The mortgage servicing industry can poise itself for stability and growth by continuing to emphasize oversight practices as it continues to rectify its relationship with the public following the financial crisis, according to a report by S&P Global Ratings.
Years of regulatory pressure have led most servicers to adopt more stringent internal controls. S&P said that its reviews showed most servicers now employ three lines of defense: a first line of interdepartmental quality control, a second line of a separate quality control program independent of the business unit, and a third line of an internal auditing mechanism.
In addition to this setup, S&P said many servicers have also introduced compliance-testing programs, periodic controls reviews performed by independent accounting firms, and fully developed vendor-management programs.
These internal controls should help servicers drive down risk from poor servicing practices and reduce the probability of getting dinged by regulators. S&P said, however, that these processes can be costly and complicated to implement.
Despite these improvements, S&P said servicers continue to face headwinds from potential changes in legislation, ongoing expenses of compliance and noncompliance, and potential instability of the US economy and housing market.
“The current administration keeps attempting to roll back certain financial regulations, such as Dodd-Frank, and replace it with the Financial Choice Act,” S&P said in the report. “By nullifying or substantially changing Dodd-Frank, the Financial Choice Act's passage could also test servicers' ability to adapt, leading to additional compliance costs for servicers. Costs may be inevitable even if only incremental changes occur to Dodd-Frank, and the CFPB because servicers will have to interpret and modify their processes and systems to comply. The future remains uncertain as to what success the current administration will have with repealing some of these rules and instituting new ones. Therefore, servicers must stay vigilant in verifying their compliance.”
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