Servicing mortgage loans involves a series of critical tasks, governed by regulatory authorities such as the Consumer Financial Protection Bureau (CFPB). The regulatory burden of loan servicing can be high, which is why several banks have stepped away from the servicing process of the mortgage value chain and focused on origination instead. This is a lost opportunity for banking and non-banking lenders, especially as emerging technologies like mortgage automation make it easier to keep up with servicing standards.
How Post-Recession Modern Monetary Theory Has Influenced Servicing Standards
Following the global financial crisis, the mortgage industry saw a host of new regulations that would shape servicing for decades to come. Specifically, the Dodd-Frank Wall Street Reform and Consumer Protection Act have overwhelmingly affected mortgage servicing processes. Dodd-Frank led to the birth of CFPB and gave the Federal Reserve the authority to regulate important institutions. It also increased compliance requirements from mortgage originators as well as servicers.
For example, the Ability-to-Repay/Qualified Mortgage (ATR/QM) rule established more conservative underwriting norms and servicing standards to prevent the kind of unprecedented foreclosure levels seen during the financial crisis. Similarly, the False Claims Act (FCA) was more vigorously implemented, compelling mortgage lenders and servicers to pay sizable penalties due to the mistakes made during the crisis.
Furthermore, due to the recent COVID-19 pandemic, modern monetary theory has undergone another wave of change, with regulatory bodies rolling out relief measures, and, consequently, also raising rates to combat growing inflation in today’s economy. The debt-service-to-income (DSTI) ratio of the average borrower has also increased after the pandemic (indicating a decline in their ability to repay a loan) to reach 30%-40%.
As a result, mortgage servicers find themselves facing complex default scenarios that must be navigated with caution while keeping in mind the CFPB’s borrower protection measures. For example, the recent servicing standard modernizing borrower communication makes it vital for mortgage servicers to adopt electronic channels in lieu of in-person notices only.
Without investing in mortgage automation and other process optimization strategies (like outsourcing), servicers will find it difficult to keep up with the evolution of servicing standards and its effects on borrowing and lending practices.
How Modern Guidelines Must Shape Borrowing and Lending Practices
Mortgage companies need to approach servicing compliance with a proactive stance, which includes anticipating future regulations and investing in technologies that can address them. Best practices in this area include:
1. Integrate digital technology to speed up the application process
Ever since Dodd-Frank, mortgage process optimization has shifted to focus on improving the borrower experience. Unfortunately, loan approval processes today remain slow and borrower satisfaction levels drop by 15% if a decision takes more than 10 days. A digital lending app can help introduce mortgage automation into the origination process, and offset some of the inevitable delays caused by stringent often changing underwriting norms.
2. Centralize data repositories to streamline default servicing
While demand for new loans remains relatively low amid inflation and high-interest rates, servicing volumes are almost back to pre-pandemic levels as borrowers gradually exit the COVID period’s forbearance programs. Foreclosure proceedings are up by 132%, which can be expensive for mortgage businesses as servicing default loans costs almost 10X more than a performing loan.
One way to improve these margins is by introducing digital systems that break down data silos and centralize borrower information spread across legacy software, spreadsheets, and paper documents. Digital servicing platforms are yet to become commonplace, but lenders can start building the foundation by consolidating disparate servicing data sources through mortgage automation.
3. Identify a reliable partner who can help improve the bottom line
One of the main challenges of mortgage servicing under modern monetary theory is growing servicing costs due to an increasing regulatory burden. Research shows that the cost of servicing a performing loan today is 2.5-3X higher than before the financial crisis, primarily because the servicing standards previously applicable to only the largest servicers now apply to the majority of mortgage businesses regardless of size. Therefore, it is crucial to identify cost savings opportunities, which is where an outsourcing partner can play a role.
4. Harness mortgage automation for delinquency management
As mentioned, delinquent and default loans place an outsized burden on servicers, which can be mitigated through mortgage automation. Whether it is intimations for first-rate adjustments or loan modification options for foreclosure prevention, a mortgage automation system can fetch the right data based on event triggers and inform the borrower via electronic channels like email. Mortgage automation can simplify follow-ups and drive transparency, making it easier for servicers to demonstrate their compliance with servicing standards and CFPB norms.
Strengthening Your Infrastructure to Meet Evolving Servicing Standards
While the financial crisis signaled a paradigmatic shift in mortgage standards, mortgage businesses can expect an accelerating pace of change in the upcoming years. Starting with the COVID-19 pandemic to supply chain and economic pressures as a result of geopolitical conflict, and ultimately, climate and weather-related factors — servicing will rapidly evolve to meet the needs of modern monetary theory, and a new generation of borrowers.
A robust technology system gives mortgage companies a competitive edge when coping with regulatory changes. Centralized data repositories enable agility while mortgage automation ensures more accurate adherence to standards via spending less on headcount. At Nexval, we work with leading mortgage companies and servicers to re-envision their digital capabilities for a rapidly changing world.
Speak with our experts to know more.