As U.S. banks struggle to maintain margins amid growing regulatory demands, some of them have started to outsource part of the onerous work involved in servicing mortgages and processing foreclosures to India’s major technology companies.
The move is creating a new revenue stream for such Indian outsourcing firms as Tata Consultancy Services Ltd. and Wipro Ltd. at a time when many Western companies have been pulling back on information-technology outsourcing. This year, Indian outsourcing firms will bring in $316 million in mortgage work, double the revenue from such work in 2009, according to estimates from HfS Research, an outsourcing consulting firm.
The banks aren’t outsourcing all the work. Citibank, for example, says that most of its mortgage servicing is still done in the U.S., though an Indian outsourcing company now supplements some work as needed. But as the government rolls out tougher rules for home loans, banks have added new financial-verification hurdles, and many of them outsource vetting rather than increasing their own staffs.
Indian outsourcing firms argue that using their services is also beneficial because it increases the layers of scrutiny. But U.S. regulators have faulted the banks for poor supervision of third-party vendors. Consumer advocates also worry that sending parts of the mortgage-servicing work to India will make it harder to ensure that reviews are done properly. “I think the lack of oversight so far away may be too much for these banks to handle, considering how badly they’ve handled overseeing their own staff,” says Ira Rheingold, executive director of the National Association of Consumer Advocates.
In the years after the 2008 global financial crisis, the U.S government criticized every facet of the mortgage business, from how financial institutions decided who got a loan to how borrowers in default were treated. Banks were also faulted for sloppiness, which, the government said, contributed to the wave of foreclosures that sank the American housing market.
The Indian outsourcers say they won’t be giving final approval for banks to foreclose on loans. Instead, they’ll make sure that the documents are in order so the banks can sign off.
Mortgage outsourcing in India takes place in the same huge glass-encased facilities as other outsourced IT work from Western companies. The technology centers now dominate industrial districts in New Delhi and Mumbai that were crowded 10 years ago with ramshackle garment factories.
The goal of the decor is to create an environment that’s familiar to Western executives, says Raman Roy, managing director for Quatrro Global Services, a New Delhi based outsourcer.
To handle the expected boom in the home-loan business over the next year, Mr. Roy says he plans to double his mortgage staff to around 2,000. Company analysts are assigned to rate potential borrowers as “very favorable” or “highly questionable” after reviewing hundreds of scanned pages detailing the borrower’s salary and credit history.
Tata, Wipro and the other Indian firms are tackling the contentious work of verifying that banks have taken all the proper steps before they proceed with foreclosures. These steps include reviewing the history of a loan to ensure that collection notices went out on time, as well as checking that the lender made the required attempts to reduce the monthly payment and the borrower was sufficiently behind to warrant foreclosure.
“We never judge the cases,” says Abid Ali Z Neemuchwala, vice president for business-process outsourcing services at Tata Consultancy. Tata, which expanded its mortgage-business revenue by about 40% over the past two years, added 2,000 staff members, for a total of 7,000, to work on mortgages.
“What we do is make it easy for the banks to make that final decision by putting together all the information and letting them know their checklist is complete,” he says.
In the past six months, Wipro has built an 11-person foreclosure unit, and it expects to generate $4 million to $5 million by helping banks close out bad loans. In coming years, it hopes to grab a larger piece of the $150 million it estimates U.S. banks spend to outsource foreclosure reviews and loan modifications. Wipro created the new revenue stream as it faced slowing growth in its information-technology business. The company’s IT services grew 5% to $6.2 billion for the fiscal year that ended in March, compared with 13.4% the previous year.
“The foreclosure process has become much more stringent, and that scrutiny has created a lot more volume for foreclosure teams [at banks]. But they don’t have the capacity,” Arjun Raman, a business-development manager at Wipro, says.
But Mr. Rheingold of the National Association of Consumer Advocates fears that pushing parts of the process overseas will make it even harder for regulators to watch.
“If their solution is to minimize costs, that’s the solution they’ve found,” says Mr. Rheingold. “If the solution is better customer service, they have clearly not found it. The solution is not overseas; it’s within their own practices.”
Source : The Wall Street Journal