QUESTION
We are a lender that is also a Master Servicer. We use a subservicer to handle our servicing. I was hired last month to manage the servicing platform. Our servicing volume is three billion at this time. Our company is on with Fannie Mae and Freddie Mac. We will be applying to Ginnie Mae at the beginning of next year.
One of the first things I looked for was the servicing quality control reports. I was shocked that servicing quality control was not done – ever! I am panicking because we are applying to Ginnie Mae, and we also have never done servicing quality control to show Fannie and Freddie. On top of that, Fannie will be doing a MORA review in the next few months.
What should we do to get current with servicing quality control? And, what are the requirements? Our CEO reads your articles, and I want to show him your response.
ANSWER
First and foremost, you will need to go back at least twelve months, maybe longer, to get servicing quality control to the point that it is acceptable to the GSEs. Ginnie Mae will undoubtedly expect to receive the reports for the twelve months previous to the application’s formal commencement.
The GSEs conduct their own performance tests. They will communicate any performance deficiencies noted to the servicer. But, the GSEs could elect to terminate a servicer’s right to service their mortgage loans, although the servicer will still have an opportunity to explain any mitigating circumstances or factors that justify the servicing actions it took or did not take, given the timeframe specified by the GSEs in their communication of the performance deficiencies.
Servicing quality control is implemented for a variety of reasons, such as complying with insurer and guarantor requirements; proper servicing to private institutional investors; conforming to company policies and procedures; complying with applicable federal, state, and local laws and regulations; complying with HUD FHA guidelines; implementing quality control requirements for various types of loans (i.e., FHA, VA, USDA, conventional); meeting Fannie Mae, Freddie Mac, and specific investor requirements; and, meeting quality control guidelines appropriate to a Ginnie Mae Issuer.
Furthermore, quality control servicing identifies inadequacies, errors, or abuses relating to particular persons or practices involved in the loan servicing process, which becomes an alert to initiate corrective action. And it helps to prevent fraud by evaluating, documenting, and monitoring the general quality of loans serviced, thereby expanding the scope of quality control reviews when fraudulent activity or patterns of deficiencies are identified.
The evaluation of the actions the servicer takes in servicing the mortgage loans will focus primarily on determining whether the servicer took all of the appropriate steps to cure the delinquency and deficiency or avoid foreclosure and if foreclosure could not be avoided, confirming that the servicer completed the legal actions within the GSEs’ required timeframes.
In all our years of providing servicing quality control, we find that some companies have been remiss in consistently conducting quality control of loan servicing. This baffles me, frankly. Sometimes, company representatives tell us they didn’t realize they should be performing quality control audits on their loan servicing. Not implementing servicing quality control is a substantive regulatory mistake. Once you recognize a mistake, you should fix it; problems propagate and lead to regulatory and investor actions if the error is not quickly resolved.
Every Master Servicer should have a Servicing Quality Control Plan (“Plan”). It should provide detailed sections that include, though are not limited to:
- Assumptions
- Borrower Contact
- Collection & Loss Mitigation
- Default System (i.e., SFDM)
- Deficiency Identification
- Delinquencies
- Discretionary Reviews Criteria
- Early Payment Defaults
- Foreclosure
- Loans in Default
- Loss Mitigation
- Maintenance
- Methodology
- Notification Requirements
- Payoffs
- Quality Control Auditor Information
- Quality Control Parameters
- Record Keeping
- Reporting
- Responsibilities and Authorities
- Risk Categories
- Risks and Ratings
- Selection and Timing
- Selection by Loan Type
- Servicing Review Timeframes
- Servicing Standards
- Servicing Transfer
- System Integrity
- Taxes, Insurance, Escrow Administration
- Third-Party Auditor Information
- Timeliness and Frequency
I could go on, but hopefully, you get the point! Depending on the size, complexity, and risk profile of the financial institution, more sections would be needed. You must have a Plan that adequately provides the audit guidelines. If you want more information about our Servicing Quality Control Plan or Servicing Audits, please ask for it HERE.
The Plan should be sufficient in scope to enable the company to evaluate the accuracy, compliance, and consumer protection within loan servicing operations. It should also provide independent evaluation, separated from the required operational functions.
Monthly quality control of your loan servicing – whether single-family or multi-family – is a critical obligation. It is an essential requirement of your relationship with investors. If you are not conducting servicing quality control, you are bucking for an adverse rating from the GSEs. Without sequential monthly reports for servicing quality control, a Ginnie Mae Issuer application will be dead in the water.
Monitoring monthly consists of several oversight categories, amongst which are:
- Aging and frequency
- Change management
- Criteria to expand the scope
- Documenting corrective action
- Follow-up requirements
- Population selection and timing
- Reporting
- Sampling methodology
In our experience of servicing audits, several deficiencies stand out, with the top defects occurring in the areas of servicing delinquent accounts, loss mitigation efforts, deficiency judgments, servicing transfers, fees and charges, claims, escrow administration, handling of prepayments, and borrower interactions.
The sample size matters. For instance, in the case of servicing fewer than 3,500 FHA loans in their total FHA portfolio, a servicer must review 10% of the FHA loans for each area of servicing. Servicers that are servicing more than 3,500 FHA loans may use an appropriately sized statistical sampling that provides a 95% confidence level with 2% precision for the review of each area of servicing sufficient to apply a statistical random sampling methodology. Regardless of their portfolio size, all servicers must document the total population and how the sample size and selections were determined for each area of servicing.
Auditing is based on a per loan file review. Our audits, for instance, review a host of compliance areas, including, but not limited to, the following categories:
- Bankruptcy Practices
- Borrower requests, complaints, and escalated cases
- Claims and claims without conveyance of title
- Collection Practices
- Credit Reporting Practices
- Customer Service
- Default Management
- Deficiency judgments
- Document retention and legibility
- Documentation of purchased or acquired Mortgages
- Escrow Administration
- Exit Strategies
- Foreclosure Practices
- Handling of Prepayments
- Home Disposition Options
- MIRE Events: Impounds/Flood Insurance
- Impounds/Force-Placed insurance
- Impounds/Hazard Insurance
- Impounds/Taxes
- Income Tax Statements
- Loan Assumption Processing
- Loan servicing Fees
- MIP Billings
- Mortgage record changes
- Occupancy Change Event
- Payment Processing
- PMI/MIP
- Prepayments
- Presidentially Declared Major Disaster Areas
- Property Preservation and Conveyance
- REO Practices
- Reporting under the Single-Family Default Monitoring System
- Servicemembers Civil Relief Act (SCRA)
- Servicing Records
- Transfer of Servicing
- Waterfall
As a Master Servicer, you should prioritize implementing a robust structure for servicing quality control. Many of our clients have a manager assigned to ongoing monitoring of the performance of the Servicing Quality Control Plan.
If our auditors identify a deficiency, senior management must be notified. Prompt and effective corrective measures should be taken and documented where loan servicing deficiencies occur. A material finding, material misrepresentation, or verified fraud must be immediately remedied to avoid the possible repeat of the same issues.
Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
