Mortgage Industry Forward – Part III

By William M. LeRoy, PHOENIX Consulting, L.L.C. & The PHOENIX Group, L.L.C.

Author: William M. Leroy


As we have discussed, in my view, the central driving force behind all the behaviors that have led to the historical issues (including third-party vendors and specifically retained law firms) we have observed in the past year or so has been for the most part completely un-appreciated and overlooked by the new audit regimens.  As previously mentioned, it is my belief that the key driver is the third party vendors’ “Culture”.  In this article we will take a look at some additional paradigms being employed to select law firms to perform legal work related to defaulting mortgage loans.

Current Paradigm #2

An Attorney or Law Firm selection decision is based on the fact that they are members of a specific attorney group or trade organization.

This is probably one of the most political of the remaining “elephants in the room” but again; we cannot have an honest conversation about change absent a general discussion about the primary attorney organizations that each in their own way purport to be the best when it comes to organizational credentials, leadership efforts, industry reputation, etc.

From my perspective, I can say that the membership criterions for each major attorney organizations in this country are as varied as the colors in an Arizona sunset. Additionally, and for the most part, whether they presently realize this or not, the organizations whose members are primarily mortgage banking attorneys are now faced with challenges pertaining to if and how they may need to align their current membership criterion with the OCC Guidelines and the new retained attorney audit environment.  Regarding membership criterions, not all organizations are challenged equally. For example, some organizations are pure marketing organizations and therefore, to expect membership standards to be anywhere near approaching the robustness of the current audit landscape may be deemed overkill.

As previously discussed, the new paradigm is based in large part upon the OCC Third Party Vendor Management Criterions and specifically the targeted areas of risk. The organizations whose membership ranks continue to contain law firms or attorneys who have been identified as participants in the robo-signing scandals, and so forth, make it difficult for that organization to have any real verifiable claims on transparent organizational character or reputation.

Each of the organizations may find that in order to retain membership value and industry credibility they will need to re-examine and then adjust their membership criterion, testing, transparency, etc.  As to the question of whether or not any of these organizations will need to pay much closer attention to the actual conduct of their members, I would venture to say that the answer to this question is yes. In my view, local and national attorney organizations have a responsibility to their members, respective industries and their member’s clients to operate as if they were collectively the Attorney. In other words, to operate as if the organization was comprised on only one member, and that the organizations credibility was based solely  upon that one member actions. I have found that this perspective is a valuable leadership tool when trying to determine what changes, if any; need to be made within the contextual landscape of large organic organization or group.   For any organization to successfully navigate a transition from the current environment to a new paradigm is not an easy task.  We will discuss some steps that be taken in the next and final article.

But before we do that, I would like to offer anyone reading this article with some critical thoughts and observations.  What you may find surprising is that many of the answers to our present woes can be found in the study of the history of economics.  In a nutshell, economics is the study of how people choose to use resources. Resources may include the time and talent people have available, the land, buildings, equipment, and other tools on hand, and perhaps most importantly, the knowledge of how to combine them to create useful products and services.

Often, people appear to use their resources to improve their well-being. Well-being includes the satisfaction people gain from the products and services they choose to consume, from their time spent in leisure and with family and community as well as in jobs, and the security and services provided by effective governments. Sometimes, however, people appear to use their resources in ways that don’t improve their well-being. For the purposes of this discussion, I will define well-being as the industry paradigm we are struggling to change.

In my view, the most important book ever published on the subject of economics is the Inquiry into the Nature and Causes of The Wealth of Nations written by Adam Smith, and published in 1776 in Scotland.

One of the fundamental observations made by Mr. Smith was the fact that while the behavior of individuals is important, true economics also addresses the collective behavior of businesses and industries, governments and countries, and the globe as a whole. Microeconomics starts by thinking about how individuals make decisions. Macroeconomics considers aggregate outcomes. The two points of view are essential in understanding most economic phenomena.

In his book, Mr. Smith refers to the invisible hand.  It is this invisible hand that I wish to discuss.  In my view, there are many invisible hands at work in our industry. The term can be used to describe events and consequences of events that take place within our industry, the causes of which go un-observed and are not well understood, if at all.  The truth is that the changes and events being brought about by the invisible hand can be observed and understood. But in order to do so, one must have the eyes to see it.  We can develop this ability by recognizing that much of the thinking that we need to change in order to move into the new paradigm is brought about as a result of our own actions and behaviors.  If there is one thing that I could recommend to any individuals in management or leadership role within our industry it would be to recognize the positive and negative power contained in feedback.

In addition to several others, feedback can be defined in the following 3 ways:

1) A reaction or response to a particular process or activity: He got very little feedback from his speech.

2) Evaluative information derived from such a reaction or response: to study the feedback from an audience survey.

3) Psychology, knowledge of the results of any behavior, considered as influencing or modifying further performance.

As leaders, we need to recognize that to move our companies forward and enable ourselves, our teams, departments and companies to change from where we are, to where we need to be, we will need to move from a self-reinforcing feedback loop into a self-balancing feedback loop. In the wrong circumstances, a self-reinforcing feed-back loop has also been described as a vicious circle, or self-fulfilling prophecy. In my experience, I have found that the secret of positive growth and survival of organizations is dependent upon their matching internally the level of complexity of their external environment.  This can be described as the essence of a self-balancing feed-back loop.  In other-words, it is critical to involve all stakeholders in your review of process and procedure. A classic example of this would be to recognize the importance of building relationships with critical and influential industry participants, such as Chapter 13 Trustees, U.S. Trustees, Debtors Counsel and Federal Bankruptcy Judges when considering changes to your default administration processes and procedures.  To remain un-informed of the thinking, inclinations and preferences of these groups of industry participants will result in many internal management headaches down the roads and add a significant layer of risk to the overall administration process. We cannot operate in a vacuum.

The first step is to be able to distinguish between the organization of a system and its physical structure.  In classical terms it is the difference between Aristotle and Rene Descartes. Before Rene Descartes came along the prevailing world view was that we are all interconnected. In other words, that we are each part of an interconnected, spiritual organic living universe.  It was Rene Descartes who created the notion that we needed to break up the universe into pieces and that we could only understand the whole from the perspective of the properties of its parts. This changed western thinking and was the beginning of the siloed approach to organizational thinking and management. It is the lingering silo approach paradigm that continues to breed many of the current industry failures.  The fact is that we live and work in a living industry community. There is nothing that takes place within our industry that does not in some way impact the workings of the whole and its individual members. The actions of 1 or 2 financial institutions affect the perception of the whole, just as the actions of a few attorneys affect the reputations of the whole. The actions within one department affect the actions of the other departments and the abilities of each of the departments to operate successfully together.  The actions of third party vendor managers or outsourced control entries, impact the work performed by the retained attorneys and the abilities of the retained attorneys to properly preform their critical work. In my view, nowhere in our industry is the importance of having a robust self-balancing feedback loop more important than when working with your retained attorney network members. The information is too critical, the tasks to important, and the risks and penalties are too great to risk having anything but the best operational policies and procedures in place. This is a critical culture.

About William M. LeRoy, PHOENIX Consulting, L.L.C. & The PHOENIX Group, L.L.C.

An accomplished leader & seasoned legal & mortgage banking professional, Mr. LeRoy is the Founder & Principal of PHOENIX Consulting, L.L.C. and The PHOENIX Group, L.L.C. PHOENIX Consulting, L.L.C., can help to ensure that all Third Party Vendor Management Policies, Procedures, Controls and Audit Processes are in alignment with the most recent regulatory requirements. The PHOENIX Group, L.L.C., is an emerging group of full service boutique law firms who are restoring credibility to the legal community one law firm at a time.

No Author Biography has been linked to this Article.

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