More Credit Unions Outsource Mortgage Servicing
As credit unions originate a growing number of mortgages and mortgage lending regulations become more complex, many cooperatives have begun seeking outside help to service the loans.
But doing so can sometimes be counterproductive for credit unions, according to several experts and two recent federal reports.
“While outsourcing can be extremely beneficial to the credit union and its membership, credit unions need to choose an originator and servicer carefully as they will be interacting with credit union members for many years,” Symbionce Financial Solutions Vice President of Client Services Joan Mahon said. Symbionce Financial Solutions is an East Hanover, N.J.-based CUSO that offers both loan origination and servicing.
“Therefore, credit unions should look at CUSO mortgage service providers to ensure their members continue to receive the same high level of attention that they receive at their own credit union,” she added.
Credit unions originated $26.7 billion in first mortgages in the first quarter of 2016, up from $26.2 billion in the first quarter of 2015, according to the Washington-based consulting firm Callahan & Associates.
At the same time, the percentage of mortgages serviced by nonbank companies increased.
The share of home mortgages serviced by nonbanks increased from approximately 6.8% in 2012 to approximately 24.2% in 2015, the Government Accountability Office reported earlier this year.
But oversight of some of these servicers can be sketchy – at best, the GAO found.
The CFPB is in charge of consumer issues in regard to mortgages. However, the agency does not have a mechanism to develop a comprehensive list of nonbank servicers – a problem that could result in the agency's inability to enforce compliance with consumer financial law, the GAO said.
The CFPB itself recently issued a report on mortgage servicers, finding that while some have made improvements since the financial crisis, progress has not occurred across the industry.
“The magnitude and persistence of compliance challenges since 2014, particularly in the areas of loss mitigation and servicing transfers, show that while the servicing market has made investments in compliance, those investments have not been sufficient across the marketplace,” the agency said in the report.
The CFPB found outdated servicing technology continues to cause problems for consumers, as does a lack of training, testing and auditing in regard to technology-driven processes.
And the CFPB said earlier this year that it plans to make mortgage servicing a high priority over the next two years.
“We will also place particular focus on implementation of our servicing rules, protecting delinquent borrowers still suffering from the aftermath of the crisis or other economic setbacks, and ensuring that servicers are equipped to handle any future delinquencies fairly,” the agency said in a report detailing issues it will focus on over the next two years.
Still, the percentage of credit unions that do not maintain mortgage servicing rights on their mortgages is increasing, according to Callahan.
Of the 6,080 credit unions in the firm's database at the end of the first quarter, 514 had servicing rights on their first mortgages. Credit unions originating mortgages without maintaining servicing rights increased by 2,305.
“As credit unions originate more mortgages, they are reaching the scale at which they can efficiently service their own portfolios,” Callahan Partner Alix Patterson said. “On the flip side, as more smaller credit unions expand their services and offer mortgage loans for the first time, those credit unions will need the expertise of outside suppliers.”
There are several advantages to farming out mortgage servicing, according to Michael Moebs, an economist and CEO of Moebs $ervices, a Lake Forest, Ill.-based economic research firm.
The first is cost, he said, as credit unions don't have to hire a servicing staff.
“Less staff means lenders and management can concentrate on obtaining credit and underwriting properly,” he said.
In addition, servicing has become more complex as a result of the financial crisis.
“Servicing is becoming more and more complicated because of the Dodd-Frank Act,” he said. “Standards have to be achieved, which requires knowledge of regulations for collections and communication with the borrower.”
Symbionce's Mahon agreed.
“Outsourcing mortgage servicing provides credit unions the ability to offer a variety of mortgage products, while keeping costs down and maintaining compliance in an ever changing regulatory environment,” she said.
Deciding whether to hire a mortgage servicer is complicated because most credit unions don't have cost accounting tools to track their in-house transaction, fixed and variable costs, according to Jeff Kline, CEO of MEMBERS Development Corporation, an Overland Park, Kan.-based research and development CUSO.
And most credit unions don't have a separate mortgage servicing department.
“Some have mortgage staff intermingled in a call center or the collections department, where they service multiple products, or they have mortgage originators who handle some servicing duties,” he added.
When considering farming out mortgage servicing, credit unions must decide whether mortgages are an important product line or simply services offered by the credit union so it can market itself as full service, Kline said.
The credit union must also take into account its reputation of putting members first.
“[Credit unions] take great pride in the way they genuinely care about their members, a factor that simply can't be replicated at a large mortgage servicing company,” he said.
Those problems can be solved by contracting with a CUSO, Kline said. A mortgage CUSO presumably would have the necessary technology and expertise, but also understand the need for personal service.
Finally, Kline said, a credit union must take into account the financial strength of a vendor and its willingness to correct its mistakes. A smaller company may provide high-quality service, but it may not have the financial strength to correct any problems it causes.