On April 11, 2016, the Government Accountability Office (“GAO”) released a hundred-plus page report analyzing the effects of the growth of nonbank servicers in the mortgage market. Although the report did not contain any shocking revelations about the increasing role of nonbank mortgage servicers, it did contain some surprising recommendations with respect to increasing the regulatory oversight of nonbank mortgage servicers. While the GAO recognized that nonbank mortgage servicers already are extensively regulated at both the state and federal levels, its report identified perceived gaps in that oversight. In particular, the report recommended Congress grant the Federal Housing Finance Agency (“FHFA”) additional authority to directly examine nonbank mortgage servicers of loans owned by Fannie Mae and Freddie Mac (collectively, the “GSEs”), akin to the prudential banking regulators’ jurisdiction over service providers to depository institutions. The report also suggested the Consumer Financial Protection Bureau (“CFPB”) collect data on the identity and number of nonbank servicers, possibly by requiring the registration of such entities at the federal level.
We summarize the major findings of the report below.
The Pros and Cons of Nonbank Mortgage Servicing, According to the GAO
The GAO report acknowledged that nonbank mortgage servicing provides benefits to consumers and market participants, including improved capacity to handle delinquent loan servicing, specialized expertise, and better high-touch servicing capabilities. The report noted the possibility that consumers may experience better outcomes when nonbank mortgage servicers service their delinquent loans, pointing to one study finding that the loss mitigation options offered by nonbank servicers may reduce the likelihood of foreclosure. The report found that the rising prominence of nonbank servicers enhanced liquidity in the secondary mortgage market.
The report also, however, outlined a number of perceived risks to consumers and the GSEs from the growth of nonbank mortgage servicers.
- Immature Operational Systems: The report cited market participants and regulators who believed the rapid growth of nonbank mortgage servicers’ portfolios created operational challenges and insufficient infrastructure (relative to banks) for managing regulatory compliance, risks, and internal controls.
- Mortgage Servicing Transfer Issues: The report noted that nonbank mortgage servicers engaged in significant acquisitions of mortgage servicing rights and found that errors and improper actions during servicing transfers resulted in harm to consumers.
- Liquidity Risk and MSR Volatility: The report found that nonbank mortgage servicers were more susceptible to liquidity challenges caused by a reliance on short-term credit facilities and dependence on a small number of investors or creditors. The report also found that some nonbank servicers are more sensitive to volatility in the pricing of master servicing rights (“MSRs”) due to a lack of diversification.
- Failure of a Nonbank Servicer: The GAO acknowledged that state officials, representatives from Freddie Mac, and the monitor of the national mortgage settlement all expressed concern regarding the impact that the failure of a nonbank servicer could have on the mortgage servicing market. However, the GAO noted these effects would likely be mitigated because of the smaller market share of nonbank mortgage servicers, the capacity of other servicers to absorb the portfolios of any failed nonbank servicers, and the likelihood that the GSEs and Ginnie Mae would intervene for agency-backed loans.The GAO report summarized the current state and federal regulatory oversight of nonbank mortgage servicers, which includes: (i) the CFPB (which has rulemaking, supervisory, and enforcement authority over nonbank mortgage servicers); (ii) 36 states, districts, and territories (which license and examine mortgage servicers); (iii) the FHFA (which has indirect oversight of nonbank mortgage servicers through its supervision of the GSEs, its review and approval of large MSR transfers, and its minimum financial requirements); and (iv) the GSEs, Ginnie Mae, and federal insurance programs, which require entities servicing their loans to meet certain operational and financial requirements. Despite the fact that nonbank mortgage servicers recently have been the particular focus of CFPB supervisory examinations and enforcement proceedings, the GAO believes that more regulatory oversight is necessary.
The Perceived Limits of Current Regulatory Oversight and Recommendations for Enhanced Oversight
- Enhanced Data Collection to Improve CFPB Oversight: The GAO report found that the CFPB lacked a mechanism to collect comprehensive data on the identity and number of nonbank mortgage servicers. Although the CFPB stated that this perceived lack of data did not materially affect its work, the GAO report recommends the CFPB take steps to collect the data anyway, such as through the required registration of certain nonbank entities.
- Examination Authority for FHFA: The GAO report finds that the FHFA’s lack of authority to examine nonbank mortgage servicers is inconsistent with its mission to ensure the safety and soundness of the GSEs. The GAO report notes that this contrasts with the authority that bank regulators have to examine servicers which act on behalf of supervised banks. The report recommends Congress consider granting the FHFA the authority to examine nonbank mortgage servicers.
The GAO report’s recommendations would require Congressional and CFPB action to implement.