1. Executive Summary
With the effect of COVID pandemic receding and the economy opening up gradually, we are witnessing an eventual roll back of forbearance extension and foreclosure moratorium. Even though the forbearance period was set to expire by the end of June, MBA estimates that nearly 1.6 million are still in forbearance. Due to this slowdown in forbearance exit, the share of loans in forbearance continues to stay high in lender & servicer portfolios. This poses a serious operational challenge to servicers during bulk transfers of MSRs that require careful handling of borrower information and loss mitigation applications.
This is because when a mortgage servicer buys MSRs or bulk loans, the loan boarding team gets inundated with excess paperwork. It requires immense manual effort to go through hundreds of documents in non-standardized formats and do a ‘stare & compare’ analysis to make sure documents & data fields are in order. The story doesn’t end there - as soon as the MSR transaction goes through, the clock starts ticking for servicers.
These loan files, typically, have to be onboarded within weeks so that servicing can start on time for newly originated loans or continue without disruption for previously originated loans. This puts tremendous strain on the loan boarding teams where they need to ensure speed as well as accuracy of processing documents in a relatively short span of time. However, this operational challenge increases manifold when we factor in slow forbearance exit and regulatory requirements prescribed by CFPB.
2. Understanding CFPB regulations & challenges
As millions of homeowners are still in forbearance programme - CFPB maintains a strict oversight on MSR transfers and whole loan portfolio transfers to prevent avoidable foreclosures. According to the Bulletin dated 1st April, 2021 - CFPB warns mortgage servicers to take all necessary steps now to prevent “a wave of avoidable foreclosures in the fall” - when those borrowers exiting COVID-19 moratoriums and forbearance plans begin to request loss mitigation options. Such situations of avoidable foreclosures may arise due to discrepancies creeping into loan files during bulk transfers which could snowball into the mishandling of loss mitigation requests by borrowers.
This is because loan boarding, as discussed above, is largely a manual & paper intensive process. Unintended errors made during a manual centric onboarding process could result in improper application of mortgage payments, incorrect borrower contact details, delayed interest rate adjustments etc. Any of these occurrences could jeopardize the loss mitigation options of the borrowrs that could push them towards financial distress and in worse case - towards foreclosures. In order to mitigate such systemic risks, CFPB has also laid down detailed procedures to properly handle transfer of borrower information & details of loss mitigation applications during bulk MSR transactions. Some of the key steps prescribed by CFPB includes, among other things, include:
- Ensuring that the transferor provides all necessary documents and information to the servicer/sub servicer at loan boarding.
- Developing standard protocols to manage integrity of data fields, document indexing process, compatibility of the transferred data with the servicer’s systems and data mapping.
- Engaging in quality control work after the transfer of preliminary data to validate that the data on the transferee’s system matches the data submitted by the transferor.
Thus, mortgage servicers are under tremendous pressure to not just onboard loan files faster but do so in compliance with regulatory requirements of CFPB. Once onboarded, servicers need to process borrower’s loss mitigation applications in compliance with guidelines laid down by the GSEs, Regulation X & state laws. Thus any error in the upstream manual onboarding process can quickly spiral into multiple compliance issues and poor service quality.
3. Automating bulk MSR acquisition
Automate First Strategy to streamline bulk MSR transfers.
As seen above, a deluge of incoming documents and data during bulk MSR transfers can choke the processing capabilities of loan boarding teams. In order to ensure frictionless onboarding, mortgage servicers could adopt an ‘automate first’ strategy in three key areas -
Standardizing document & data transfer at scale -
Non- standardized loan file delivery as a result of MSR purchase from different lenders can cause downstream servicing challenges. Thus, normalizing delivery and receipt of loan file data and documents at scale during such transactions should be one of the priorities for mortgage servicers. This could mean integrating a loan servicing software that is compatible with the lender's LOS and could automatically ingest documents in a standardized format.
Document indexing & version control -
During loan boarding process, a large portion of the documents is printed out for making minor omissions and corrections. However, sifting through & re- organizing hundreds of pages of loan files is tedious and time consuming. Further, any manual data entry or updates in the paper documents, makes it difficult to maintain a proper version control. Consequently, mortgage servicers become vulnerable to compliance risks arising from violation of general transfer related rules & procedures prescribed by CFPB.
In order to mitigate these risks, servicers should automate their document processing workflow such that documents can be indexed and version control could be done at the click of a button.
Data extraction & validation -
Just like document classification - data verification & discrepancy identification is highly labour intensive. It is practically impossible to be 100% accurate while manually validating the integrity of hundreds of data fields across multiple documents in bulk loan files. Thus, mortgage servicers should implement an automated data extraction software that can highlight mismatches between values for similar data fields across documents. This will free up the user - to focus only on rectifying the exceptions.
In other words, automating the loan boarding process would require deploying a robust loan servicing software in tandem with a document processing automation system. Such a system can automatically ingest non-standard documents, index them into correct document types and extract relevant information to cross validate data integrity. While there are many document automation solutions available, servicers should focus on three core functionalities that aligns with their loan boarding requirements -
Document Recognition & Classification - This involves automating identification of different documents & forms; followed by indexing the pages mapped to the appropriate document types. Once indexed, these pages can be stored in separate e-folders to be accessed as & when needed.
Document Construction - The system should provide a simple user interface / display to view pages sorted by document type while separating out & labelling individual forms & documents. This should also allow the users to easily re-arrange misplaced documents at the click of a button.
Data Verification & Exception Handling - Most importantly, the software should extract data from both structured and unstructured document types, assign a confidence score and a label (color code) to indicate whether it needs user review or not. It should let users review the data simply by clicking on the extracted value & direct them towards the source document. This can transform exception handling from a 100% manual process to one where only 10%-15% documents need to be reviewed manually.
It has been seen in some cases that deploying a document processing automation solution can cut down resource cost & processing time by 70% while delivering an accuracy of 99% in data verification.
With forbearance rollback on the horizon, mortgage servicers will have to play a balancing act between ensuring proper loss mitigation for existing loan assets and providing high service quality for recently onboarded loan assets. At the same time, they need to be compliant with the regulatory requirements of CFPB, Regulation X & a myriad of state laws. In such a scenario, mortgage servicers need to ensure that their loan boarding & servicing operations are robust enough to provide a competitive edge during such challenging times. An area where servicers can see maximum lift is - bulk loan boarding process. Loan boarding being a manual & paper intensive process - can often get choked during bulk MSR acquisitions.
In order to stay ahead of the game & lower their cost of per serviced loan, servicers should look at a 360 degree automation strategy. At the operational level, it could translate into deploying a loan servicing software & a document processing automation solution that can reduce the manual effort in document indexing, data extraction and data validation by at least 50%-60%. If such a system is implemented, then it can help servicers improve overall servicing efficiency while re-allocating resources from loan boarding to other processes thus optimizing their cost structure.
Vaultedge is an AI powered ADR / ADE software that automates the splitting, indexing, data extraction and validation of mortgage documents saving up to 80% of time & cost in Loan Processing, Post Close and Loan Boarding.