By: David A. Tallman
The alleged failure of servicers to adequately supervise the activities of their foreclosure and loss mitigation vendors and other service providers is one of the central criticisms levelled by federal and state regulators against residential mortgage servicers. The regulators assert that skyrocketing foreclosure volumes caused key vendors – including foreclosure firms, bankruptcy attorneys, and document custodians – to take shortcuts. Moreover, with respect to the management and execution of legal documents, regulators assert that servicers failed to adequately supervise the activities of their foreclosure and loss mitigation vendors and other service providers. According to the regulators, servicers were not sufficiently equipped to track the movement of original documents, verify that affidavits and declarations filed in foreclosure and bankruptcy proceedings were factually accurate and correctly executed, or ensure that the vendors otherwise performed their services in compliance with applicable law.
Thus, it is no surprise that vendor management is a significant focus of the March 2012 Global Foreclosure Settlement. The settlement’s vendor management-related Servicing Standards are consistent with the overarching risk management principles articulated by the federal banking agencies for depository institutions subject to their jurisdiction (e.g., OCC Bulletin 2001-47 and the FFIEC Information Technology Handbook), and also incorporate a number of vendor management requirements previously articulated in the 2011 residential mortgage servicing consent orders. For example, the general vendor management obligation set forth in both the 2011 consent orders and the Servicing Standards is that a servicer must adopt policies and processes to oversee and manage vendors performing foreclosure, bankruptcy, loss mitigation, or mortgage servicing activities. Such policies and procedures must cover a range of matters, including, but not limited to: (i) due diligence on vendor qualifications and key business practices; (ii) contractual controls, including measures to enforce vendor obligations; (iii) vendor certification and recertification processes; (iv) verifying that documents used in legal proceedings are accurate and appropriately executed; (v) documenting chain of title and loan ownership; and (vi) ensuring that incentive compensation does not encourage undue haste or lack of due diligence over quality.
But in addition to requiring servicers to enhance their general due diligence, contracting, audit, and quality control functions, the Settlement Agreement includes much more granular vendor management obligations. In this regard, the Agreement goes well beyond the standards set forth in existing guidance, including the banking agency guidelines, the 2011 consent orders and the Fannie Mae and Freddie Mac servicing guides (which, among other vendor management matters, require servicers to verify that vendors have business continuity plans, limit permissible third party fees, and restrict a servicer’s ability to influence the selection of vendors by attorneys and trustees).
For example, the 2011 consent orders required servicers to implement “processes to ensure periodic reviews of [vendor] work for timeliness, competence, completeness, and compliance with all applicable Legal Requirements and supervisory guidance, and to ensure that foreclosures are conducted in a safe and sound manner.” The Settlement Agreement elaborates on this obligation by describing several specific issues that such periodic reviews must cover, including:
• A review of a sample of the foreclosure and bankruptcy documents prepared by the vendor, to provide for compliance with applicable state and federal law and the Settlement Agreement in connection with the preparation of the documents, and the accuracy of the facts contained therein;
• A review of the fees and costs assessed by the vendor to provide that only fees and costs that are lawful, reasonable and actually incurred are charged to borrowers and that no portion of any fees or charges incurred by any vendor for technology usage, connectivity, or electronic invoice submission is charged as a cost to the borrower;
• A review of the vendor processes to provide for compliance with the servicer’s policies and procedures concerning servicing activities;
• A review of the security of original loan documents maintained by the vendor;
• A requirement that the vendor disclose to the servicer any imposition of sanctions or professional disciplinary action taken against it for misconduct related to performance of servicing activities; and
• An assessment of whether bankruptcy attorneys comply with the best practice of determining whether a borrower has made a payment curing any motion of relief from stay (“MRS”) delinquency within two business days of the scheduled hearing date of the related MRS.
The Settlement Agreement also departs from previous guidance with respect to vendor contracting. Although the consent orders and banking agency guidance each require general processes to ensure that contracts provide for adequate oversight of vendors, the Settlement Agreement expressly requires servicers to amend existing agreements to require vendors to comply not only with applicable law, but also with policies and procedures that incorporate the specific obligations in the Settlement Agreement. Because of the level of detail in the Servicing Standards (and in light of the vendor incentive compensation limitations), it thus often may prove necessary for servicers to renegotiate existing contracts. Vendors are unlikely to resist changes required by the Settlement Agreement if they intend to stay competitive.
Other granular vendor management obligations listed in the Settlement Agreement include:
• Ensuring that foreclosure and bankruptcy counsel and foreclosure trustees have appropriate access to information from the servicer’s books and records;
• Ensuring that all information provided by or on behalf of the servicer to a vendor in connection with servicing activities is accurate and complete;
• Reviewing and approving standardized forms of affidavits, sworn statements, and declarations;
• Making good faith efforts to obtain or locate lost notes and requiring vendors to do the same;
• Ensuring not only that attorneys are licensed to practice in the relevant jurisdiction, but also that they have the experience and competence necessary to perform the services requested, and that their services comply with applicable law and other requirements;
• Ensuring that foreclosure and bankruptcy counsel and foreclosure trustees have an appropriate servicer contact to assist in legal proceedings and to facilitate borrower loss mitigation questions;
• Requiring vendors to maintain records that identify all notarizations of servicer documents executed by each notary employed by the vendor; and
• Ensuring timely and accurate communication of or access to relevant loss mitigation status and changes in status to foreclosure attorneys, bankruptcy attorneys and foreclosure trustees and, where applicable, to court-mandated mediators.
The Servicing Standards apply directly only to the five settling parties and their affiliates, but as a practical matter they are likely to become a compliance benchmark for the industry. Although the Servicing Standards’ vendor management provisions may seem at first blush to be more onerous than the 2011 consent orders and other industry guidance, the added specificity likely is consistent with the work plans adopted in response to the 2011 consent orders and provides a useful guide towards the creation of a residential mortgage servicing vendor management program that meets regulatory expectations.