A special report on residential mortgage servicers by Moody's Investors Service offered descriptions of how servicers' practices have changed in response to legal and regulatory concerns over the past year.
The report, entitled "Trends in Residential Mortgage Servicing Practices," disclosed the reduction or elimination of ancillary fees, improved disclosure and itemization of fees, initiation of pre-foreclosure reviews, scrutiny of force-placed insurance activity, increased quality-control initiatives, and instituted quality-based incentive compensation programs.
"Moody's believes that servicers who have reviewed their operations and have implemented changes will be in a better position to minimize legal issues and costs, as well as avoid headline risk'," analysts penned
Moody's has rated residential mortgage servicers since 2001 and recently began rating servicers in other asset classes in 2004, said analyst Jason Grohotolski, the report's author. Many of the changes servicers have made enhance servicing stability (a significant component of Moody's Servicer Quality ratings), and should help reduce borrower complaints. The ratings should also assist servicers in remaining compliant with appropriate servicing standards and regulators, added Grohotolski.
Ancillary fees were one of the first areas to receive attention. A perceived lack of reasonableness of these fees has led to reductions and in some cases even elimination of the fees, according to the report. In addition to ancillary fees, other fees reduced or eliminated: escrow account maintenance, loan history, phone payment, loan document service, payoff statement, demand letter and forbearance agreement fees. Similarly, disclosure and fee itemization has also become a trend in response to the lack of transparency between servicers and borrowers.
Another trend that has made the charts is the application of pre-foreclosure committees, which review loan activity before foreclosure referral. Moody's finds this trend as one of the most promising activities it has observed, added Grohotolski. "By engaging in this activity, there is a higher probability that the servicers will identify instances of inadequate servicing for certain loans and will also identify certain loans that could have potential legal risk or headline risk' if foreclosure was pursued," he said.
Servicers are also taking extra measures to make sure that force-placed insurance is not being assigned unnecessarily. A few servicers are also refusing to pay commission on policies to insurers, which is geared at reducing premium charges for borrowers. Furthermore, servicers are taking the initiative to add quality-control groups "specifically focused on compliance and regulatory issues," according to the report. Finally, servicers are utilizing incentive compensation programs to motivate their associates and in turn, to enhance the quality of their services.
"Servicers should take the time and dedicate adequate resources to some of the concerns that have been raised," said Grohotolski. "The better servicers will continue to conduct operations in a manner that considers a stable control environment, fairness and transparency to the borrower, and potential headline risk'."
It should be noted that the report was based on a presentation given at a recent Moody's RMBS Home Equity Briefing.
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