John Walsh: Tax Service – A New Era
John Walsh is CEO of Covina, Calif.-based LERETA, a national provider of property tax and flood hazard data for the real estate industry. He assumed the role in September of 2015. Walsh leads an executive leadership team focused on providing the mortgage and insurance industries accuracy, responsiveness and innovative technology. He has more than 20 years of senior management experience in the financial services industry and more than 10 years leading technology firms. This includes previously serving as president of San Diego-based companies DataQuick and Del Mar Database. He was also president of ORF/Spectrum Decision Science Corp. and was chairman and CEO of PureCarbon, Inc. Additionally, he has held executive management positions with Weyerhaeuser Mortgage; SeaFirst Bank; and All Pacific Mortgage.
For decades, tax service has gone unchanged. County collectors still receive physical checks, data is sent in tapes, and there are tens of thousands of local tax agencies – none of which follow any uniformity, standardizations, or modernization in their technology. The broader industry is evolving to improve the borrower experience; leveraging digital file exchanges, auto deducts, online applications, drone appraisals – you get the idea. There’s cool stuff going on all over the mortgage lifecycle, yet escrow functions are still sitting in a dusty corner.
There are many efforts to change this dynamic; layering in new technology for servicers to engage with their tax vendor and improving transparency in a historically monochromatic space. Bringing together a group of experienced data science engineers, product and industry specialists, technologists and user groups creates a unique opportunity to examine inefficiencies and build a better mousetrap.
Technology aside, there is another important change that must occur regarding escrow management, a critical function of any lending institution. We cannot overstate the importance of reliability when evaluating how a borrower’s taxes are managed. There are not only penalties and interest at risk, but borrower confidence and reputational risk as well. To better manage this enormous responsibility, we must embrace the need for vendor diversification among the top 30 servicers.
The Office of the Comptroller of the Currency publishes guidance on Third Party Relationships and their recommended Risk Management Guidance. The OCC Bulletin 2013-29 states that “banks continue to increase the number and complexity of relationships with both foreign and domestic third parties” and the guidance further defines complex relationships as “outsourcing entire bank functions to third parties, such as tax, legal, audit, or information technology operations.”
While discussing the Risk Management Life Cycle the OCC states they expect “more comprehensive and rigorous oversight and management of third-party relationships that involve critical activities” and critical activities are defined as having significant customer impact (not paying taxes on time) and/or “causes a bank to face significant risk if the third party fails to meet expectations” (tax liens are superior to mortgage liens). The published guidance continues to discuss due diligence and selection, oversight, strategies, and goals, etc. In our opinion the obvious is not being stated: putting all your eggs in one basket for tax service creates an enormous risk and liability for a financial organization that is not commensurate with the degree of care needed for this critical function.
Here is our recommendation for best practices in the industry.
- Evaluate your critical functions and ensure there are two providers. A backup provider, a fail-safe provider or a parallel provider. Find what is right for your business and your clients.
- Work with both vendors to establish SLAs or KPIs that are comparably similar; this way you can measure the performance against each other and have an even comparison. This takes some investment in the beginning, but the rewards will pay dividends. This sparks inherent competition between the two vendors and a byproduct should be better service from both.
- Ensure behind the scenes diversity with vendor’s offshore partners. In our world, it is unrealistic to think that there is zero outsourcing. Make sure that vendors are not using the same business process outsourcing provider (BPO) and a bonus if there is diversity in the countries where work is sent.
- Consider options for the best approach to splitting tax service. Does it make sense to divide portfolios by state, by clients or by business line? Does the size of the portfolio determine the strategy? This is crucial for top 30 servicers but may not be necessary for smaller lenders. A great vendor partner will get in the weeds with you and help your team see opportunities that perhaps you are overlooking.
- Lastly, test your back-up plans. There are so many learning opportunities arising from the pandemic and one that we have seen with our clients is that having a business continuity or disaster recovery plan may not be enough. Contemplate all scenarios and evaluate previously unforeseen circumstances. Until the COVID-19 crisis, no one anticipated that an entire country could lockdown overnight – leaving outsource employees stranded from their computers in countries without a work-from-home infrastructure.
Vendor diversification of critical functions is a borrower’s right. Borrowers are trusting that their lenders have processes in place to assure taxes get paid regardless of any unforeseen disaster. There is plenty of white space available to build better products, streamline processes and automate the manual. As we bring new services to a long-forgotten segment, we are committed to starting with the basics by supporting vendor diversification and ensuring a consistent borrower experience.
(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at email@example.com; or Michael Tucker, editorial manager, at firstname.lastname@example.org.)