"Small Servicer" Advantages?
Today we try to spark a discussion on "small servicers"- their definition, and at least one example of the advantages as the dust settles from the 2014 implementation of Dodd-Frank's changes to Federal servicing regulations.
So-called "small servicers" are exempt from some - but not all - of the federal mortgage servicing rules that took effect in January.
Being a "small servicer" has nothing to do with size. In order to be considered a "small servicer," you must service fewer than 5,000 mortgage loans (any affiliate-serviced loans count towards this limit too). Also, to maintain "small servicer" status, you cannot act as a subservicer for even a single loan! (Meaning you originated or currently own every single loan in your servicing portfolio). Note: You are not a "subservicer" under this Federal rule if you sell loans to Fannie, but retain servicing. (Unlike Massachusetts law). But Note: You are considered a subservicer if you buy closed loans under a TPO agreement and turn around and sell the loan to Fannie or Freddie but retain servicing. The key here is who originated the loan- and there can only be one originator under Dodd-Frank ... that person is whoever's name is on the loan.
To be clear, the small servicer exemption is separate and distinct from QM's "small creditor" exemption. The small servicer exemption does not consider total assets or number of loans originated.
Of the 9 major changes in 2014 to Federal servicing regulations (all stemming from Dodd-Frank), small servicers are exempt from all the regulations except:
ARM disclosures
Prompt crediting/payoff statement rules
Force-placed insurance limitations
Most of the loss mitigation requirements
One noteworthy benefit of the small servicer exemption is that small servicers can continue entering into informal repayment arrangements tailored to an individual borrower's needs.
For example:
A borrower comes into your branch. Her car just broke down, and will need expensive repairs. She needs the car to be fixed to keep her job. She asks whether your bank can offer any kind of flexibility in her mortgage payments for the next several months, until she's back on her feet.
A CFPB senior attorney recently spoke about the application of the new rules in similar situations. The above is an example of what they call an "incomplete loss mitigation application" and it illustrates the advantage of the small servicer exemption. Here's why:
Non-Small Servicers are generally prohibited from offering any loss mitigation option to this borrower because it is an "incomplete loss mitigation application." (Likely incomplete because the servicer has not gathered all the information relevant to this borrower's financial troubles, or the documentation to support her claims). The rule says servicers cannot respond to an incomplete loss mitigation application, and instead requires servicers to exercise "reasonable diligence" to try and get enough information to make it a "complete application."
"a servicer shall not evade the requirement to evaluate a complete loss mitigation application for all loss mitigation options available to the borrower by offering a loss mitigation option based upon an evaluation of any information provided by a borrower in connection with an incomplete loss mitigation application." - 1024.41(c)(2)(i).
Why? The blatant lack of trust in servicers to do what is best for the borrower. There are 2 exceptions. First, the servicer in the above example could respond to the incomplete application after unsuccessfully trying to make this a "complete" application, but only after waiting a "significant period of time." That doesn't seem fair to your borrower (especially since she will lose her job if the car isn't fixed soon)! The second exception is that the servicer can offer the borrower a short-term forbearance (under 6 months). Note: Even if the application is "complete," the non-small servicer still needs to formally "evaluate" the borrower for loss mitigation options and disclose to her all the loss mitigation options it would be willing to offer her (make sure there is uniformity here, this will be a fair lending target this year!)
Small Servicers are not bound by this loss mitigation rule. Therefore, they can act to help this borrower however they please, even if the regulators consider the application to be "incomplete." Whether that's a forbearance (for any length of time ... even 7 months!), a trial, or permanent modification, refinancing or any other loss mitigation option.
In other news:
Does your bank not offer modifications? Some small lenders are known not to....with the expense/hassle of foreclosure today (not to mention reputational harm), that policy seems to be "penny wise and pound foolish"
CFPB released a major proposal to amend the QM rule to allow post-consummation cures of QM points/fees violations. But only if you made a "good faith" attempt to originate it as a QM and only within 120 days. Still though, talk about making quality control / compliance review even more important!
And what about Pre-funding QC? It's a reality for every Fannie / Freddie / FHLB lender (and often if selling to any investor that might sell to the GSEs). Doing this internally may be causing you problems; if you're concerned with doing this without frequent delays to closing, consider outsourcing to a specialty shop that can guarantee a 48-72 hour turnaround. Caution, sales pitch ahead -- to consider SCA for this, contact our own Judy Cianciarulo at (781) 356- 2772 or JudyC@scapartnering.com. Why us? The underwriters that handle Pre-funding QC for SCA have an average of 27.5 years experience and we invest heavily in technology that allows this to be a quick and efficient process.
A jury full of Yankee fans awarded a New Jersey man $1.5 million after the city (including the mayor, an "avowed Boston Red Sox fan") refused to let him name his bar "Buck Foston."
Do you track employee sick days? Do you yourself complain about the "nanny state" and too much regulatory oversight? Have you heard of the term, "irony?" Maybe that's a little harsh ... but a forward-thinking trend has been to allow employees to simply take as many sick days as they claim to need. Stories abound of companies that trust employees enough to not formally monitor sick time: employers report not only that workers are happier and more empowered, but also that overall sick time is actually reduced! After all, do you track time spent responding to client calls or doing research after hours or on weekends? This might not be possible under your business model, but for a small, mid-sized, or otherwise flexible shop, why not consider it? The bottom line: you're not hiring children. If you can't trust an employee to be devoted to your company, and to take only a reasonable amount of sick time, perhaps you shouldn't have hired them in the first place.
The only easy day was yesterday.
- Seal Motto
Thanks so much for reading our weekly newsletters. We're not always going to be perfect, but because we always do our best and try not to overpromise, we hope that we're always going to be trustworthy. Your calls and e-mails are very helpful - please keep contributing.
**These are our opinions. We're not authorized, or willing, to express those of others.**