Bridging the Gap A Dialogue on Select Issues in Audits and Scorecards ALFN ANSWERS 2015.

Bridging the Gap

A Dialogue on Select Issues in Audits and ScorecardsALFN ANSWERS 2015

Introduction

• Purpose of Panel to inspire dialogue surrounding one of the more controversial topics in our industry.

• In asking questions of our panelists, please avoid client or attorney firm specific scenarios.

• This panel is meant to provide a Bird’s Eye view.

You can submit them by:

• Texting 66363 and your question to 22333

• Ask questions or make comments verbally by using the microphones provided in the session room

Questions for the Panelists?

Anne Beck

Anne Beck is Vice President of Servicing Risk Oversight at Caliber Home Loans, Inc. where she oversees Attorney Oversight, Quality Assurance, and Breach. She joined Caliber in 2011 as AVP of Asset Performance, monitoring foreclosure and REO. She also served as Vice President of REO Operations. Prior to joining Caliber, Anne was with JP Morgan Chase as well as EMC Mortgage.

Jan DukeJan Duke is the president of and lead consultant at Firm Solutions. In this capacity, she provides strategic leadership for the company and utilizes her extensive industry experience to create customized solutions to resolve operational challenges for clients. Her primary focuses are audit/compliance consulting, business-process improvement consulting, business-development efforts, and operational leadership guidance.

Jan began her career in the consumer packaged goods industries and later moved to the legal field where she has held senior leadership positions in human resources, information technology, support services, operations management, and compliance. With over 15 years of experience in the industry, she is able to leverage her knowledge to assist client firms in meeting their performance and fiscal objectives.

Corey Danzig

COREY DANZIG is Chief Compli ance Counsel for Ohio-based default services law firm, Felty & Lembright. Danzig originally joined the Firm as an Associate in Felty & Lembright’s fore closure practice, handling foreclosure and real estate title matters through out Ohio's 88 counties. In her current role, Danzig’s responsibilities include coordinating the Firm's compliance with all Federal and State laws, managing the Firm's relationships with its vendors, and handling the Firm’s clients’ due diligence and audit requests. Corey's experience also includes bankruptcy law and commer cial and construction litigation. Corey received her undergraduate degree from Boston University and her J.D. from Cleveland State University, Cleveland-Marshall College of Law. Danzig can be reached at cdanzig@ feltyandlembright.com

Lindsey PurdyLindsey Purdy graduated from the Walsh School of Foreign Service at Georgetown University in 2008 with a Bachelor of Science in Foreign Service and Mandarin Chinese. She graduated from Drake University Law School in 2013 when she joined the firm of Klatt, Augustine, Sayer, Treinen, and Rastede, P.C. Purdy’s areas of practice include residential foreclosure, commercial foreclosure and deficiency pursuit, federal compliance, and litigation.

In 2014, Purdy worked with a select ALFN committee, drafting the Organization’s comment on Proposed Regulation F. She has been published on the CFPB and the upcoming debt collection regulations and was a recipient of the 2014“Picture the Future” award. She is currently co-chair of the DSPG and an active member of the JPEG and COMPG practice groups. Purdy also has presented on ethics and professionalism in the legal profession.

A Servicer’s Perspective: Anne Beck

Questions for the panelists? Text 66363 and your question to 22333

CFPB• RESPA• TILA• FDCPA• HPA• ECOA• FRAUD• SCRA• FCRA

GSE, Gov’t, NY Agreement• Notice Requirements• FCL Timelines• Allowable fees• Processing SLA’s• Reporting

Servicer Standards• Best Practices• SLA’s• Procedures• Responsiveness

Why Scorecard?

■Regulatory Requirementso CFPBo OCCo Attorney General o State Examiners

■ Investor Requirements■ Trustee Requirements■ Performance Management

o Timelineo Best Practiceso Qualityo Responsiveness

■ Financial Risk

PAGE: 10Questions for the panelists? Text 66363 and your question to 22333

ScorecardsWhat Makes a Good Scorecard

A scorecard should provide firms with valuable performance feedback to assists in improving overall performance. Scorecards should be:• Consistent• Specific• Measurable and;• Align with Servicers Business Objectives

How Are We Doing?

Timeline

ForeclosureBankruptcyMediationLitigation

Quality

Document ReviewFees/CostsPull Through RateSLA’s

Compliance

OnsiteComplaintsResponsiveness to Alerts

SCORECARD

• KPI Challenges• What is the timeline and how to calculate

– GSE Allowable– Is it realistic– What is included and removed– Not all firms using holds correctly– How do you account for prior servicer delays and hold firms accountable– System constraints– Some firms send us scorecards – should we incorporate

• Quality Reviews– Timeliness of document revisions– Documents not in system– Lack of response

• Fees and Costs– Failure to review rejected and adjusted invoices Causing late submissions

• No one wants to be #2

ScorecardsServicer Challenges


Know Your ServicerFocus On What Matters Most

Learn what’s most important to your servicer Know to which goal you are being measured Know what holds you are allowed to use and use them Provide contact information and update regularly Never miss responding to an alert If you are scoring poorly in a metric – figure out why Hold calls with servicer and firm line level staff not just

management Understand the technology – not just the flaws Pick up the phone and call

To standardize scorecard methodology or have an onsite exam shared by multiple servicers?

Will It Ever Be Possible?


Putting Your Best Foot Forward: Jan Duke

Be Pro-Active and Prepared for New Client Due Diligence

Requests and Existing Client Audit Inquiries

• GSE Firm Requirements/Supporting Documentation

• Reporting Capabilities • Capacity Planning/Model • Organized Storage and Dissemination Process

-Alerts -Policies and Procedures -Audit documents and responses


BE PREPARED TO PUT YOUR BEST FOOT FORWARD WHEN RESPONDING TO NEW CLIENT DUE DILIGENCE REQUESTS AND/OR EXISTING CLIENT

AUDIT INQUIRIES

The basis of most due diligence requests as well as the oversight initiatives from existing servicers is based on the foundational GSE requirements in addition to subsequent CFPB requirements. Having a “package” of the relevant supporting documents organized and ready to submit will help ensure your firm can respond quickly and with comprehensive and concise information. The following guide contains suggested supporting documents/data


GSE REQUIREMENTS GUIDE

# Requirement Supporting Documentation

1 Firm’s practice areas must include end-to-end default related and REO related legal services

Attorney Bios and Firm History – outlining years of experience in industry as well as # of years FNMA designated counsel.Loss Mitigation statisticsMediation statistics if applicableTitle Curative statisticsList of memberships/affiliations

2 Firm must have a stated office located in the jurisdiction for which it is retained

Office location list

3 Firm must provide two jurisdiction specific industry references

Client authorized references

4 Firm must have the ability to handle default-related and REO- related legal matters throughout the jurisdiction

Third Party Vendor Management Process and Procedures Evaluation & Onboarding Confidentiality Agreement including newly required language -Breach notification requirement -Term for violation Contracts including newly required language -Right to audit SLA’s Proof of insurance/licensing Reputation check Oversight program Offboarding Outside Counsel Reliance Statistics/Report

5 Firm must have completed a sufficient volume of default related and REO related legal services to demonstrate its experience

Reports indicating incoming volume as well as closed cases for FC, BK, REO for 24 month period

6 Firms partners must have adequate, relevant, overall jurisdiction specific experience (one or more partner/mgng attorney with 8-10 yrs exp)

List of partner/managing attorneys with # of years admitted to practice law + years of experience with firm



7 Firm must have one or more lead attorney(s) for Fannie Mae matters with adequate, relevant litigation experience in the jurisdiction (5 yrs)

Same as above

8 Firms attorneys must be licensed and in good standing in the jurisdiction in which the firm will be retained

List of all attorneys and their Bar numbers/date of Admittance; statement indicating all are in good standing

9 Firm’s non attorney staff must have reasonable experience

Report of average tenure of non-attorney staff; report indicating non-attorneys with related certifications

10 Firm must have appropriate attorney-to-staff ratio to ensure appropriate staff oversight

Metrics illustrating attorney to staff ratio Documentation of processes (process mapping) including escalation points;

attorney touch points; exception reporting and quality control checkpoints.

11 Firm must have appropriate attorney-to-file and staff-to-file ratios to ensure appropriate oversight

Metrics illustrating attorney/staff to file ratio (total active files divided by attorneys) Documentation of processes (process mapping) including escalation points;

attorney touch points; exception reporting and quality control checkpoints.

12 Firm must have ability to grow and contract based on market conditions

Documented Capacity Planning Model and Process supported by following data:

o monitoring of incoming referral trendso file attrition datao employee attrition datao incoming mail & matterso outgoing pleadings & packageso exception reportso timeline management reports

Draft a staffing policy regarding use of outsourcing and/or contingent workforce as well as process regarding implementation of RIF and/or VSP for contraction



13 Firm must demonstrate high professional standards Report of bar complaints/status Report of firm litigation Statement regarding good standing with FNMA/FHLMC

14 Firm must be able to track, monitor and complete matters within defined timelines

Reports from case management system outlining target timeframes; compliance with targets; exceptions to targets

o Pipelineo Performanceo Productivityo Exceptiono Analysis

15 Firm must have ability to report key data to Fannie Mae Process flow indicating ability to export all key data elements on regular basis to FNMA (automation capabilities for DMRS)

16 Firm must have ability to report diversity data EEO-1 report from HR system

17 Firm must have adequate technology Documented overview of technology applications and systems in place

18 Firm must have adequate technical support IT org chart

19 Firm must have an appropriate amount of E&O coverage E&O declaration page

20 Firm must have adequate financial resources Financial statements as submitted currently to servicers

21 Firm must have business continuity and/or disaster recovery plans in place

Business Continuity Plan Testing of BCP Succession Plan



22 Firm must have adequate quality control, supervision of staff and review of documents

Knowledge database in secure format with versioning control and key word search capabilities (i.e. Sharepoint)

Notarization Policy/Procedure Code of Conduct (includes document execution as well as avenue for employees to

raise concerns) Overview of Quality Control practices in place

23 Firm must provided adequate employee training Training/Onboarding Process Flow Documented Attorney Expectation/Guidelines Attorney Training Checklist Standardized Learning Plans with testing and reporting capabilities

24 Firm must have adequate controls over information security, data management and fraud prevention

ISO type standard information security policies Security Training Hiring/Screening Process Termination Process Code of Conduct & related Training

25 No substantial part of the law firm’s practice may include matters that are adverse to financial institutions, including Fannie Mae or Freddie Mac

Conflicts Check Policy

26 Servicer must disclose to Fannie Mae any relationships between the servicer and the firm and any relationships between the firm and any outsourcing company utilized by the servicer

Attestation

27 Firm must disclose any interest in providers of related services

Attestation

28 Firm must adhere to FNMA guidelines regarding outsourcing fees, referral fees, technology and electronic invoice fees, and vendor selection

Attestation

Best Practices Guide to Quality Reporting

The ability to report accurate information to your clients is critical from an attorney oversight and compliance perspective. It is also a necessary component to a well-managed practice. The below bullet points contain suggested report “types” to ensure you meet those two objectives:

Pipeline Reporting: Increasing traceability to report on portfolio statistics allowing the firm to report accurately on their pipeline to manage staffing levels and identify trending. (Total files within stage and carved out by client/loan type/status)

Workflow Reports: Reducing time by creating manual work lists and delivering physical files throughout the firm. (i.e. Petitions to be prepared, Upcoming Sales, etc.)

Billing Reports: Capturing milestone events completed in the case management system in a snapshot report so all billing could be centralized throughout the firm.

Exception Reports: Mitigating risk by identifying issues with files so they can be escalated and assigned as needed. (i.e. title ordered/not received, service complete/sale not scheduled, referral received/pending original note).

Aging Reports: Uncovering information by comparing target dates against incomplete tasks. (i.e. Service not complete within 30 days, Title not reviewed within 10 days, etc.


Capacity Planning Model Sample

Capacity Model Triggers: • At each trigger event, senior management meets and reviews the currently staffing levels.

Depending on either new demands of the industry, an increase of work driven by referrals, or in contractions of work assessment is made with our technology capabilities and staffing levels. We take into account our current technology, cross training with employees and levels of staffing and adjust accordingly.

Trigger events: • Judicial changes: Changes in the court system can account for increase in workload due to

new guidelines, rules and orders. Each new Order issued by the court is reviewed by the senior management team to gauge the impact on the firm and if the current staffing and technological means is capable of handling an additional change.

• Investor changes: Changes from our clients and the investor are reviewed to see if additional work is needed in order to meet new guidelines and or regulation. Each regulation/guideline is reviewed in order to predict the impact on current workloads and staffing levels.

• Volume: Work volume (new referrals) to the firm, directly impacts each stage of the foreclosure. Volume is reviewed monthly and compared to capacity plan by Senior Management, please see attached. Based on all current industry factors the ideal maximum case volume are as follows:


Table 1: File Volume (Pipeline)Line of Business MAX

(per month)CURRENT

(per month)Percentage of capacity used

(current, monthly rolling)

Low Capacity Trigger (percent, 3 consecutive month

average)

High Capacity Trigger (percent, 3 consecutive month

average)

Foreclosure

Bankruptcy

Eviction

REO

Table 2: File Volume (New Referrals)

Line of Business MAX(per month)

CURRENT(per month)

Percentage of capacity used

(current, monthly rolling)

Low Capacity Trigger (percent, 3

consecutive month average)

High Capacity Trigger (percent, 3

consecutive month average)

Foreclosure

Bankruptcy

Eviction

REO

Table 3: Foreclosure Specific Employee MatrixBelow is the Foreclosure specific staffing model and matrix. In the event a Trigger is reached, that particular

position triggered should be evaluated for contraction or hire.

Total FTEs Current Allocation Per Employee

Maximum Allocation Per Employee

(monthly rolling)

Low Capacity Trigger High Capacity Trigger

Attorneys

Non-Attorney Staff

Table 4: Bankruptcy Specific Employee MatrixBelow is the Bankruptcy specific staffing model and matrix. In the event a Trigger is reached, that particular




(monthly rolling)


Attorneys

Non-Attorney Staff

Table 5: Evictions Specific Employee MatrixBelow is the Bankruptcy specific staffing model and matrix. In the event a Trigger is reached, that particular




(monthly rolling)


Attorneys

Non-Attorney Staff

Table 6: Deed in Lieu Specific Employee MatrixBelow is the Bankruptcy specific staffing model and matrix. In the event a Trigger is reached, that particular




(monthly rolling)


Attorneys

Non-Attorney Staff

Rebuttal and Response: Corey Danzig

INTERPRETING AUDIT RESULTS AND FORMULATING A REBUTTAL OR RESPONSE TO THE

AUDITCorey Danzig, Felty and Lembright

First, what may trigger a client to make a finding, cite an area of concern, or issue an item requiring remediation (“Finding”)?*Considering why and how the client made a particular Finding will assist in

interpreting audit results and formulating a rebuttal, response or corrective action plan.*

1. Regulator and Investor Guidance and Mandates for Managing Third Party Risk

2. Client’s Scorecards and Loan Level Audits

3. Client’s Notices of Complaints or Findings

4. Consumer Complaints

5. Government or Investor Investigations, Enforcement Actions, and LawsuitsQuestions for the panelists? Text 66363 and your question to 22333

REGULATOR AND INVESTOR GUIDANCE AND MANDATES FOR MANAGING THIRD PARTY RISK 1. Government regulators require entities to conduct due diligence

reviews and continually oversee vendors.

*This typically occurs through conducted via assessments, questionnaires, and on-sight visits.

*Due Diligence and ongoing monitoring required by Regulators as follows:

a. Evaluate operational, compliance, reputation, strategic, legal, transaction, credit risk, other risks

Federal Deposit Insurance Corporation (FDIC): Financial Institution Letter-44-2008: Guidance for Managing Third Party Risk (dated June 6, 2008)

Office of the Comptroller of the Currency (OCC): Bulletin 2013-29: Third-Party Relationships: Risk Management Guidance (dated October 30, 2013)

Board of Governors of the Federal Reserve System: Guidance on Managing Outsourcing Risk (dated December 5, 2013)

b. Federal consumer financial laws

Consumer Financial Protection Bureau (CFPB): Bulletin 2012-03: Service Providers (dated April 13, 2012)


c. Safeguarding customer information

Federal Trade Commission (FTC): Safeguards Rule implementing The Gramm-Leach-Blilely Act: As part of a financial institution’s information security program, it must oversee service providers by “[t]aking reasonable steps to select and retain service providers that are capable of maintaining appropriate safeguards for the customer information at issue….” (12 CFR §314.4(d))

2. Firm Selection and Continued Monitoring: Government-Sponsored Entities also require loan servicers to conduct due diligence in selecting and monitoring firms.

a. GSEs require servicers to review law firms on approximately 28 topics.Chapter 69 of the Freddie Mac Regulations: Selection, Retention and Management of Law

Firms for Freddie Mac Default Legal MattersExhibit F-2-05 of Fannie Mae’s Servicing Guide: “Firm Minimum Requirements”

b. Among the 28 categories are specifics involving: Firm background; operations; experience; capacity; volume; finances; insurance; licensing; file; staff; and vendor oversight; technology; information privacy (“controls meeting or exceeding industry standards, including as applicable, standards promulgated by the International Office for Standardization or National Institute for Standards and Technology”).

REGULATOR AND INVESTOR GUIDANCE AND MANDATES FOR MANAGING THIRD PARTY RISK


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Second, what should be considered in developing the response or rebuttal to the Finding?

*Two questions to consider:*

1.Can you refute the Finding with substantiating documents?

2. Do you need to provide written corrective action plan remediating the Finding and/or cause of the Finding on a go-forward basis?


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FIRST, CAN YOU REFUTE THE FINDING WITH SUBSTANTIATING DOCUMENTATION?

1.Documentation (importance of “papering your file” during the pendency of the case) and

2. Summary and timeline of events as part of your answer.


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SECOND, DO YOU NEED TO PROVIDE A WRITTEN CORRECTIVE ACTION PLAN REMEDIATING THE FINDING AND/OR ITS CAUSE ON A GO-FORWARD BASIS?

1. Engage firm management and/or other necessary internal or external stakeholders (vendors) to:

a. Review the Finding and determine what caused the Finding.

b. Determine whether the Finding and/or its cause can be remediated.

c. Develop and implement solutions to the Finding and/or its cause (see below). 2. Analyze the Finding and its underlying cause.

3. Develop and implement solutions remediating the Finding and preventing its cause from occurring again: what resources can be used?

4. Putting it all together: drafting the corrective action plan.


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Develop and implement solutions remediating the Finding and preventing its cause from occurring again: what resources can be used?

a.Does your firm use a systematic approach to create or improve your operations?

b.Consider client and investor requirements and expectations.

c. Consider applicable laws, regulations, industry standards, and Federal enforcement actions/consent orders (See Appendix for Examples).


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d. How can your case management system be modified or customized to remediate the Finding’s cause? Will it have controls in place to ensure that the Finding’s cause will be prevented going forward?

e. Draft, present, and implement written internal policies and procedures or guides to prevent the cause of the Finding.

f. Provide supplemental and ongoing staff training on the new policies and procedures.


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g. Quality Control: Develop worksheets or checklists to ensure staff follows the newly developed policies and procedures.

h. Cold Review of “post-mortem” files by staff who have not worked on the file or by employees solely dedicated to reviewing files.

i. Quality Assurance: Regular review of quality control and cold review results, applicable law, client requirements to keep policies and procedures up to date. Questions for the panelists? Text 66363 and your question to 22333

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Putting it all together: Tips for drafting the corrective action plan.

a. Ask for clarification.

b. Tone and content of the written materials: Methodically and clearly defined steps demonstrating how the Finding can be corrected and/or prevented on a go-forward basis, explaining and providing:

1. How your business improvement process will cure the Finding and prevent it from happening again. 2. How your case management system will be modified or customized Questions for the panelists? Text 66363 and your question to 22333

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b. Tone and content of the written materials 3. Policies and procedures that have been created or revised

4. Staff and/or vendor training5. Quality Control: How will files and staff be reviewed to

ensure the policies and procedures are being followed?6. Quality Assurance: How will you review your policies and

procedures to ensure similar Findings will not occur?

c. Be realistic with implementation dates.

d. Ensure the plan is satisfactory to the firm, stakeholders, and management.

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e. Remember the perspective of the client or client’s third party auditor.

f. Stick to your plan.


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1. Examples of applicable federal debt collection laws and regulation

Protecting Confidential Information: The Gramm-Leach Bliley Act (15 U.S.C. §§ 6801-6809) Corresponding FTC Regulations implementing the Safeguards Rule (12 CFT Part

314) Interagency Guidelines Establishing Information Security Standards (12 CFT Part 30

Appendix: Addresses standards for administrative, technical and physical safeguards for protecting customer information

CFPB’s Regulation P on limits of disclosure (12 CFT §§ 1016.10-106.12) State law

Real Estate Settlement Practices Act Real Estate Settlement Practices Act (12 U.S.C §§2601 et seq.) & Corresponding CFPB’s Regulation X (12 CFR Part 1024)

Truth in Lending Act: (15 U.S.C §§1601 et seq.) and Regulation Z (12 CFR 1026)Federal Debt Consumer Practices Act (15 USC §§ 1692-1692p)Unfair, Deceptive, or Abusive Acts of Practices (12 USC §§ 5531-5538)Equal Credit Opportunity Act (15 USC §§ 1691 et seq.) and Regulation B (12 CFR Part

1002)Fair Credit Reporting Act (15 USC §§ 601 et seq.) and Regulation V (12 CFT Part 222)Servicemembers Civil Relief Act (50 USC App. §§ 501 et seq.)Bankruptcy Stay and Relief (11 USC § 362)

Appendix: Applicable laws, regulations, industry standards, and Federal enforcement actions /consent

orders

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**CFPB Publications: CFPB Supervision and Examination Manual (http://www.consumerfinance.gov/guidance/supervision/manual/) and Small Entity Compliance Guides (http://www.consumerfinance.gov/regulatory-implementation/title-xiv/)

**See OCC’s operating standards for scheduled foreclosure sales (specifically states it does not incorporating RESPA and TILA): http://www.occ.gov/topics/consumer-protection/foreclosure-prevention/foreclosure_standards_42013.pdf

2. Examples of cited industry standards and guidance from regulators

International Standard for Organization (ISO) 27001 and 27002: Criteria for Policies and Procedures for Management Systems and Controls

Service Organization Controls’ “SOC 2”: Reporting on Controls at a Service Organization Relevant to Security, Availability, Processing, Confidentiality or Privacy

Shared Assessments Program: Offers standardized vendor risk assurance approach for financial institutions “Standard Information Gathering” Questionnaire (SIG) regarding IT, privacy, and data

security controls and “Agreed Upon Procedures” (AUG): regarding how to validate answers and financial

institution should assess risk controls as part of an onsite assessment of its vendorshttps://sharedassessments.org/

Appendix: (cont’d)

http://www.consumerfinance.gov/regulatory-implementation/title-xiv/

http://www.occ.gov/topics/consumer-protection/foreclosure-prevention/foreclosure_standards_42013.pdf

http://www.occ.gov/topics/consumer-protection/foreclosure-prevention/foreclosure_standards_42013.pdf

https://sharedassessments.org/

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3. Recent Enforcement actions and consent orders

FTC et al. v. Green Tree Servicing, LLC, 15-CV-02064 (U.S. District Court of Minnesota 2015) CFPB Administrative Proceeding: In RE Flagstar Bank, File No. 2014-CFPB-0014 (Consent Order)CFPB Administrative Proceeding: In RE JP Morgan Chase Bank, N.A., File No. 2013-CFPB-0007 (Consent Order)

Appendix: (cont’d)


Questions?

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