Five Big Challenges of Servicing Modified Adjustable Rate Mortgages
Oakleaf has been performing audits on modified ARM and HELOC portfolios for over a decade. We have been seeing a higher incidence of problems associated with servicer books. Below are five of the biggest challenges that are currently trending:
- People are creative. In an apparent rush to add value, portfolio managers and loss mitigation teams created an endless mixture of modification terms. Each unique combination forcing a new loan level cash flow model. These innovative agreements have all but setup servicers to fail. We’re waiting to find the modification that fluctuates the index between LIBOR and Prime.
- Post transfer data exchange is more than just an ETL (extract, transform, load) exercise. We are seeing a lot of customization in servicer platforms and the use of subsystems to track things like payment history. The complexity of the systems architecture in conjunction with intricate modification structures create the need to diligently validate the data against source documents paying special attention to loans that may have been modified multiple times.
- Under/Overcharges snowball. If a borrower has been undercharged principal or a payment was under-allocated to principal, then at the next cycle, and forever after until corrected, the borrower will be overcharged interest. Identifying and correcting discrepancies early and resolving them quickly will be far less expensive than ignoring the issue.
- The devil is in the details. Coding errors in small things like day count conventions and lookback methodologies can create minor but pesky discrepancies. Even the difference between accounting for 365 vs. 366 in an interest calculation can lead to a ‘material’ difference. Further exacerbated by the lack of standard form in HELOC agreements, a highly trained reviewer is required to correctly pull out the terms.
- No clear regulatory tolerance. We haven’t seen any clear guidance from the CFPB on a materiality threshold for under/overcharges. As a result, servicers are erring on the side of caution and notifying borrowers about the smallest amount of change.
As you can see from these trends, there is reason for servicers to worry. The impact of these challenges can range from a mere headache to costing your company thousands of dollars per loan. Contact The Oakleaf Group today to discuss your servicing books or click here to learn more about the loan quality services we offer.