If modification fees from the HMP program are the carrot for servicers to help borrowers restructure their loans then compliance training and development requirements are the “stick” or the other side of the proverbial two-edged sword. Servicers must comply with the HMP requirements and must document the execution of loan evaluation, loan modification and accounting processes in order to receive the modification fees. Servicers must develop and execute a quality assurance program that includes either a statistically based (with a 95 percent confidence level) or a ten percent stratified sample of loans modified, drawn within 30-45 days of final modification and reported on within 30-45 days of review. In addition, a trending analysis must be performed on a rolling 12-month basis.
To begin with servicers may not charge the borrower to cover the administrative processing costs incurred in connection with a HMP. The servicer must pay any actual out-of-pocket expenses such as any required notary fees, recordation fees, title costs, property valuation fees, credit report fees, or other allowable and documented expenses. Servicers will not be reimbursed for the cost of the credit report(s).
The Treasury has selected Freddie Mac to serve as its compliance agent for the HMP. In its role as compliance agent, Freddie Mac will conduct independent compliance assessments/reviews. In addition, loan level data will be reviewed for eligibility and fraud.The assessments will include, among other things, an evaluation of documented evidence to confirm adherence (e.g., accuracy and timeliness) to HMP requirements with respect to the following information:
• Evaluation of Borrower and Property Eligibility
• Compliance with Underwriting Guidelines
• Execution of NPV/Waterfall processes
• Completion of Borrower Incentive Payments
• Investor Subsidy Calculations
• Data Integrity
Each one of these areas becomes a topic and/or SOP that needs to be properly addressed/trained to ensure operational execution that leads to proper compliance so that modification fees are not forfeit.
The reviews will be used to evaluate the effectiveness of the servicer’s quality assurance program.There will be two types of compliance assessments: on-site and remote. Both on-site and remote reviews will consist of the following activities: notification, scheduling, self assessments, documentation submission, interviews, file reviews, and reporting.
Freddie Mac will request the servicer to make available documentation, including, policies and procedures, management reports, loan files and a risk control self assessment ready for review. Additionally, Freddie Mac may request additional loan files during the review.
For remote reviews, Freddie Mac will request the servicer to send documentation, including, policies and procedures, management reports, loan files and a risk control self assessment within 30 days of the request. There will be an issue/resolution appeal process for servicer assessments. Servicers will be able to submit concerns or disputes to an independent quality assurance team within Freddie Mac.
So how does a bank maximize its income while at the same time minimizing its risk on this government mandated program for institutions who have received TARP money? Next time, I will consider some of the best practices, options and methodologies for training, support, tracking, and reporting related to HMP implementations and compliance and other strategic initiatives for financial institutions.
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