Risks in Credit Union Mortgage Servicing, Escrow, and Compliance

Escrow compliance is a high-risk, low-reward venture. Keeping up with evolving regulations takes time and effort. And after all of that work getting up to speed? Another change in regulations could come along that sends you back to square one.

So, what processes do you have in place to ensure compliance? Who oversees following and implementing the latest regulatory changes? And what happens if those processes or oversight fail?How can you minimize your exposure to regulatory risk in mortgage servicing?

Escrow Compliance is Risky Business

Expense. Liability. Lawyers. Those are words that get thrown around a lot when we talk about escrow compliance. And if we’re being honest, they’re a bit stressful.Monitoring compliance measures is a job that must be done—and done well. With high penalties at stake, it’s an expensive job. The only real profit earned when you do a good job handling compliance in-house is escaping a fine.Here are a few examples of these regulatory issues that could lead to larger problems:

  1. While Regulation X allows for escrow deficiencies to be paid off in 1–2 months (if the deficiency is small enough), CT and NH require that it be paid over no less than 1 year.
  2. CA and other states require that escrow interest be paid to the consumer in certain circumstances. If you handle this incorrectly, you could be fined millions of dollars.
  3. Some states require up to 36 months of history on annual activity statements. Other states (like ME) require you to disclose the amount of escrow interest that was credited.

So, if a borrower makes a payment into their escrow account to pay for something, are you certain you know what must happen (depending on the state)? Sure, you’ll hold the funds on the borrower’s behalf, but what happens to those funds while waiting for property taxes to settle? Is it earning interest? How much of that interest must you share with the borrower?Most lenders and servicers simply don’t track these issues because they’re very obscure laws. Furthermore, consumers generally don’t know about them. Yet unfortunately, slip-ups around escrow compliance can be incredibly costly.So, how do you keep your institution safe—and your borrowers happy?

No Two Accounts Are Alike

Home buyers don’t want to worry about federal and state regulations or the ins and outs of escrow. All they care about is that they get their house with minimal complications. They may not mind that their mortgage gets bought, sold, and serviced by several people throughout the life of the loan—so long as it all works the way it’s supposed to.But behind the curtains, a lot of manpower goes into keeping up to date on rules and regulations. And often, all that effort goes into understanding the federal ones. State issues are a whole other beast, and they can vary greatly. There’s no one-size fits all solution for mortgage servicing compliance.Your compliance officer or expert will ensure that everything is done by the book. But what happens when regulations change? How do you ensure escrow compliance across multiple states?For example, you certainly can’t use Arizona regulations for Idaho properties. So, if you service mortgages in more than one state, you may need to expand your compliance team. As you service multiple states—and as your mortgage portfolio grows—you hire to scale, drastically increasing your overhead.And though your team is large, many of them are simply doing perfunctory compliance work. That’s less time spend on actual servicing and processing. Furthermore, while your compliance team may be expert, human error is real—and it happens often. What happens when someone misses or misunderstands a regulatory update?You may see fines commensurate with the size of the offense. Jobs are on the line.More importantly, by spending so much effort on regulatory compliance, you may lose sight of the end goal:Providing people with an unparalleled home buying experience. Yes, the whole process should be easy for your team, but it’s even more important for the borrower. It should be uncomplicated, transparent, and error-free.

You Didn’t Make the Rules

But if you could, you probably have a few ideas about how to write them better. Many lenders and servicers make the effort to design proprietary rules.You could have training manuals, continued education, and a top-notch system or process. However, constantly changing rules and regulations, new measures, and now a pandemic make shifting regulatory minutiae particularly straining.Processing the right paperwork and meeting all of the demands is a high-stress job. Especially when the repercussions are fineable, or even fireable offenses.So, many lenders find that the wise thing is to contract lawyers.Legal advisors won’t focus on delivering a satisfactory mortgage experience. They’ll do the difficult job they were hired to do: crunch numbers, make sure the periods are in the right place, and hand off their findings (maybe to someone who doesn’t know what they’re looking at).When it comes time to discuss the details, there could be a lot lost in translation. And again, this raises the question: if your organization is spending all its resources on regulatory issues, are you able to provide the lending experience that your borrowers expect?

How to Minimize Regulatory Risk

There are a few things your organization can do to minimize regulatory risk, such as that posed by escrow compliance.

  1. Build a culture of compliance. Everybody involved in lending and servicing must take responsibility for knowing, understanding, and executing on even the smallest details.
  2. Keep sufficient staff in-house to handle these issues. If you originate or service many mortgages, this can be difficult and expensive if there’s no process or support to achieve scale.
  3. Consider not worrying about it. Rather, let a third party worry about it for you. Hiring a vendor to manage the regulatory details will ensure that your institution enjoys a much larger, dedicated team of compliance experts to keep you on track—and provide strong support for your borrowers.
Do What You Do Best: Help People Get in a House

Are you as daunted by escrow compliance as the average lender? Are there other mortgage servicing issues that expose your institution (or accounts) to increased regulatory scrutiny or risk? If you are, you have another option.Outsourcing could be a great solution for your credit union. Certainly, you’ll save money. Plus, a dedicated third-party team is going to be able to do things faster. That means less hours spent trying to understand the problem, and more time to apply the answers.

Most importantly, the right mortgage servicer brings modern user experience (UX) principles to borrowers. Instead of clunky lender-side dashboards, weeks-long inquiries, and phone calls to other institutions, servicers like Valon bring attractive, intuitive digital dashboards to the borrower. This borrower-centric experience provides improved transparency and flexibility to borrowers—while cutting down the amount of manpower needed to actually service the mortgage.Would you like to learn more about what a borrower-centric mortgage servicing team brings to the table?

Contact us for a short consultation about our partnerships with mortgage lenders.

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