage market, but the process is complex. This post examines potential challenges and ways technology can eliminate friction.
Just as mortgage loans are bundled and sold to investors in the secondary market, lenders often contract with third parties to manage the day-to-day details of “servicing” the borrower relationship, including payment processing, customer communications, loss mitigation, and escrow disbursements. This transfer of servicing rights is a common but complex practice with lots of room for improvement.
A servicing transfer is a transaction where one servicer acquires the mortgage servicing rights (MSR) for a loan from another servicer or sub-servicer. Servicing transfers are common, but there are lots of hand-offs involved, each of which could be a potential failure point in the process.
During servicing transfers, consumers receive notices in the mail that their loan is being transferred to a new servicer. That might not seem like a big deal, until they start noticing changes: different paperwork, unfamiliar staff, a new account number, different policies, and a new remittance address. They may even receive a missed payment notice before they realize they need to add the new servicer to the list of companies authorized to debit directly from their bank account. Consumers with loans in default may experience additional complications.
Getting these hand-offs right is more than a customer service consideration, it is also a regulatory concern. The Consumer Financial Protection Bureau (CFPB), one of the regulatory agencies which set the rules for how servicers interact with borrowers, has clear policies and procedures that must be followed to the letter, covering everything from late charges, credit reporting and escrow and loss mitigation procedures.
There are lots of potential pitfalls that can create consumer and regulatory compliance headaches during and after the servicing transfer process. These can be broadly grouped into three categories: technical challenges, internal process challenges and outdated industry practices. With proper planning, servicers and investors can successfully navigate the servicing transfer process, remain in compliance with the CFPB’s regulatory requirements and potentially eliminate adverse effects on consumers.
Technical Challenges
Servicing transfers often require moving hundreds of thousands of pieces of loan data from one servicing system to another. They can be plagued with issues when the companies’ servicing systems do not talk to each other. Not all servicing systems have the same fields and data structure, so moving a loan from one system to another is not as simple as sending the files. Accurately mapping the data from one servicing system to another is an essential part of the process.
Some servicing systems don’t have loss mitigation capabilities and the servicer relies on spreadsheets and other solutions to capture that data. When it comes time to move the loss mitigation data, for example, they rely on manual setup, which can interrupt servicing.
One way to avoid technical challenges is to work with your servicing system provider in advance to assess the situation and develop a servicing transfer plan. They can help you analyze and address any compatibility issues and resolve them prior to transferring loan data and loss mitigation information.
Internal Process Challenges
Every servicer has its own unique set of internal processes. Even slight variations, however, can have an adverse effect on consumers when their loan is transferred. It is important to remember that the consumer ultimately experiences the ripple effects of all process conflicts downstream when their loan is processed by a new servicer. It is in the best interest of both the original servicer and the new servicer to ensure the hand-off goes smoothly.
For example, if a servicer with a two-month escrow cushion requirement transfers a loan to a servicer with a zero-month escrow cushion, it is important to resolve, in advance, how to address the overage created in the borrower’s account.
Issues often arise over the application of payments. For example, a borrower accustomed to having occasional short payments covered out of escrow might become understandably angry when a new servicer refuses the payment as insufficient, potentially causing problems with the loan.
Conversely, a borrower accustomed to having overpayments applied against their outstanding principal balance might become frustrated by a new servicer’s policy of depositing overpayments into escrow accounts.
Other internal processes that can affect consumers during servicing transfers include timing for escrow disbursement and timing for escrow analysis. For example, many servicers perform the escrow analysis on loans based on the anniversary date of when the loan was originated or schedule it to coincide with an ARM adjustment. Others base the escrow analysis schedule on when tax disbursements are made. If timing of the escrow analysis changes, the borrower’s payment amount can change unexpectedly. If the borrower sends in the old payment amount, it could sit in suspense.
When planning a servicing transfer, analyzing the process and procedure differences that could impact the consumer is an important step. This analysis can provide valuable insights into potential pitfalls that can be addressed through proactive communication with consumers to prevent any confusion, concerns or disruptions.
Industry Challenges
In addition to the technology and internal process differences between specific servicers, there are a variety of ways the mortgage industry as a whole might be able to systemically improve practices to streamline mortgage servicing transfers.
For example, it is common practice to assign a new account number whenever a loan is transferred to a new servicer. The two primary reasons for this, historically have been to resolve inconsistencies and avoid duplication. The industry can address both issues by identifying a unique account number assignment process across the industry.
Another industry-related challenge involves drafting. Drafting agreements give banks the right to draft money from a consumer’s account. When the loan moves from one servicer to another, drafting often stops until the borrower specifically authorizes drafting by the new servicer. A standard drafting agreement could facilitate seamless transfers by granting both current and future servicers the ability to draft from a borrower’s account.
Communication Is Key
Many pitfalls can be avoided simply by providing better communication to borrowers and insurance providers. It is vital those consumers understand exactly what is happening.
When a servicer is going to transfer a loan, they are required to send a “goodbye letter” to notify the borrower not less than 15 days in advance of the pending servicing transfer. This is followed by a “welcome letter” from the new servicer. Both letters should contain information regarding the transfer, including the name, location, and phone number of the new servicer, along with a statement explaining the consumer’s rights and what to do if they have questions. The welcome letter should also include information about when and where the borrower should make their monthly payments.
Most regulations contemplate the servicer sending out paper letters, but today’s consumers often don’t look at their daily mail, so providing updates via digital channels like mobile apps or email can enhance communication.
In addition to communicating with consumers, it is important for servicers to properly notify other interested third parties, especially insurance providers, of the servicing transfer. Many borrowers pay their hazard, flood, and other insurance through escrow. Communication with insurers – including the name of the new servicer, the new loan number, and where to submit their bills for payment – is important to avoid lapses in coverage. The Mortgagee Clause should also be updated to have checks written to the new servicer and the borrower if there is a claim against the property. This will eliminate having to void incorrect checks and reissue insurance claim payments.
Default and Bankruptcy Complications
When transferring MSRs, one of the biggest areas of concern is loans in default including active foreclosure and bankruptcy, or any loss mitigation efforts including forbearance agreements. The loss mitigation process, and any trial or permanent loan modifications, should continue uninterrupted during servicing transfer.
It’s important to plan how to transfer loans in loss mitigation so that the new servicer correctly applies payments or collects amounts under the agreements. The servicer must update borrowers in the loss mitigation process and inform them when they must submit new information for a trial or permanent loan modification.
Servicing systems don’t have a standard process across the board, so managing loss mitigation requires extra diligence. There are very specific steps that must be followed based on investor type and the state where the loan originated.
When servicers try to transfer a loan involved in a bankruptcy, other steps are required. During a typical Chapter 13 bankruptcy, for example, the servicer must account for multiple loan payments, including the pre-petition payment, the post-petition payment, and the contractual amount due.
Navigating Potential Pitfalls
Servicing transfers are on the rise, along with heightened regulatory expectations, making it imperative to have a solid plan in place to navigate the potential pitfalls that can negatively impact consumers. Proactive planning and clear communications with consumers can improve the entire servicing transfer experience for servicers, investors, and consumers. Black Knight’s Professional Services team can work with you to develop a servicing transfer plan that will help streamline data migration, align policies/procedures, address loss mitigation requirements, and improve communications to make your servicing transfers a success.
Learn more about our Professional Services.