The Community Home Lenders Association has written a letter to the Federal Housing Finance Agency, saying its proposed servicing standards for nonbanks will be harmful.

In particular, the CHLA says it is concerned about how the rules will negatively affect low and moderate income borrowers, and tilt the playing field in favor of larger lenders.

“The CHLA calls on FHFA to delay finalization of the rule, pending further study about both its potential impact on accelerating market developments that are restricting access to credit for low and moderate income homebuyers and in underserved markets — as well as the increased financial and consumer risk of increased concentration in the mortgage servicing industry,” the letter says.

The letter raises four specific areas of concern.

According to the CHLA, Freddie Mac and Fannie Mae should not use what it calls “subjective, non-transparent add-on requirements on top of the basic net worth/liquidity requirements.

It is our understanding that some individual nonbank servicers have recently been subjected to additional requirements, on top of the more bright line capital and liquidity requirements. There are several problems with this, including the lack of transparency, the possibility that they may be utilized arbitrarily and subjectively, and the possibility that they may disproportionately be imposed on smaller servicers or those doing less Enterprise volume. FHFA and the Enterprises have objective net worth and liquidity requirements. These should stand as they are, and not be supplemented by other black box type requirements. 

Second, CHLA says it is worried that the 25-basis point add-on provision applied to all loans is too severe.

This provision impedes organic growth of servicing through loan origination, since it has the effect of creating a very high marginal capital requirement — effectively 25% — on such growth. Moreover, we question the inclusion of other federally insured loans (GNMA securitization of FHA, RHS, and VA loans) in this metric. We note that, for example, GNMA does not include Enterprise loans in their add-on requirement, so Enterprise inclusion of GNMA loans seems asymmetric.

CHLA says that the proposal does not appropriately distinguish between “actual/actual” and “scheduled/scheduled” servicing.  

The financial responsibilities under actual/actual servicing are less substantial than under scheduled/scheduled servicing. Therefore, we believe that numerical reductions should be made to the proposal to reflect the lower Enterprise financial risk that such responsibilities entail.

Finally, the 200-basis point delinquency requirement > 6% should include PLS loans.

We do not understand why this was excluded from the proposal, particularly since this is the least regulated portion of the market.

There is also the issue of industry concentration.

“We believe that whatever minimal risk reduction might result from the proposal would be more than outweighed by the negative impact on access to credit for consumers, particularly for low and moderate income and minority  homebuyers and in underserved markets,” the letter states. “The proposed capital and liquidity requirements are likely to reduce the number of firms that service loans, thus reducing competition and reducing the number of community based lender/servicers serving consumers. This would come at a time when the homeownership rate is at a 20-year low, and mortgage credit is the tightest it has been in years.

“The proposal appears to primarily negatively impact smaller community-based lender/servicers, the very firms that have historically provided more personalized loan origination and servicing services to consumers. As a result, the rule’s main impact appears likely to increase concentration in the servicing of Enterprise loans among the big banks and a few large nonbank specialty servicers, which will in turn reduce access to credit and reduce servicing responsiveness for consumers,” they said.

CHLA also views this in the broader context of equitable Enterprise treatment by size with respect to g-fees, repurchase demands, and terms of seller-servicer agreements — as well as maintaining securitization options for non-bank lenders and a non-discriminatory cash window that fully meets market needs. 

“As currently drafted, the proposal does not appear to focus on concerns related to either the explosive growth of specialty servicing firms through purchase of mortgage servicing rights or to servicing problems of the large servicers, including the big banks (as evidenced by multi-billion dollar settlements they have entered into regarding anti-consumer servicing practices). Instead, as noted, the impact seems to fall predominately on smaller community-based lender/servicers,” they write.