Regulatory landscape impacting loan servicers
Key workflows typically within loan servicers’ responsibilities are at the center of recent regulatory updates, prompting a need for additional data collection and changes to operational processes and related controls.
In the United States, regulators have recently increased scrutiny and focus on data collection. The Consumer Financial Protection Bureau has updated mortgage servicing examination procedures to support continued account maintenance and loss mitigation practices and has pushed to build a national auto-lending data set (e.g., a request for nine large auto lenders to provide data on lending portfolios around lending channels and loan portfolio trends, including days-past-due and payment trends prior to repossession).
The Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the National Credit Union Administration have proposed a policy statement on commercial real estate loans highlighting the need for financial institutions to work closely with borrowers during financial stress, including areas like loan-loss accounting, loan modification, classification and reporting.
The Financial Consumer Agency of Canada has proposed guidelines for loan servicers to support consumers with increasing hardships resulting from the current environment of higher interest rates, and those with high levels of household debt. These guidelines establish the expectation for institutions to proactively monitor consumers vulnerable to mortgage delinquency due to these exceptional circumstances and offer them appropriate relief measures as applicable, implement effective policies and procedures, and maintain detailed recordkeeping and reporting so that they can be made available to the agency on request.
In the United Kingdom, the Financial Conduct Authority in March 2023 finalised guidance on how financial institutions can support mortgage borrowers impacted by the rising cost of living through automated processes and digital channels. The guidance highlights the importance of providing forbearance at scale and mortgage-contract variations for the purpose of forbearance.
Call to action
To address this growing set of regulatory asks and sharpen their focus on operational efficiency and resiliency, servicers should take the following multipronged approach:
- Establish or reinforce a compliance focus within the cross-functional transformation task force
- Continually review and strengthen compliance key risk indicators and risk reporting
- Scan and leverage the right technology-enablement toolset.
Detailed discussion of these strategies follows.
Establish or reinforce a compliance focus within the cross-functional transformation task force
Small to midsize lending and servicing institutions typically do not have a centralised and focused transformation office or task force that can ensure that relevant compliance requirements are adequately considered across all initiatives. Servicers should establish a centralised and multidisciplinary (i.e., business, operations and technology) process transformation and data analytics task force, or strengthen their existing one, making compliance an explicit focus area. This task force and the enabling infrastructure components should ensure that the strategies for compliance readiness are also embedded within operational efficiency and resiliency mandates.
These strategies include:
- Structured and intelligent regulatory mapping to impacted business functions and business or operational processes
- Performing an operational and regulatory compliance gap assessment to identify priority areas (e.g., parts of servicing, manually extensive but important processes, and collections) that may require deeper-dive analysis and remediation
- Defining and/or strengthening regulatory compliance-related responsibilities and ownership
- Enhancing or setting up a compliance change-management function to effectively integrate regulatory-compliance changes within ongoing initiatives across impacted processes
- Designing controls to monitor compliance (i.e., manual versus automated).
Continually review and strengthen compliance key risk indicators and risk reporting
Servicers should increase the frequency and coverage with which they review their loan portfolio and enhance regulatory compliance and loss-mitigation practices by strengthening proactive risk indicators and risk reporting. This action is especially important now, with several industry and market factors driving a potential increase in delinquencies and the focus on concentration risks, impacting servicing. Risk reporting should focus on areas such as:
- Loss-mitigation options and processing time: Substantial or significant disparities across processing time or loss-mitigation servicing options by specific customer-group characteristics
- Noncompliant collection practices: Collection practices not based on delinquency status
- Delinquencies and workout options offered: Options offered to customers, including forbearances and loan modifications
- Gaps in disclosures: Weak or nonexistent processes (e.g., disclosures) and controls (e.g., reporting) to ensure ongoing lending and servicing compliance
- Complaints: Consumer complaints alleging discrimination in servicing or loss-mitigation practices
- Audit and regulatory findings: Internal audits, compliance reviews or monitoring reports identifying significant weaknesses or violations in handling exceptions, fee waivers, credit reporting, agency reporting or compliance with bank policies and procedures.
To address regulatory examinations and facilitate operational excellence, servicers should be prepared to record, track and report the items highlighted above.
Scan and leverage the right technology-enablement toolset
The challenge for any regulated lending institution is effectively leveraging technology on an ongoing basis to track myriad regulations issued by different regulatory agencies and effectively map and integrate them within existing internal policies and processes. Lending organisations should explore data and analytics tools along with artificial intelligence. A set of leading use cases is highlighted in the table below.
- Aggregate, store and analyse data
- Automate and streamline workflows and manage customer engagement
- Easily structure, store and access data to fulfill increased volume of regulatory requests
- Build automated monitoring to routinely measure compliance metrics such as flood lender-placed insurance and refunds
- Use automated-testing tools to map and test servicing compliance, provide complete evidence of compliance and identify proactive risk mitigation process and policy gaps
- Drive lending decisions through intelligent credit scoring
- Provide proactive customer support by identifying issues before they materialise (e.g., tying historic and current data to identify inherent risks)
- Identify less-engaged customers at a higher risk of attrition
- Tie historic and current data to identify inherent risk, potentially identifying compliance concerns before they materialise
- Zone in on areas with known issues (e.g., customer complaints) and analyse large sets of available data (e.g., debt-to- income, loan-to-value FICO)
|Natural-language processing, chatbots and speech analytics
- Automate repetitive tasks, answer customer questions and process servicing transactions
- Collect data related to customer interactions across multiple channels (e.g., chat, emails, speech, text) to build analytics using keywords, phrases, call emotions for automation in compliance testing and broader operational efficiency
- Monitor and notify the business regarding any changes to regulatory requirements
- Ensure adherence to regulatory requirements (e.g., call disclosures, customer greetings) and reduce customer complaints and regulatory criticism (e.g., using speech analytics to test effectiveness of Fair Debt Collection Practices Act and Unfair, Deceptive, or Abusive Acts or Practices policies and procedures, and identify areas in need of improvements and training)
|Optical character recognition
- Accelerate initial data upload and document indexing and classification
- Accelerate document review and validation across the loan-servicing lifecycle to verify completeness and accuracy of loan documentation
- Compare loan information in documentation with system of records
- Board critical data fields (e.g., payment instructions, fees and accrual schedules, escrow, and flood) to reduce manual-input error and provide more accurate reporting
- Accelerate review of critical compliance-related data fields across documents
- Produce evidence in support of compliance testing across documents