Inside This Issue ////////////////////////////////////////////////////////////// A Message From Tom Sanzone: Proactively Addressing Change

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1 Inside This Issue ////////////////////////////////////////////////////////////// ///////////////////////////////////////////////////////////////////////////////////////// 2 A Message From Tom Sanzone: Proactively Addressing Change 3 Unprecedented Collaboration Among Mortgage Industry Participants Yields Big Benefits 4 TRID A Work in Progress 5 Black Knight s LoanSphere Road Map Set to Deliver New Solutions in Enhanced Client Audit Program Improves Delivery Time Frames and Expands Information Availability 7 Market and Regulatory Changes Create Opportunities and Challenges for Residential Real Estate Lenders 8 HMDA Expansion: What Is on the Horizon? 9 Servicing: Regulatory Considerations for What Can I Do With All This Data?: Putting Big Data to Work : A Look Back at Mortgage Performance 13 Bringing Big Data to Bear on Regulatory Challenges ////////////////////////////////////////////////////////////// 14 Compliance Management Services ongoing efforts to support our origination and servicing 15 Q&A With Jack Konyk From Weiner Brodsky Kider PC and evolving market. For questions about the 2016 issue, please 2016 ///// A Current is an annual publication highlighting Black Knight Financial clients as they meet the challenges of today s highly regulated contact your Black Knight Account Director. The articles are intended for general informational purposes only and are not intended to provide legal and/or any other professional advice to any individual or entity. We urge you to consult with your legal and professional advisors before taking any action based on information appearing in the articles. B

2 BLACK KNIGHT: THE RIGHT PARTNER AT THE RIGHT TIME Black Knight is laser-focused on addressing our clients greatest challenges: mitigating risk and improving efficiency and profitability by delivering... COMPLETE INTEGRATION Black Knight offers a complete suite of technology and data solutions across the loan lifecycle. SIGNIFICANT INVESTMENT Black Knight continually invests to enhance system capabilities and support regulatory changes. UNMATCHED SCALE Black Knight can provide the scale to support the largest lenders and servicers in the country. Visit BKFS.com to discover why Black Knight is the Right Partner at the Right Time. Opening Message From Tom Sanzone: Proactively Addressing Change Tom Sanzone, Chief Executive Officer, Black Knight Financial Services During the past decade, there have been considerable changes and significant challenges in the financial services industry, with hundreds of new regulatory requirements and billions of dollars paid in fines. Loan originators and servicers have experienced accelerated compliance risk, along with a steep rise in costs due to factors such as increased staff, disparate technology, and tedious processes, to name a few. A recent example of these changes is the CFPB s TRID rule, which has been in effect for a few months. While originators are implementing technologies to support these new processes, they must also begin to focus on the recent amendments to the Home Mortgage Disclosure Act (HMDA), which are detailed in a 797-page document issued by the CFPB. Additionally, Fannie Mae and Freddie Mac recently announced future updates to the Uniform Residential Loan Application, and their plans to develop a corresponding standardized dataset. These changes will require financial institutions to relook at their processes and enhance their technology in order to collect and track data, and report on new loan requirements. These changes will undoubtedly compound the business challenges the industry currently faces. The Right Company at the Right Time In this heightened regulatory environment, many lenders and servicers are looking for comprehensive technology and robust data to help enhance decision-making and minimize risk. As the premier provider of integrated technology, data and analytics to the financial services industry, I am confident that Black Knight is the right company at the right time. Our product strategy is aligned to solve the industry s biggest challenges, and provide an alternative to the fragmented operating environments that have increased risk, decreased productivity and driven up costs. Black Knight provides proven and scalable solutions that enable loans to travel seamlessly from origination to servicing and through final disposition. Home Equity Loan Support Black Knight continues to be a leader in developing advanced solutions that help lenders and servicers improve efficiencies and meet regulatory requirements. For years, our LoanSphere MSP servicing system has included the functionality to support both first mortgages and home equity loans (HELOANs). We are in the process of enhancing our LoanSphere Empower loan origination system to also support HELOANs. Real estate-backed loans have unique characteristics and risks, and it simply makes sense for first mortgages and HELOANs to be serviced on one platform designed to address those requirements, especially since they both are subject to CFPB regulations. Data-Driven Decisioning Finally, Black Knight has made significant investments to ensure that a comprehensive range of valuable data is accessible to our clients across the loan lifecycle. Mortgage operations from lead generation to origination, servicing, loss mitigation and final disposition of a loan require best-in-class data assets to fully leverage sophisticated decisioning models. At every stage of the loan process, the right data at the right time can be vital to growth, profitability, regulatory compliance and customer satisfaction. We will continue to remain focused on enhancing our data and analytics to ensure we deliver the information you need when you need it. Compliance Ready There is little doubt that regulators will not only be looking at lenders operations, but also at their business partners. Black Knight s solutions have been reviewed by several agencies, and we believe that our tremendous attention to detail, along with a staff of more than 250 specialists focused on understanding current regulations and their impact to our clients, position us to support you in very powerful ways. 1 LoanSphere, our end-to-end platform of technology, data and analytics, supports the entire mortgage and home equity loan lifecycle and is a game-changer for our industry. Not only does LoanSphere offer the efficiency advantages of working within a single platform, but it enables transparency across loan portfolios. By providing a standardized view into the processes, decisions, timelines and performance of a loan, Black Knight can deliver the insights and data consistency our clients need to report to regulators and the GSEs. Our mission is to help you manage and mitigate evolving compliance risk, restore operational efficiency to optimal levels, and generate healthier financial results. We are committed to continuous investment in our products and solutions to deliver the performance you need. I am proud to lead the professional, dedicated team at Black Knight Financial Services, and to work as your partner in delivering the innovative solutions you need today and in the future. Thank you for your continued partnership. 2

3 Unprecedented Collaboration Among Mortgage Industry Participants Yields Big Benefits For those of us who have been around the mortgage industry for a while, the idea of productive collaboration across our incredibly diverse industry has been more of a pipe dream than reality. First, there have been significant barriers to this type of collaboration, such as a fiercely competitive environment comprised of many different types of organizations, from lenders, title agents and underwriters to software providers, solution providers and industry associations. In addition, there has never been a comprehensive framework for industry-level collaboration, especially to solve a complex problem within a given time frame. But, that was then and this is now. The perfect storm was created when the CFPB released the complex TRID requirements in November With the original deadline just 20 months out, there was certainly a great deal of industry wide motivation to find workable, collaborative solutions to help with the challenges presented by TRID. However, to benefit from a collaborative approach, many critical elements had to fall into place including an appropriate model, a willing facilitator, and the right participants in order to achieve the transformative results that were required. And, that s just what happened. The Vision By the spring of 2014, industry participants were beginning to understand the far-reaching impact of TRID, and to recognize the critical need for new technologies to support these significant changes. Yet, to develop something that could help the industry meant that the technology could not be developed in a vacuum. Without the significant input and involvement of influential leaders across the industry, there would be no way to create the comprehensive utility that was truly needed to support the new loan closing requirements. To create this utility, a different kind of approach would be required: an unprecedented level of collaboration across multiple industry business segments. Black Knight Financial Services RealEC Technologies (RealEC) division offers LoanSphere Exchange, a collaboration platform that has been used by mortgage lenders for over 15 years. It is a well-known and trusted solution that is used to connect thousands of the industry s service and solution providers to order, track and receive mortgage origination products and services. Dan Sogorka, president of RealEC, had the vision to leverage the Exchange architecture to develop a truly cross-functional, highly collaborative process that could support the requirements of diverse organizations and deliver the common workflow, integrations and audit support capabilities needed for TRID compliance. As a result, RealEC reached out to clients to share this vision, and invited participants to attend a foundational meeting where they would provide feedback about how such a process might work, what governance would look like, and how the mission of the group would be crafted to address common technology needs, yet remain sensitive to inherent differences. The Organization To ensure that the process of collaboration would work efficiently, the first step was to create the Closing Insight Advisory Board, which included representatives that had the authority to make decisions, on behalf of their companies, about the features and functionality that s designed by Black Knight to meet their needs. Governance Beyond a well-organized, well-documented governance and development process, the most important element in this collaboration was the clear and effective communication between the diverse parties that participated. To support this effort, several subcommittees were formed and each organization selected individuals who were subject-matter experts (SMEs). These SMEs were responsible for understanding the goal of each step in the development process and communicating the business requirements back to RealEC. Over a one-year period, the subcommittees met regularly to define various requirements and make recommendations to the advisory board. Upon approval by RealEC, the development team would adopt the requirements and keep the process moving forward. Throughout this highly collaborative process, there was a significant amount of testing not only with the organizations that participated in the advisory board, but also with other lenders that intended to implement LoanSphere Closing Insight. RealEC managed and coordinated the testing, with more than 50 organizations participating in the effort. To ensure a consistent approach and effective execution, RealEC kept comprehensive records of all the processes, communications, changes, updates, approvals and feedback that were received from the participants throughout the 20 months the advisory board and various subcommittees worked together. Lessons Learned This level of collaboration was unprecedented in our industry, and was critical to the on-time delivery of Closing Insight that is now helping the mortgage industry support TRID compliance. There were many lessons learned along the way, including the need for a very clear mission to keep everyone focused, and the collective agreement of everyone involved that discussions would be about the technology. Input from advisory board members was vitally important to the development process because each member provided unique background, perspective and skills. Subcommittee members kept the process moving forward, met the deadlines, and provided timely and efficient feedback to their respective companies. In fact, the level of commitment from all of the participating companies, as well as the individuals involved, helped to keep Closing Insight on track and enabled Black Knight to deliver a production-ready solution for the final TRID deadline. What s Next? RealEC will continue to leverage this proven and highly successful collaboration model to tap the expertise and teamwork of diverse industry participants in order to help ensure this solution continues to meet industry needs. TRID A Work in Progress Dan Sogorka, President, RealEC Technologies, Black Knight Financial Services The mortgage lending industry experienced some fireworks on TRID s effective date of Oct. 3, There was a lot of noise, a few explosions, and a bit of lingering smoke after the CFPB s launch of the new rule. TRID certainly created significant changes in the lending process and some believe the impact is even bigger than expected. To help our clients prepare for the implementation of TRID, Black Knight worked with a group of top lenders, title underwriters and title software production developers to create LoanSphere Closing Insight our Web-based solution that enables lenders to deploy a data-driven closing process across their settlement network. The level of collaboration, idea sharing and intelligent discussion among this team to create Closing Insight was unprecedented. Additionally, more than one million hours of programming time was invested by Black Knight to develop a best-in-class solution, and we worked diligently for more than two years to achieve a successful, on-time product launch for clients to be ready on Oct. 3. Black Knight and I suspect many of our clients knew that the rule s October effective date would be one milestone in a much longer process. We have been the most successful in areas of the origination process that we are able to control. On the other hand, uncontrollable factors such as individual players hesitance to give up their old paper-driven processes in favor of technology have delayed the transition process. Settlement Agent Readiness As a result of TRID s significant change to the closing process, settlement agents now have to follow each lender s instructions, which can vary from bank to bank. Because of these differences, the rule is being implemented in multiple ways creating a wide variety of disparate information and training materials. Settlement agents have had to learn differing processes, procedures and technologies. As a result, typical change management strategies are not as effective as they might be. Black Knight continues to proactively engage settlement agents to help them register for Closing Insight and learn how to use it. From our experience with the technology, settlement agents and their lender partners grow accustomed to a more efficient, techenabled process, and become more self-sufficient and supportive of the new approach. Still, old habits die hard, and we must all stay committed to continuous outreach and communication to help achieve consistent use of this innovative technology. What s Next? Now that Black Knight has successfully launched Closing Insight, our primary focus is to enhance its features and deliver additional helpful tools. As we continue to learn about how Closing Insight works in the field, we remain fully committed to ongoing technology investment, so we can support and anticipate clients needs to meet any challenge they must face. 3 4

4 Black Knight s LoanSphere Road Map Set to Deliver New Solutions in 2016 Shelley Leonard, Product Strategy Executive, Black Knight Financial Services Regulatory changes and compliance challenges have affected the industry for years and we expect 2016 to be no exception. Across the lending lifecycle, compliance complexity remains an area that has the potential to drain resources and drive up costs for financial institutions. Black Knight s LoanSphere strategy is designed to enable our clients to gain valuable operational insights and access to powerful data and information across the loan lifecycle. As we continue to achieve new milestones along the LoanSphere road map in 2016, our clients will experience unprecedented integration with the tools and information they need for regulatory compliance and operational efficiency. End-to-End Connectivity LoanSphere delivers a single set of solutions that enables our clients to seamlessly originate loans and service both performing and non-performing loans without having to leave the system to perform a particular task. The foundation for these solutions includes functionality such as business process automation, workflow, configurable rules and integrated data. Clients who use multiple Black Knight applications realize significant value through efficiency gains, reduced costs, less manual intervention and an improved borrower experience. For example, integrations with the LoanSphere MSP servicing system provide servicers with seamless access to powerful tools like Lien Alert. Through automated monitoring of properties within a portfolio, Lien Alert can identify changes in ownership, property tax delinquencies, lien status changes, value changes, and the placement of involuntary liens or judgments against any property. Clients can also be automatically notified if hazard insurance has lapsed, HOA fees become delinquent or a property has been put up for sale. Not only do these capabilities help institutions reliably identify financial and compliance risk within their portfolios, but they enable them to efficiently mitigate those issues before they become more expensive to cure. Access and Analyze Data From One Source One of the most significant solutions we will be delivering in 2016 is the LoanSphere Data Hub a powerful source of information that will enable financial institutions to look at their Black Knight system data across their entire portfolio, and link it with property records data all within one system. Using the Data Hub, clients will have the ability to view loan information beyond simple snapshots in time, and conduct a time-series analysis of data over days, weeks, months, month-end and year-end. The Data Hub will also deliver valuable insights into specific products. Lenders and servicers can establish the thresholds and conditions they want to monitor whether it is CFPB compliance, investor guideline thresholds, OCC requirements or other factors. For example, by integrating public records information straight through to the LoanSphere Empower loan origination system, lenders will be able to see the property census tract ID during the loan application process to determine whether or not a loan is CRA (Community Reinvestment Act) eligible. On page 13, Ben Graboske from Black Knight s Data & Analytics division discusses this example further, and details our approach to big data and its use on current regulatory challenges. Across the loan lifecycle, the Data Hub can support lenders and servicers with managing even granular level requirements, such as time-sensitive borrower notifications, disclosures, loss mitigation activities and SCRA protections. Loans that approach certain thresholds or conditions can be automatically queued into an appropriate workflow to cure the issue, with the updated status information returned to the system of record. Single Entry to Black Knight Systems Another area of significant focus in 2016 is the LoanSphere Portal, which will ultimately provide a single sign-on capability for users of Black Knight products. This is an expansion of Lending Portal (utilized by servicers today) with a fresh look and feel, and a new name. The LoanSphere Portal will include all loan-related Black Knight products from origination, servicing, default and data solutions. From a road map perspective, the first product to be implemented into the LoanSphere Portal will be Empower, with expansion into some of the default applications, as well as data and analytics products. In addition to the convenience of LoanSphere Portal, which will give users role-specific access to the tools and information they need, clients will be better able to manage the security of their information assets, improve navigation and decrease system training times. The Benefits of LoanSphere While these few examples are representative of the many advantages associated with LoanSphere, most of you realize that these merely scratch the surface. The full potential of a seamlessly integrated, end-to-end mortgage and home equity As a critical vendor for many of the financial industry s leading institutions, Black Knight is committed to assisting our clients by providing them with the necessary information to effectively respond to regulators inquiries. In 2015, Black Knight fulfilled more than 500 unique client inquiries for due diligence and assessment information. Black Knight is working to further streamline our response processes and improve delivery times to our clients. Last year, Black Knight adopted the use of the Standard Information Gathering (SIG) Questionnaire developed by Shared Assessments, along with a robust package of relevant corporate information as a standard response for due diligence and assessment requests. The SIG is a comprehensive collection of more than 1,600 questions across 16 risk-control areas. In addition, the package of corporate information includes artifacts such as corporate profile, financials, insurance certificates, governance information and policy/procedural overviews. system is something we are all just beginning to understand. The beneficial impacts to our clients will include operational simplification, visibility across the loan lifecycle, rules-based monitoring and curative action, significant improvements in efficiency, better monitoring of regulatory compliance factors and so much more. We look forward to 2016 with great anticipation, and with sincere appreciation for your partnership as we work together to create a new, more transparent and productive working environment for our clients. Enhanced Client Audit Program Improves Delivery Time Frames and Expands Information Availability This Effort Will Help Clients: Save time. Current turnaround times for responding to the multiple, client-specific assessment questionnaires can reach days. By leveraging the use of the SIG Questionnaire, Black Knight will provide responses immediately. Improve efficiency. Using the SIG gives Black Knight greater agility in providing the most accurate, up-to-date information that clients need to meet internal and regulatory requirements. Enhance responses. Reduced questionnaire volume allows for more resource time and focus to expand and improve the information available. Later this year, look for increased accessibility to key Black Knight company information with the planned launch of the client selfservice Web portal, Black Knight Assessment Resource Center, targeted for second quarter. For more information regarding Black Knight s Client Audit Program, please contact your Black Knight Account Director. For more information regarding the Shared Assessments organization, please visit 5 6

5 Market and Regulatory Changes Create Opportunities and Challenges for Residential Real Estate Lenders Jerry Halbrook, President, Black Knight Origination Technologies The improved U.S. economy has led to increasing home values in nearly every part of the country. On average, home prices are at the highest point they ve been since November As a result, the reservoir of home equity among U.S. mortgage holders has expanded to a colossal $7 trillion since 2012.* Many of our clients are experiencing a growing demand for home equity loans and lines of credit, fueled not only by home price appreciation, but also by more stringent first mortgage eligibility requirements and expectations of rising interest rates. However, because the lending environment has become more complicated, the number of closed-end home equity loan originations, which now falls under the CFPB s TRID has dropped. In fact, a 2015 poll by the American Land Title Association (ALTA) revealed that some lenders were considering a temporary halt to closed-end home equity lending until the financial and operational impact of TRID regulations could be further evaluated. Regulatory challenges have been a significant cause of increasing operating costs across the industry. Average operating costs have risen approximately 30 percent yearover-year since 2009, in large part due to the frequency and magnitude of regulatory change. For lenders offering home equity products as well as mortgages, the cost of regulatory change may be even higher. The reason? Although both home equity and mortgage loans are real estate-secured products, they are often originated using separate applications: home equity loans on retail/consumer lending systems and home mortgages on mortgage-specific applications. The growing reach and range of regulations for all residential real estate-secured lending products are requiring updates to both systems, often at a very high cost. As more lenders discover this, many are taking steps to address the challenge. While some are choosing to maintain originations of home equity products using their consumer banking applications, others are considering a consolidation approach originating all residential real estate-secured loans on one system. Let s take a look at these different approaches and the impact of each. Strategy I: Maintain Home Equity Product Origination Using a Consumer Banking Application Some institutions are enhancing their consumer banking systems to meet evolving CFPB regulatory requirements. This approach often requires significant customization and new capabilities in areas previously not needed for consumer loans. The cost for this level of modification could be substantial, with ongoing investment required as new regulations are rolled out. For lenders that rely on a third-party consumer banking application, we recommend you confirm that your software provider is qualified and fully committed to making the necessary investments in development and support to meet the evolving regulatory requirements for home equity loans. Strategy II: Add a Separate System to Originate Home Equity Products This option would require adding another application into the operating environment that already includes systems for both mortgage origination and consumer banking. While this approach could help provide the features, functionality and controls needed to meet CFPB regulatory requirements, as well as support other product-specific operational and customer needs, it also presents challenges. Lenders will encounter higher costs and increased IT complexity associated with incorporating, managing and updating another application. Many of the ongoing updates to meet regulatory requirements will be duplicative for lenders that also originate traditional mortgage loans. Lenders may also incur additional costs, such as training for resources to manage, maintain, update and utilize a new application. Strategy III: Use One System for Originating All Residential Real Estate-Secured Lending Products This approach eliminates the cost associated with duplicative regulatory updates for separate home equity and first mortgage origination systems. By consolidating all residential real estatesecured products on one system, lenders can leverage existing technology to reduce IT complexity, help ensure that regulatory requirements are addressed consistently across all products, lower overall operating costs, increase data source uniformity and much more. It is certain that the regulatory landscape will continue to evolve. Already, the industry is focusing on the updated Home Mortgage Disclosure Act (HMDA) regulations. These new requirements include expanded data collection for mortgages and home equity loans starting in 2018, with reporting effective in Then beginning on Jan. 1, 2018, data collection and reporting on home equity lines and loans, as well as on reverse mortgages, will also be required. HMDA Expansion: What Is on the Horizon? A key regulatory compliance obligation facing the mortgage industry over the next few years will be implementing changes to Regulation C, Home Mortgage Disclosure Act (HMDA), released by the CFPB on Oct. 15, Among other things, the final rule expands the amount of information that must be collected and reported by financial institutions to the regulators on the topics of race, gender and financial situation of mortgage applicants and borrowers. Black Knight is analyzing the rule and will be updating its origination and servicing systems to support HMDA reporting and data retention requirements for our clients. What Is Expanding in the New HMDA Rule? The CFPB added new data points that must be collected in 2018 and reported in This includes new fields to capture applicant/borrower age, credit score, automated underwriting system information, points and fees, borrower-paid origination charges, discount points, lender credits, loan term, prepayment penalty, non-amortizing loan features and interest rate. Moreover, CFPB modified many of the existing data points. For example, the rule further breakdowns ethnicity and race categories of applicants/borrowers. The final rule also changes: 1) who has to report; 2) the types of transactions covered; and 3) timing of reporting. Quarterly reporting rather than annual reporting will be required for larger institutions starting in Also, home equity lines of credit (HELOCs) will be covered by the mandatory reporting requirements for the first time. Today, HELOCs are reported at the option of the financial institution. There will continue to be great opportunities, as well as challenges, associated with the origination and servicing of home equity and first mortgage loans. We appreciate the opportunity to work with our clients to address these industry challenges and create new strategies, as we continue our long-standing commitment to invest in the Black Knight solutions you use and trust. Through our strong client partnerships, and history of delivering innovative, industry-leading solutions, Black Knight stands ready to assist with the evolving regulatory and market environment. *Data provided by Black Knight s Data & Analytics division. Loan origination systems will need the functionality to collect the additional data points, report them to regulators and retain them for the required time period. The updates to the regulation include a requirement that HMDA data be reported in an electronic format starting in 2018, meaning the origination system will require integration with a new Web-based submission tool being developed by the CFPB. HMDA compliance may fall on parties other than the originator. This can occur for reporting assumptions, loan purchases and possibly repurchases. As a result, servicing departments, loan purchasers or specialty departments may also need access to HMDA data fields, and Black Knight s origination and servicing systems can assist with entering and reporting these events. In addition, the rule requires the assignment of a Universal Loan Identifier (ULI) on or after Jan. 1, 2018 for covered transactions. This ULI remains with the loan throughout its life, as well as through subsequent HMDA reporting events, such as loan purchases. As a result, the lender or other party will need to retain the ULI in the system of record to persist it through subsequent HMDA reporting events. The CFPB has recently launched a HMDA webpage at that provides helpful information to the public and the mortgage industry about the final rule. This website will continue to be updated over time as more information and technical specifications are released. During the implementation period, Black Knight will be working across departments, as well as with our clients, to make the necessary system changes to support compliance with the HMDA rule. 7 8

6 Servicing: Regulatory Considerations for 2016 George FitzGerald, Executive Vice President, Solutions Management, Black Knight Servicing Technologies possible scenarios are clearly explained and well documented will not only help borrowers make the best personal decisions, but also support modification efforts as required by the CFPB. While other regulatory changes are always likely to come up, Black Knight will continue to be vigilant and ready to support your needs when these and other requirements arise. The industry is better prepared to successfully manage change than it has ever been before. And so are we. Compared to recent years, the regulatory changes in the mortgage servicing industry were not as intense. Most of the focus was on originations particularly with the implementation of the new TRID rule. However, 2016 promises to keep servicers busy with significant changes ahead. Fannie Mae Investor Reporting One of the most sweeping changes is the new Fannie Mae investor reporting requirements that will go into effect Feb. 1, In Lender Letter LL dated Nov. 13, 2014, Fannie outlined its elimination of the Single-Family MBS call-in requirement for monthly pool balance reporting, as well as its changes to loan-level reporting for scheduled schedule loans, which are moving from monthly to daily reporting. While there will still be only one remittance, daily reporting will occur through the 22 of the month, followed by a total-up that will happen at cut-off to capture any additional changes that occur in the last weekdays of the month. These changes are in preparation for the GSE transition to the Common Securitization Platform, which is presently under development for Fannie Mae and Freddie Mac. The new platform will enable more loan-level granularity and visibility for the GSEs, presumably for general analysis purposes. Black Knight has been working on this project since September 2014, and our LoanSphere MSP enhancement initiatives were underway by January 2015, including the creation of the new RECON 817 for FNMA S/S loan-level reporting and remittance functionality, and in preparation for the retirement of the previous RECON 540 requirements. Black Knight has also established an extensive testing strategy that will continue throughout the year to help mitigate risk and ensure a smooth transition to the new Fannie Mae reporting requirements when the time comes. Black Knight clients with Fannie Mae loans in their portfolios are encouraged to continue assessing their business processes to identify changes that may be needed to replace S/S MBS pool reporting with loan-level reporting processes. Black Knight will also continue to conduct webinars and provide training to support clients in getting their staff up to speed on how the new reporting and reconciliation processes will work. General Bankruptcy In the area of bankruptcy, certainly the process itself is much different than it was 10 years ago. Largely because of the many loss mitigation options, and other attempts that may have been made to help avoid foreclosure, loans today are typically far more delinquent by the time they reach bankruptcy perhaps many years delinquent. In addition, multiple payment, term and interest rate changes may have occurred between the date of the last payment and what is presently due, making the bankruptcy process much more complicated than it was in years past. In terms of bankruptcy-related changes, the Proof of Claim form was updated as of Dec. 1, The change included the addition of the new Item 10, which asks whether the claim is based on a lease, and requiring the amount necessary to cure any default as of the date of the petition. The new form also eliminates the previous summary format in favor of a detailed ledger of debits and credits spanning the entire period of delinquency. We expect the CFPB s final decision on important proposed changes to bankruptcy requirements to be announced in Under the current rules, servicers are exempt from providing periodic statements to any of the obligors in bankruptcy. Proposed rules would significantly change that status, requiring most borrowers in bankruptcy to receive periodic statements/ coupons, unless certain conditions are present, such as the borrower requesting that the servicer stop sending them. The End of HAMP? The official end of the Home Affordable Modification Program (HAMP) occurs this year, but loss mitigation efforts will live on. Currently, the CFPB is deciding whether to extend HAMP indefinitely. Even if it doesn t, it will certainly be watching to ensure that borrowers are not moved into foreclosure without exhausting all reasonable loss mitigation options. It is also possible that new programs will be introduced by both Fannie Mae and Freddie Mac, possibly patterned after HAMP, and if so, the GSE-specific options would likely be required for loans sold to the GSEs. Regardless of the type of modification options that are made available to them, information and transparency for borrowers will continue to be extremely important. Making sure that all What Can I Do With All This Data?: Putting Big Data to Work Big data is being generated by everything around us all the time. It s arriving at an alarming velocity, in increasingly large volumes and from a growing variety of sources. But the term big doesn t refer to size alone it also describes the enormity of the challenge in effectively managing and utilizing this much information. As the saying goes, information is power. But that s only true if you know how to find the right data, then extract value and insights from it that can benefit your business. Big data includes not only transaction and operational data you likely already collect but also information from other sources, including social media, Web logs, s, documents, multimedia, text messages and more. There s no doubt that applying sophisticated analytics to this combination of data can help you gather valuable insights you can use to make faster, smarter lending decisions. Data Integration Delivers More Data But what data is most valuable? Which data do you trust? How do you manage all the places where this data originates? And how do you bring the relevant pieces of the big data puzzle together? IBM offers a wide variety of big data solutions to help lenders more effectively manage big data and make better, more informed decisions. As you delve deeper into big data, IBM is here to help your organization take advantage of it with robust and comprehensive anywhere big data solutions. This feature Sponsored by IBM helps your organization flexibly integrate data wherever it resides on a mainframe, in big data sources or in the cloud. Flexible capabilities built into IBM s software work behind the scenes to gather and analyze the data so lenders can react quicker to changing business conditions. Analytics That Deliver When lenders like you are ready to put better data management and integration in place, IBM s solutions can help your organization maximize intelligence gathering from the large trusted pool of information. Applying powerful advanced analytics to the broad combination of data that has been collected can provide a richer, more complete view of your customers. And that can greatly enhance your knowledge of, and improve your decisions about borrowers. Reduce Risk and Build Portfolio Value We all know the present-day mortgage lending business bears little resemblance to that of the past. Which is exactly the reason why your organization needs to apply 21 st century thinking to every available piece of data that you can collect and analyze. Today s data management and analytics tools from IBM give you a 360-degree view of the entire mortgage lifecycle and can play a significant role in helping you originate performing loans to strengthen loan portfolios. Black Knight stands ready, along with IBM, to help you move forward into a more profitable future. 9 10

7 2015: A Look Back at Mortgage Performance Tappable Equity Distribution by Current Interest Rate of First Lien 11 Black Knight tracks mortgage performance data for its lender, servicer and other financial services clients and is looked at by the national media as an unsurpassed information source on these matters. Using data from its industry-leading McDash TM database, the Black Knight Data & Analytics division provides this look back at the mortgage performance trends over the last year. In years past, this space has looked back at key mortgage performance indicators, largely in an attempt to gauge improvement from the crisis years. While 2015 has continued that trend delinquency and foreclosure rates continued to fall, and new problem loan rates are firmly in pre-crisis territory the biggest stories have been tied to 43 consecutive months of annual home price appreciation. Rising home prices have dramatically increased the level of equity available to U.S. mortgage holders, and as a result, 2015 saw increased levels of both cash-out refinance and HELOC originations. Rising interest rates will likely impact the balance of these markets in the coming months, and in fact have already significantly impacted the population of refinanceable borrowers. Nearing Pre-Crisis Levels In 2015, we saw foreclosure inventory levels continue to improve, declining nearly 70 percent from December 2010 s peak. As the most recent available data states, just 1.4 percent of active mortgages are in active foreclosure about 689,000 loans. However, while down 22 percent from last year, and the lowest we ve seen since November 2007, this is still roughly 2.5 times normal. First time foreclosure starts were down also, with approximately 432,000 at year s end, as compared to 536,000 in By that metric, we are squarely back to pre-crisis levels. In fact, not only were November 2015 first time foreclosure starts the lowest in over 10 years, they were actually below the lowest level seen in all of Likewise, the delinquency rate also improved over the course of the year. Though there were some seasonal upticks none unexpected delinquent but not yet in foreclosure inventory sat at 4.8 percent, down nearly 15 percent from last year. This puts today s delinquency rate within just half a percentage point of the pre-crisis average. In terms of new non-current loans those that were current six months ago but are now 60 or more days past due there has been incredible progress. At last check, the new non-current rate was just.63 percent, a decline of 14 percent from this time last year, and down nearly 78 percent from the high of 2.87 percent back in January Equity Resurgent The rate of home price appreciation picked up a bit in 2015 as compared to where we ended 2014; prices were up 5.5 percent at the national level as of November, as compared to just 4.6 percent over the same period in Regardless, as of November, we had seen 43 consecutive months of annual home price appreciation, and the result was a tremendous expansion of equity among U.S. mortgage holders. As of third quarter 2015, U.S. mortgage holders held over $7 trillion in net equity, an increase of nearly $1 trillion from the year before. That s more than twice the amount of equity in the entire U.S. mortgage market in 2011, and the average borrower today has about $19,000 more in equity than just last year. Looking at the amount of equity available on each home with a mortgage using an upper limit of an 80 percent total combined loan-to-value (CLTV), including first and any second liens we found that $4.2 trillion of that equity could be accessed by borrowers before hitting that limit. In total that s over 37 million borrowers with an average of roughly $112,000 in tappable equity available in their homes. In addition, we ve seen negative equity levels drop by nearly 80 percent from third quarter That s a drop from nearly 15 million borrowers underwater on their mortgages four years ago to just over 3 million today. This past year also saw the population of refinanceable borrowers climb back up from 2014 due to 30-year interest rates dropping early in 2015 and then begin to shrink again. As of our most recent analysis, there were still 5.2 million borrowers who met broad-based eligibility criteria: loan-to-values (LTV) of 80 percent or less, credit scores of at least 720, and current interest rates on their first lien mortgage at least 75 basis points above the most recent Freddie Mac weekly 30-year rate survey. However, this population had already declined from over 7 million in April of 2015, when interest rates were below 3.7 percent. An increase of 50 basis points in the 30-year rate would take away the interest rate incentive to refinance from 2.1 million borrowers; 100 basis points would leave only 2 million remaining, the smallest population of potential refinance candidates in recent history. Share of Tappable Equity 15% 10% 9% 6% 3% 0% Below 3% % % Cash-Outs and HELOCs Return For the 12 months ending in third quarter 2015, $64 billion in equity had been tapped via first lien cash-out refinances, a 51 percent increase over the preceding 12-month period. On average, borrowers were pulling out over $60,000 in equity via refinances, but the resulting average LTV of 67 percent was the lowest on record. Roughly half of all of tappable equity belongs to borrowers with interest rates higher than today s 30-year rate making them potential candidates for cash-out refinancing. As interest rates rise, so will the amount of tappable equity sitting on first lien mortgages below par; a 50 basis point rise in rates would result in two thirds of the country s tappable equity sitting below the going 30-year rate. For the most part, as rates rise, HELOCs will continue to become more popular to homeowners looking to tap available equity. Last year, we d already begun to see signs of this. In third quarter 2015, HELOC originations were up 35 percent year-to-date over 2014, though still 85 percent below 2007 levels. What s more, the average HELOC line amount is at its highest level in over 10 years, but it s going to a much lower risk % % % % % % % % % Current Interest Rate on First Lien Mortgage 51% of tappable equity is tied to first lien mortgages with current interest rates below 4% Two thirds of tappable equity is tied to first liens with rates below 4.5% Nearly 80% of tappable equity is tied to first liens with rates below 5% (Tappable Equity Equity available on a property with an existing mortgage before reaching a current CLTV of 80%) % % profile borrower than in the bubble years. At 782, first quarter 2015 HELOC originations had the highest weighted average credit scores on record. Overall, 70 percent of HELOCs are going to borrowers with credit scores of 760 or higher, and 60 percent of the nation s total tappable equity belongs to borrowers in that credit score group. Further, while HELOC line amounts may be at 10-year highs, initial utilization rates a key risk factor are near 10-year lows. Also, the average resulting CLTV for borrowers with second lien HELOCs assuming full line utilization is just 66 percent. The most recent available data shows delinquency rates on existing HELOCs at 1.9 percent, the lowest level since April 2007 and delinquencies among recent vintage originations are essentially nonexistent. Of course, resets on existing bubble-era vintage HELOCs are still waiting in the wings, and no one has an infallible crystal ball when it comes to home prices, or wider macroeconomic conditions, for that matter. Rest assured that we ll be keeping a close eye on these and other issues as 2016 moves forward. Black Knight Data & Analytics monthly data reports, available on are great resources to help keep track of these trends and more % % % 7% and Above 12

8 Bringing Big Data to Bear on Regulatory Challenges Ben Graboske, Chief Technology Officer, Black Knight Data & Analytics Compliance Management Bob Pinder, Chief Compliance Officer, Black Knight Financial Services Big data the aggregation of incredibly vast amounts of information and employing innovative methods of processing and analysis to provide enhanced insight, decision making and process automation has produced revolutionary, transformative changes in many fields and industries. The ability to find patterns, anomalies or even completely new arrangements within otherwise chaotic or complex data sets is already delivering incredible dividends in healthcare, energy efficiency, manufacturing, supply chain management, urban transportation and city planning the list goes on, and will only continue to grow. The mortgage industry, however, has been much slower to reap the benefits. This is staggering, especially when one considers the breadth and depth of the data the industry accumulates in the course of doing business; not to mention the degree to which it relies on the accurate processing and analysis of that data to function properly. When you add in the costs and risks associated with regulatory compliance and consider the incredible potential that exists in bringing big data to bear on the challenge of regulatory compliance the lack of movement in the industry becomes all the more puzzling. Black Knight Is Changing All That From our integrated LoanSphere end-to-end mortgage platform, to our unified Data Hub, to our Active Insight suite of information access and visualization tools and most importantly, to the free flowing interchange between them all Black Knight is bringing the power and promise of big data to our clients. The key is pulling together multiple, disparate data sources the client s own loan and borrower data; Black Knight s McDash TM mortgage industry performance data set; our SiteX Pro TM, the largest property information database in the industry; and any number of third-party databases. The result is not only faster, more accurate analysis, but also better decision-making, improved efficiency and increased transparency into previously unavailable insights. In terms of regulatory compliance, Black Knight s approach to big data can help our clients meet the challenges of a continually evolving regulatory environment, while also supporting their individual business goals. For example, consider the Community Reinvestment Act (CRA). Lenders need to prove to federal regulators that they are originating CRA-qualifying loans. When a lender can more quickly identify these loans, not only is it in compliance with federal regulations, but those loans can be sold at a premium on the secondary market. On the other hand, lenders that do not originate CRA loans may have to pay a premium to acquire pools of CRA-qualified loans to achieve compliance. By pulling in additional sources of data and linking those to a larger data ecosystem, we re able to provide infinitely deeper insight for the lender. Census and demographic data, charity information, community features and economic indicators can all be leveraged to identify pools of potential homebuyers whose loans would likely qualify as CRA. Targeted marketing campaigns can be developed based on previous results and statistical modeling. In turn, big data in-memory analytics engines can assess the effectiveness of these acquisition campaigns, letting the lender further fine tune and improve future efforts. We could also look at the requirements under the federal Servicemembers Civil Relief Act (SCRA), which prohibits foreclosure actions from being pursued against active status members of the military. In this case, we d pull data from the Department of Defense Manpower Data Center database into the Data Hub. The database could then be pinged against any severely delinquent borrower against whom foreclosure proceedings were to begin, supporting compliance with SCRA. Again, these are just two of the ways in which Black Knight s approach to big data can improve not only our clients compliance with regulatory requirements, but also their core business processes. For us, big data is about taking the vast amount of raw information that our clients and this industry are collecting on a daily basis, and turning it into something truly meaningful. From there, the potential is almost limitless. Existing and emergent regulatory requirements confronting the mortgage industry are considerable. The CFPB is now responsible for enforcing 19 different consumer financial laws, along with the Dodd-Frank Act prohibitions against unfair, deceptive, or abusive acts or practices (UDAAP). Additionally, the Federal Trade Commission s (FTC) authority to regulate and enforce a company s cybersecurity practices under the unfairness prong of the FTC Act was recently confirmed by a federal appellate court in the Wyndham Hotels case. There is no indication that existing regulatory requirements imposed upon mortgage industry participants will decrease in As part of their oversight, regulators don t just check a box to validate a company s compliance department. Instead, there is an emphasis on a company s compliance program, and benchmarks are used to test its effectiveness. The U.S. Department of Justice (DOJ) evaluates a company s compliance program during the course of federal prosecutions and, like the CFPB and other regulators, requires that a company establish an effective compliance program. The DOJ s emphasis on an effective program became evident at the end of 2015 through two separate pronouncements. First, on Sep. 9, 2015, the DOJ issued the Yates Memo. The Yates Memo, named after its author Deputy Attorney General Sally Quillian Yates, is designed to combat corporate misconduct through enhanced DOJ measures that focus on greater individual accountability. This increased emphasis on individual accountability correlates directly to the most commonly cited definition for an organization s compliance program found in Chapter 8 of the U.S. Sentencing Guidelines Manual which states that an effective compliance program shall exercise due diligence to prevent and detect criminal conduct. Second, on Nov. 3, 2015, the DOJ welcomed its inaugural Compliance Counsel Hui Chen. Ms. Chen comes to the agency with a substantial in-house background, including experience in the financial and technology sectors. Importantly, as Assistant Attorney General Leslie Caldwell explained during a November 2015 Securities Industry and Financial Markets Association seminar, Ms. Chen will evaluate a target company at a more global and a more granular level by assess[ing] a company s program, as well as test[ing] the validity of its claims about its program, such as whether the compliance program truly is thoughtfully designed and sufficiently resourced to address the company s compliance risks, or essentially window dressing. While encounters with the DOJ occur in the most extreme of circumstances, adherence to the DOJ guidance related to effective compliance programs provides a useful model for meeting compliance responsibilities. In this vein, mortgage industry participants would be well served to start 2016 by reviewing the effectiveness of their compliance programs. An integral part of establishing an effective compliance program involves implementing a robust Compliance Management System (CMS). In fact, as stated within the CFPB s Supervision and Examination Manual, the CFPB expects every regulated entity under its supervision and enforcement to have an effective compliance management system adapted to its business strategy and operation. The FDIC has provided guidance for CMSs and has noted that an effective CMS is commonly comprised of three interdependent elements: 1) board and management oversight; 2) a compliance program; and 3) compliance audit. A CMS is measured by how an institution: learns about its compliance responsibilities; ensures that employees understand these responsibilities; ensures that requirements are incorporated into business processes; reviews operations to ensure responsibilities are carried out and requirements are met; and takes corrective action and updates materials as necessary. When an institution has a robust CMS and the elements are supported by a strong culture of compliance, an institution should be successful in 2016 at managing its risk and compliance responsibilities

9 Q&A: With Jack Konyk From Weiner Brodsky Kider PC Jack Konyk is the Executive Director of Government Affairs at Washington, DC-based Weiner Brodsky Kider PC, one of the nation s premier law firms with a national practice focused on compliance, regulatory, transactional and litigation matters related to financial services concerns. Black Knight recently interviewed Jack to explore what insights his unique exposure to the industry and regulatory community might provide. If you can t show in the system of record that something occurred, for example that a notice was sent timely, then it s as if it didn t happen. Technology can also help by implementing business rules built around the regulatory requirements. Regulators want to see reliability and uniformity in compliance. Technology addresses both. It can help take the human factor out of the equation by driving uniform processes and procedures, and ensuring consistent applications of the same business rules, removing operational variances and controlling discretion, which can lead to differences in outcomes that might impact similarly situated borrowers differently. In effect, efficient use of technology can reduce a company s regulatory and legal risks. 15 Q: What are the biggest regulatory challenges facing the mortgage industry in 2016 and beyond? A: I think it s important to recognize that there are really two answers to this question a macro answer and a micro answer. The macro answer is the ability to develop and maintain an effective and efficient Compliance Management System (CMS) that actually achieves the kind of control necessary to determine what must be done and how to do it correctly, provide the training and support tools to put that in place, have the appropriate review and oversight to determine if it s working right or not, and ensure the involvement of everyone necessary throughout the entity from senior management on down to see that it gets fixed properly if it s not working right. Without that as a base, it won t matter much what the specific micro issues are. On the micro side, there will be several areas of regulatory focus in the origination space. The first will be a concentration on Loan Originator Compensation, as the CFPB believes that there has been widespread circumvention, if not deliberate violation, of those requirements. Second, there will be intense focus on the interaction of entities across the lending space, most notably Marketing Service Agreements and similar arrangements, along with proper management of third-party vendors. Third, the CFPB still needs to help clarify and provide guidance on several outstanding issues related to the TRID rule. Finally, the industry will focus over the next several years on implementing the expanded HMDA collection and reporting requirements. On the servicing side, the CFPB is expected to finalize its proposed servicing rule this coming summer. The most significant provisions of the proposal would expand periodic statements to borrowers in bankruptcy and treat successors in interest as borrowers for purposes of the protections found in the rules. Loss mitigation activities will continue to be a primary focus, especially as it relates to servicing transfers. The CFPB frequently warns that borrowers must not be harmed because servicing changes hands. As a result, all appropriate data and borrower documents must be retained, and accurately and fully transferred in a timely manner. The new servicer must be ready to promptly pick up where the transferor left off, particularly if loss mitigation activities were ongoing at the time of the transfer. Q: At Black Knight s 2015 Fall Committee Meetings, you spoke about CFPB examinations. Can you describe what the CFPB is focused on in its examinations? A: Originators, servicers and even third-party providers must have the appropriate CMS. The CFPB outlines what comprises an acceptable CMS in its examination manual. It also wants to see that companies have policies, procedures and controls, and that executive management and the CEO are actively involved in the development, execution and ongoing maintenance of those policies, procedures and controls, and ongoing training on the policies and procedures. Also, if the controls uncover a compliance problem, the CFPB not only expects companies to fix it, but to take action to ensure that the same problem does not occur again. We find that if a company has a strong CMS, examinations often can be faster, smaller in scope, and result in fewer findings or supervisory/remedial requirements. Q: What role does technology play in compliance? A: Technology can provide, and I would suggest may be the only way to reliably provide, two essential elements of survival in the coming world. The first is the ability to capture, store and produce accurate data on demand, and the other is the ability to ensure that all required tasks, processes and procedures are consistently followed throughout all activities, and done the same way every time. Data is critical. The regulators (as well as others in the process, such as aggregators, securitizers, ratings agencies, etc.) are requiring more data, as we are seeing with HMDA, so mortgage companies have to be able to accurately capture, store and deliver ever increasing amounts of information. Particularly in the case of regulatory requirements, CFPB has repeatedly stated that it considers the inability to deliver accurate data on time to not just be a failing of systems, but a failure of the quality of an entity s management and controls as well. The regulators also expect entities to actively track and use their own data internally, as an essential element of their CMS, to ensure compliance with rules. Further, we stress to clients that they must not only comply with the rules, but they must also be able to prove they complied in their system of record. Weiner Brodsky Kider PC (WBK) represents a broad client base, from start-up businesses to Fortune 500 companies, depositories and non-depositories, in the United States. Jack is not a lawyer, but has over four decades of financial services experience, having held a wide array of front-line and back-office positions in consumer banking and lending disciplines, including a particular focus on compliance and risk management. WBK provides an array of services beyond those typical to a law firm, including advisory and consulting activities, and advocacy support with legislative and regulatory agencies. One popular service is the firm s mock exam program, which duplicates a typical CFPB examination to enable clients to prepare for the real thing. Visit the firm s website at 16

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