Mortgage Regulation: ‘At Your Service’ Turns Costly


Community home mortgage servicers consider their options under the new regulatory spotlight

By Howard Schneider

Final rules from the Consumer Financial Protection Bureau covering residential mortgage origination practices have community banks straining to adapt under the weight of new regulatory compliance. Yet the CFPB’s ability-to-repay and qualified mortgage requirements are just a snapshot of the whole picture for community mortgage lenders.

The CFPB also issued regulations in January 2014 covering mortgage-servicing procedures. Specific guidelines are laid out, which home loan servicers must follow. Lenders servicing up to 5,000 residential mortgages are exempt from the new guidelines, however.

Community bankers point out how the servicing issues that developed during the housing crisis mainly were caused by large servicers trying to manage rising delinquencies, which led to the famous “robo-signing” scandal of foreclosure documents by giant monolithic services. Ron Haynie, ICBA’s senior vice president for mortgage finance policy, adds how today’s stringent CFPB servicing guidelines are requiring many community bank mortgage lenders to add compliance staff.

For example, CorTrust Bank, a $740 million-asset community bank based in Sioux Falls, S.D., is above the 5,000-loan cutoff for the CFPB’s small-servicer exemption. For that reason, federal regulations are suddenly playing a huge new role in how CorTrust Bank’s servicing business is conducted, says the bank’s president and CEO, Jack Hopkins. The new role translates to additional staff time and costs.

Hopkins notes that CorTrust Bank’s servicing manual has expanded from 20 pages to 388, with most of those additions coming over the past year. And that’s not counting the 90-page collections manual which the bank’s servicing workers also use.

“My portfolio hasn’t grown, but my servicing staff has doubled” over the last few years, Hopkins adds. Six full-time employees now work with mortgage servicing at CorTrust Bank.

Similarly, Mark Bragelman recalls the difficulty community mortgage servicers faced coming out of the Wall Street housing crisis as they dealt with changing federal loan modification guidelines. “We were implementing tons of new regs,” says Bragelman, president and CEO of Liberty Savings Bank in St. Cloud, Minn.

“My portfolio hasn’t grown, but my servicing staff has doubled.”
—Jack Hopkins, CorTrust Bank

With $189 million in total assets, Liberty Savings’ six-office community bank produces retail loans within a 75-mile radius of St. Cloud. Over the last decade, the bank has originated $3 billion in residential mortgages. Currently it’s servicing $1 billion in home loans and doesn’t qualify for regulatory exemption as a small servicer. Three full-time employees are dedicated to the bank’s servicing operation, with other staffers also assisting as needed.

Mortgage servicing has been a core practice for Liberty Savings for decades, Bragelman says. Servicing allows the community bank to provide “end-to-end customer service.” He explains that “if you sell the loan to a larger entity, customers aren’t going to be happy.” Alternatively, servicing home loans well creates the opportunity of “loyalty and multiple banking relationships with customers. You seldom lose the customer,” he adds.

Banks servicing their own residential mortgages are likely to gain checking and savings accounts from those borrowers, as well as home equity loans and first-mortgage refinancings. “I’ve never seen anything like it for customer retention,” Bragelman says.

Conundrums with opportunities

Yet servicing is also not an easy business. “Servicing is not for the faint of heart,” Bragelman comments. “You can’t dabble in it. You must dedicate a lot of resources.”

In the wake of the new CFPB servicing rules, CorTrust Bank has spent $400,000 in the last 12 months on new software, upgrading the bank’s phone system and updating its procedures manual. “It’s very difficult,” says Hopkins. “Some days you wake up and say, ‘Why am I doing this?’ It doesn’t make a whole lot of financial sense.”
Yet CorTrust has been servicing its mortgages for more than two decades. Its ongoing marketing emphasizes that its mortgages will be serviced locally. While that’s an advantage, notes Hopkins, “it comes at a cost.”

“I would tell community banks not to get into servicing now,” he suggests. “It’s not worth the investment and effort” if you’re not already committed to that line of business.

But there’s the flip side for community lenders as well—not servicing their mortgages can be just as problematic. Selling loans on a servicing-released basis gives the final mortgage holder considerable control over the loan, letting that servicing company effectively market directly to the homeowner. Hopkins also isn’t certain a mortgage subservicer would provide the quality customer service, a problem that can reflect badly on the community bank originator.

Subservicing does offer community banks an option for retaining customer relationships while reducing overhead and compliance burdens. Interest in subservicing “absolutely” has picked up since the CFPB issued its January 2014 standards, comments David J. Miller Jr., senior vice president and business development director at Cenlar Federal Savings Bank in Ewing, N.J.

Miller adds that Cenlar Federal Savings indemnifies clients against the consequences of any servicing errors it makes. Under this arrangement, community banks can stay close to their borrowers “but lay off the risk” of servicing noncompliance.

Subservicers perform the work while staying in the background. Dedicated toll-free phone lines are answered using the community bank’s name. All communication with servicing accounts appears to be from the originator.

When borrowers inquire about refinancing, those calls are transferred to the bank’s lending staff. “We want it to look like we’re the bank’s mortgage department,” Miller says.

Meanwhile, the servicers can earn servicing fees and interest on funds held in escrow accounts, notes Mark Garland, president of MountainView Servicing Group, a servicing analytics and advisory firm in Denver.

But Bragelman calls servicing “a zero-sum game” after factoring in technology and personnel expenses. He says Liberty Savings Bank’s focus on providing exceptional customer service turns its operation into a break-even proposition. If a borrower is behind on payments and not communicating with the bank, he says, someone with the bank will drive to their home, “knock on the door and ask if we can help.”

When hailstorms damaged many homes throughout its marketplace, Liberty Savings “turned that into a customer-service opportunity,” Bragelman notes. The bank redoubled its efforts to conduct inspections quickly, so homeowners could receive their insurance checks and make repairs during the stressful time for them. Liberty Savings picked up new customers, as homeowners who were serviced by large institutions waited months for home inspections—while their neighbors told them about the quick response Liberty Savings gave when they needed it most.

“Seventy-five percent of our business is referrals,” Bragelman estimates. “It’s very gratifying.”
Staying in touch with borrowers also provides openings to remind them that their servicer can help with additional financial needs. Today, Liberty Savings is seeing growing interest in home equity credit lines as a stronger real estate market boosts property values.

Howard Schneider is a writer in California.