QUESTION
We have used a subservicer for many years. Recently, we decided to bring servicing in-house. The committee we formed to shepherd the transition has determined that several guidelines must be developed to ensure a smooth transition.
One problem we discovered is that some processes and procedures were not documented and approved. Relevant policies need some updating. The change management area needs further fulfillment. But we are overcoming these issues well as we get ready for the transition.
Handling a smooth transition from subservicing to in-house servicing requires considerable attention to process, procedures, policies, and risk evaluations. I would like to know a few pointers I can take to the committee to assist in our plans.
What tips can you give us to ensure a smooth transition from subservicing to in-house servicing?
SOLUTION
Servicing Platform Development
ANSWER
Transitioning from a subservicer to a servicer is a complex process that involves gaining approval from investors and significantly expanding operational capacity. A subservicer performs the day-to-day duties of servicing a loan, but the master servicer holds the ultimate contractual responsibility to the investor. The transition to a servicer requires a company to develop the robust infrastructure and oversight capabilities of servicing, which go far beyond the monitoring of typical subservicer functions.
To transition from a subservicer to a servicer conducting the servicing of its own loan portfolio, a financial institution must assume greater responsibilities and risks, which requires building significant internal capacity and obtaining approval from investors. The transition involves expanding operations, upgrading technology, and shifting legal obligations.
As a master servicer, you own the right to perform servicing and may choose to service loans yourself or through subservicers. In the agency mortgage market, master servicers typically outsource the day-to-day functions to subservicers and assume a high-level oversight role. You do not state whether your in-house servicing will be exclusively for your own portfolio or if you plan to service both your own portfolio and also offer subservicing. For purposes of this article, I will assume the latter is the case.
Key challenges when transitioning to servicing include meeting certain capital requirements, managing complex data migration, navigating intense regulatory scrutiny, and controlling operational costs while scaling the business.
In the development of servicing platforms, we have outlined a step-by-step approach, consisting of five essential transition categories. Every one of these categories is essential to the smooth transition to in-house servicing. If your committee does not take these categories into account, the success of your transition may be in peril.
The following are essential factors in the development of an in-house servicing platform.
five Essential Transition Categories
1. Investor approval
Obtain approval from appropriate investors to function as a master servicer that services its own portfolio.
Application Submission
The process requires a detailed business background, financial health, policies, and operational procedures.
Onsite Review
An investor's risk team may conduct an on-site operational review to evaluate the company's servicing capabilities.
Financial and Operational Assessment
Investors may review the company's financial and operational metrics to ensure it has the capacity to handle the full range of servicing responsibilities.
Compliance with Guidelines
The company must meet all applicable eligibility requirements set forth in the investor's servicing and selling guides, announcements, formal issuances, and Best Practice expectations.
