The explosive rise of nonbank mortgage servicers over the last few years happened so quickly that regulators have failed to keep up; therefore regulators need to act quickly and increase oversight of nonbanks in an effort to further protect consumers, two prominent Democrats said this week.
In a letter sent Monday to Consumer Financial Protection Bureau Director Richard Cordray, Sen. Elizabeth Warren, D-Mass, and Rep. Elijah Cummings, D-Md, call on the CFPB to increase its oversight of nonbank mortgage servicers, citing a report from the U.S. Government Accountability Office on the rise of nonbank servicers.
The GAO report notes that the share of mortgages serviced by nonbanks increased from approximately 6.8% in 2012 to approximately 24.2% in 2015, in terms of unpaid principal balance.
The GAO report was conducted after a request from Warren and Cummings in 2014.
At the time, Warren and Cummings asked the GAO to study several areas that could potentially be impacted by the rise of nonbank servicers, specifically:
- The risks posed to consumers by the growth in nonbank specialty servicers generally
- The vulnerability of nonbank specialty servicers to volatility in the mortgage servicing rights market given the lack of requirements compelling these servicers to maintain capital cushions
- The likely effect on consumers should a major nonbank specialty servicers fail as a result of this vulnerability
- The effect on the nonbank specialty servicing industry generally should a major nonbank servicer fail
The full GAO report, which was released earlier this week, is wide-ranging and through. In the report, the GAO said that the rise of nonbank servicers “has created benefits, but also poses risks to consumers, the enterprises, and Ginnie Mae, and others.”
The GAO notes that some nonbank mortgage servicers have "less mature infrastructures relative to banks for tasks such as managing regulatory compliance, risks, and internal controls," which may cause "problems or errors with account transfers, payment processing, and loss mitigation processing" when mortgages are transferred between servicers.
And while the CFPB already directly oversees nonbank servicers as “part of its responsibility to help ensure compliance with federal laws governing mortgage lending and consumer financial protection,” the CFPB apparently does not have a comprehensive list of nonbank servicers, nor does it have the ability to develop one.
As a result, the CFPB may not be able to comprehensively enforce compliance with consumer financial laws, the GAO review states.
The GAO report also said that without a comprehensive list of nonbank servicers, the CFPB “may face challenges as it seeks to fulfill its mission to enforce consumer protection laws and to study consumers, financial services providers, and consumer financial markets.”
Additionally, the Federal Housing Finance Agency has some indirect oversight of the “third parties” that do business with Fannie Mae and Freddie Mac, which includes nonbanks that service loans on Fannie and Freddie’s behalf.
“However, in contrast to bank regulators, FHFA lacks statutory authority to examine these third parties to identify and address deficiencies that could affect the enterprises,” the GAO states. “Without such authority, FHFA may lack a supervisory tool to help it more effectively monitor third parties' operations and the enterprises' actions to manage any associated risks.”
In their letter, which can be read here, Warren and Cummings urge the CFPB to work to “develop comprehensive data on the identity and number of nonbank mortgage servicers.”
Warren and Cummings said that they acknowledge the work done by the CFPB to regulate non-bank servicers, noting that that according to the GAO, "CFPB's examinations of nonbank servicers revealed various possible violations of relevant laws and regulations or operational deficiencies, and CFPB required corrective actions to address those deficiencies."
But the Democrats want the CFPB to do more.
“Collecting information on and regulating nonbank mortgage services to protect consumers is well within CFPB's statutory authority and core mission,” Warren and Cummings write. “We hope that you take actions to do so as rapidly as possible.”