This linear, direct production process overlooks one critical component – the research and resolution of the manufacturing errors that result in downstream investor reporting exceptions and reconciling differences.

Resolving reporting, cash remittance, reconciling items, and payment clearing differences is extremely time-consuming. Time is incurred not only by the investor reporting team, but also the cashiering, escrow, loss mitigation, foreclosure, claims, and loan transfer team(s). Indirectly, each team incurs costs through wasted time spent on inefficient research and resolution activities that repeat monthly, have similar root cause issues, and rarely get resolved.

94% (+/- 3%) of all reporting and remittance exceptions require involvement from capital markets, originations and servicing teams to resolve.

The element of wasted time.

The direct cost-to-service equation for is mathematical and straightforward. It involves a combination of people, technology, and infrastructure, with a little “secret sauce” applied to create a servicer’s competitive advantage. The cost and usage of time is a key ingredient in this sauce.

In today’s environment, the investor reporting assembly line components of data aggregation, compilation, and validation have already been automated to varying degrees. Most servicers agree that team members should no longer manually aggregate, prepare, and complete reconciliations in a spreadsheet environment. Instead, a systemically prepared reconciliation should be made available to users as they log into the system, ensuring all human time is spent on resolving the exception fall-out. Measuring and optimizing these costs is very achievable.

As the process shifts away from these linear activities to the more challenging tasks of resolving exceptions and data errors initiated by upstream operational partners, the risk of “wasted” non-identifiable time begins to increase. These exceptions and data errors most often stem from upstream servicing functions that operate with little to no knowledge of the investor reporting impacts they initiate.

While the cost of the investor reporting function may be known, it is the 94% (+/- 3%) of all reporting and remittance exceptions requiring re-work time that adds to your real cost-to-service. These costs are avoidable.

Common Upstream Exception Contributors

• Servicing acquisitions and transfers.
• Loan modifications.
• Cashiering and payment processing.
• New loan products.

Investor reporting teams are forced to employ a variety of communication mediums across multiple members of servicing operation teams to resolve a variety of issues that stem from these activities. The time associated with these activities is challenging to track and thus contributes to the wasted time element.

Common Exception Resolution Wasted Time Drivers

• Enterprise operating model complexity.
• Siloed operating teams disbursed geographically.
• Various user subject matter skill levels.
• Level of familiarity with counterparty processes and functions.
• Outdated servicing platforms and wrap around technology systems.

• Disaggregated data sources and repositories.
• Poor communication practices

The problem to solve.

Servicers are fully aware of the general impact on operational efficiency and are looking for technology to address is, but at the core have been unable to fully address this element of cost.

Most have accepted either a tolerable amount of waste in their investor reporting function or a diminished ability to thoroughly address root causes of cash-impacting issues. Neither approach is optimal.

Servicers should be driving quality improvement in upstream processes as opposed to relying on investor reporting as a quality control function.

Upstream servicing processes cause downstream reporting impacts.

A servicing operation is a massively complex system of moving parts. Issues stem from multiple transactions and everything is connected. A loan record update, data field parameter adjustment, system update, or user-initiated error will find its way to the investor reporting team to resolve

Servicing transfers, loan sales, and asset movement

Asset movement is a fundamental reality to mortgage servicers. Bulk servicing transfers, loan-level/individual transfers, mortgage servicing (MSR) transfers, default related transfers all contribute to a complex exchange of data between multiple servicing

counterparties, often under compressed transaction execution timelines.

Anyone who has played the game of “broken telephone” before knows that data quickly becomes distorted with each passing transmission. The acquiring servicer is dependent on the prior servicer to deliver data that is clean, accurate, and consistent with investor records. Cash settlement errors, data boarding errors, and incomplete resolution of trailing issues dramatically increase the risk of wasted time spent by the investor reporting team at both the time of the transaction, as well as subsequent reporting periods to follow.

Loan modifications

Loan modification programs are often imposed upon servicers in response to external market forces that require some level of loan repayment relief to the consumer (i.e. FHA COVID-19 Relief, FNMA and FHLMC Flex Mods, etc.) They can be challenging for servicers to implement as they usually require changes to the servicing platform’s configuration as well as staff training. There is often little time to adequately implement, test, and train.

Transaction volume, system errors, inconsistent human processing, and time constraints all create investor cash flow reporting and remittance exceptions specific to:

• Unpaid principal balance
• Capitalized interest
• Repayment/amortization schedules

All resulting in real cash losses to the servicer. If left unresolved for long durations of time, servicers may not be successful in identifying and remediating these errors and thus, the risk of financial loss increases.

Cashiering and payment processing

As the market continues to redefine the way in which consumers transact money, servicers must continuously accommodate a broad spectrum of inbound cash processing capabilities. They must accommodate:

• Automatic bank drafts (ACH)
• Online bill payments
• Mobile banking applications
• Money orders
• Check by mail
• Phone payments
• In-person branch payments
• Wire transfers

And that’s just to name a few….

Billions of dollars in monthly mortgage payments move in a compacted period of time (typically the bulk of customer payments are made within the first five business days of the month). Volume, variability, and limited time impact the risk of misapplied cash postings to loan records and investor custodial accounts. Investor reporting teams are left to search for needles within the haystack when system cash amounts posted do not align with cash amounts expected, or cash amounts remitted.

New loan products

New and innovative loan products are necessary to meet changing market demands. They also introduce risk to servicing platforms as they require servicers to configure pre-defined system parameters and workflows in ways the servicing platform may not be designed to accommodate.

Creative loan parameters, unique amortization schedules, and interest rate reset schedules all introduce opportunities for discrepancies between the cash an investor is expecting to receive, versus the cash the

borrower remitted, versus the cash the servicing system is reflecting.

Servicers cannot afford to allow their investor reporting function to serve as the enterprise “clean-up” team – it is too costly, and it is unnecessary.

Current processes and technology fall short in supporting efficient investor reporting teams.

By the time the investor reporting team becomes aware of these upstream issues it is too late. The transaction is complete, the system is updated, and the cash has likely already been transmitted to the investor in accordance with their pre-defined expectations. If everything works in perfect concert – the system updates, human updates, and process updates all match the investor’s expectations – and everything is fine.

But when that is not the case – and quite often it is not – the investor reporting team becomes and servicer’s “in-house investigative department”. Their ability to complete these investigations in a timeefficient manner is impacted by the quality of the data and tools they have available.

All too often, investor reporting and reconciliation teams are given sub-optimal tools to perform herculean tasks.

Recurring unresolved exceptions

New populations of the same underlying
errors occur month after month, resulting in
similar sets of exceptions to resolve – the
upstream root cause of the issue is never
addressed. Instead, the teams spend valuable
time fixing the same errors repeatedly. The
risk of false positives increases as users will
begin to cut corners on the research by

making assumptions that the errors they are researching are in fact identical to what they reviewed the prior month.

Competing priorities

Servicing operations teams have competing priorities when it comes to assisting their investor reporting counterparts in researching and resolving exceptions caused by errors from their group. Operations teams are typically incentivized to produce and create forward throughput, not to spend time addressing issues from the past. Often the result is a “close enough” resolution that will resurface again resulting in the investor reporting team’s wasted time spent on recurring reviews of the same issue.

E-mail driven workflows.

E-mails are sent back and forth to multiple people across the servicing organization to provide insight into – and to assist with – resolution of loan-level discrepancies. These are not efficient and easily missed as in-boxes quickly become overloaded. Users struggle to prioritize and focus and focus on the necessary issues at hand.

Ad-hoc research time

Time to research issues is often performed as time permits. It is not the primary focus of an operational partner and thus time is wasted as the servicing operations and the investor reporting users “re-familiarize” themselves with the specific issue to be solved.

Manually maintained work queues

Reconciling item work queues are maintained manually across individual lists, shared access sheets and thus, cannot be systematically tracked for aging and efficiency of resolution. Collaborative shared file locations are often used to drive a modified workflow environment but those still fall short as they are reliant upon users to

accurately update manual lists and manual work trackers of outstanding items.

Access to on-demand data

Access to on-demand historical, loan level information across multiple time periods, both investor-reported, and servicer-reported is not standard in the industry. The user performing the research to understand the nature of the exception is limited to the data readily available. That is often limited to what the current servicing platform has retained. Complete historical records of the loans from prior servicers, and investor records are not available. Time is wasted querying multiple systems to aggregate enough data to make an education guess at the resolution, however the risk of false conclusion based on limited data remains high.

Conclusions can be subjective.

Human driven research and resolution involves subjectivity. No two operational subject matter experts are the same when it comes to their understanding of the servicing platform, loan product parameters, and servicing processes. Thus, research and conclusions on the underlying root cause issues of cash differences are inconsistently applied.

Current servicing platforms fall short in delivering the expert logic and systematically driven exception management capabilities necessary to address these issues.

“Powering up” the investor reporting team’s purpose across the servicing organization.

Servicers can choose to accept these
inefficiencies as a cost of business, or they can
leverage their investor reporting team to

become an optimization driver across the servicing organization as-a-whole!

Advancements in automation and AI continue to change the scope of possibilities for improving a function that has historically been overlooked when it comes to strategic investment in delivery capabilities.

Servicers should be dedicating focus to implementing technologies that will enable their investor reporting teams to work more efficiently with their partners in the following ways:

• One single centralized database for all team members to work within – eliminating emails, spreadsheets, and manual trackers.
• Automated multi-feed data ingestion from investor portals, banks, and servicing platforms.
• System-generated data aggregation, validation, and adjudication logic enabling users to focus time on exceptions resolution.
• Systematic research and resolution of exceptions with on-demand audit trail evidence of every change made.
• Integrated functionality feeding research into cash analysis, reconciliation, and remittance functions – eliminated toggling across multiple systems.
• Embedded compliance with FNMA, FHLMC, GNMA and private investor requirements.