Back-Office Processing

Some lenders get so big that they think there is a need to set up remote processing, otherwise known as back-office processing, or, to put it bluntly, a downsizing ploy the purpose of which is to fire internal staff and hire external staff at a lower cost. I see this happening particularly when margins get compressed and lenders look for ways to cut.

It amazes me still how loyalty is expected by employees but less so by employers. I’ve been told it is a “profit over people issue.” But not really. After all, a competent internal employee can offer the consumer a hands-on experience that is usually not possible to achieve by remote back-office personnel. Catching a few extra mazumah may lead to increasing the bottom line, but it can also cause a chain reaction of decreasing morale, not only in operations but also in the entire loan flow process from point of sale to securitization. In my view, people are not replaceable widgets to be booted out for a few extra kernels of moolah.

There are even back-offices that are remote – in the sense of very, very, very remote, as in off-shore, as in way off-shore in India and elsewhere in the wide world. These entities may have offices in the United States that give the look and feel of a presence in this country, but the real work is done thousands of miles away. Their USA offices are more like fronts for assuaging regulatory concerns. I am not suggesting that they are doing anything illegal per se. But, realistically, how does a lender exercise due diligence for consumers’ non-public personal information and all the aspects of privacy, when that lender never actually visits the remote location in some far-off country to verify that such protection even exists? Just because a system is digital does not mean it can’t be compromised.

Going further, some lenders set up an affiliated back-office processing unit. But there is much more involved than a simple ‘plug and play’ add-on. To set it up correctly the financial institution should be carefully ensuring that various regulatory factors are reviewed. Careful analysis must be done, which I call an undertaking, so that we have considered all the ramifications. The review should be documented, in the event that a regulator wishes to examine the relationship.

I will discuss just one of multiple factors to take into consideration in the context of affiliated back-office processing.

The factor I will discuss is called “required use.”

Here’s an important question: Is the lender required to disclose the affiliated back-office relationship as an affiliated business arrangement?

Construing the Nuances of the QWR

Every once and a while I get what may seem like an oddball question, but actually is a very perceptive question! There are so many intricacies to federal and state regulatory compliance laws, rules, regulations, and common practices, that it is a constant challenge to stay current.

Now you might think this is an oddball question: does a QWR relate only to servicing?

But it is not odd at all! In fact, the question is brilliant, and the answer requires considerable fine-tuning to be precise, comprehensive, and practicable.

Let’s look closer!

RESPA Section 6 includes a set of procedures that mortgage loan servicers must follow when handling customer inquiries. The statute defines a Qualified Written Request (QWR) to mean:

"[A] written correspondence, other than notice on a payment coupon or other payment medium supplied by the servicer, that – (i) includes, or otherwise enables the servicer to identify, the name and account of the borrower; and (ii) includes a statement of the reasons for the belief of the borrower, to the extent applicable, that the account is in error or provides sufficient detail to the servicer regarding other information sought by the borrower."

Previously, Regulation X § 1024.21(e)(2) restated this definition almost word-for-word, except for two additions, one of which is relevant to the answer. Regulation X, RESPA’s implementing regulation, added to item (ii) the phrase “relating to the servicing of the loan” before “sought by the borrower.”

Today’s version of Regulation X, in 12 CFR 1024.31, also includes the phrase “relating to the servicing of the loan” in its definition of the term:

"Qualified written request means a written correspondence from the borrower to the servicer that includes, or otherwise enables the servicer to identify, the name and account of the borrower, and either:

(1) States the reasons the borrower believes the account is in error; or

(2) Provides sufficient detail to the servicer regarding information relating to the servicing of the mortgage loan sought by the borrower."

If the borrower states the reasons for believing an error has occurred in the account, the borrower need not also provide sufficient detail regarding “information relating to the servicing of the mortgage loan.” It probably would be fair to conclude that an account being in error relates to servicing, so a QWR must relate to servicing.

Will the real borrower please stand up?

A large servicing client called me about feeling she is a sitting duck when it comes to servicing litigation, most especially in the loss mitigation area. The caller, the company’s Chief Compliance Officer, referenced the “loss mitigation option” and felt that there is a tremendous burden placed on the servicer to implement the applicable guidelines.

The conversation went something like this.

Me: I feel for you, but this rule was not designed to assuage your inconvenience.

She: Maybe so, but I think there should be an Article III procedure to strengthen these litigation attacks, so that it is more of a two-way street.

Me: Well, under RESPA, only a borrower may bring a civil action and only a borrower would have Article III standing.

She: Wait, what?

Me. That’s correct. In fact, in this instance there has been litigation to determine who is entitled to the loss mitigation protections, and that is given Article III requirements being judicially applied.

[Long Pause.]

She: We are going to have to take yet another close, hard look at our procedures!

First, let’s get the “Article III” terminology out of the way. It is pretty much well settled now that there are constitutional requisites under Article III for the existence of standing; that is, the party seeking to sue must personally have suffered some actual or threatened injury that can fairly be traced to the challenged action of the defendant and that the injury is likely to be redressed by a favorable decision. For the most part, there must be a causal connection between the injury and the conduct complained.

Dissatisfied Borrower leads to RESPA Litigation

A new client of ours did a thorough investigation of a Qualified Written Request (QWR) but, unfortunately, the borrower was not satisfied with the conclusions. Our client contacted me because of concerns arising out of the Notice of Error (NOE) and Request for Information (RFI) process. After reviewing their response and decision tree, we suggested revisions to their policies and procedures.

The importance of complying with RESPA’s NOE and RFI procedures is fundamental to RESPA compliance. It is not a simple matter of having a dissatisfied borrower on your hands, although that is bad enough. The larger problem is that the borrower may commence litigation, which almost certainly will include a RESPA claim for violations of these procedures. If they don’t already have a claim when they start looking for causes of action, they may test the waters by sending an NOE and/or RFI.

This is a situation of significant exposure to the financial institution. In point of fact, by my count more than 1,100 court decisions filed since August 1, 2013 have involved alleged QWR, NOE, or RFI violations.

Here’s just one of the cases among the hundreds upon hundreds of such actions.

First, let me set the stage. Effective January 10, 2014, the Consumer Financial Protection Bureau (CFPB) reorganized the provisions of Regulation X regarding error resolution and borrower inquiries. Regulation X [12 C.F.R. § 1024.35] addresses NOEs and § 1024.36 covers RFIs. The revised processes subsume the QWR requirements of the RESPA statute, with both sections expanded to include certain written borrower inquiries that are not QWRs.

Section 1024.35 applies to any written NOE from a mortgage loan borrower to the servicer that: (1) asserts an error; (2) includes the name of the borrower; (3) includes information that enables the servicer to identify the borrower’s mortgage loan account; and (4) describes the error the borrower believes occurred.