The Conference of State Bank Supervisors (CSBS) today released standards for states to craft regulations for nonbank mortgage servicers.
The standards largely align with those the GSEs – Fannie Mae and Freddie Mac – already have for their servicers.
The regulatory standards focused on financial condition and governance. Within those categories, the rules would govern capital, liquidity, board of directors, internal and external auditing and risk management.
The standards would require nonbank mortgage servicers to have a minimum net worth of $2.5 million and the tangible net worth divided by total assets must exceed 6%. That lines up with GSE requirements.
The CSBS liquidity requirements also conform to the requirements the Federal Housing Finance Agency already has. The FHFA’s baseline liquidity requirement is 3.5 basis points of total servicing unpaid principal balance. An additional 200 basis points is charged on nonperforming loans greater than 6% of the total servicing unpaid principal balance. That requirement does not apply to subservicing or reverse mortgage servicing.
Servicers should be communicating with borrowers early, ensuring to do so in a compliant manner by staying abreast of the current and proposed regulations, CFPB or otherwise. Alert them that they do have the option to sell their house now while in forbearance if they wish as a forbearance exit option.
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Some, including the Urban Institute, criticized requiring nonbanks to increase liquidity when defaults rise, calling it counterproductive. CSBS said it agreed that it required servicers to have more liquidity when it is least able to do so. Ultimately, it decided that aligning with other government agencies was paramount.
“State regulators agree with this conclusion; however, the Final Model Standards are intentionally aligned with FHFA’s eligibility requirements for consistency across government agencies, versus taking a counter‐cyclical approach of requiring servicers to build liquidity reserves when performance is on a more positive path with increasing revenues and profitability,” the CSBS wrote.
The standards would also require nonbank mortgage servicers to establish a board of directors, or, if the servicer is not approved to service GSE loans, a similar oversight body.
The board would be responsible for internal audits that are “appropriate for the size and complexity and risk profile of the servicer,” the standards read. External audits carried out by an independent public accountant are based on portions of Ginnie Mae’s requirements.
Mortgage servicers would also need to establish a risk management program with guidance from the board of directors. The program would examine everything from credit risk, to compliance risk and even the risk of negative publicity.
CSBS first proposed the standards in September 2020.
In the past decade, nonbank servicers have grown from 6% to 60% of the nonbank mortgage servicer market. That rapid growth has made them “responsible for a greater share of consumer care and protection,” CSBS noted.
“Sound financial condition and safe management practices are essential to performing compliance and consumer protection obligations, yet many nonbank mortgage servicers are historically thinly capitalized with insufficient nonborrowed liquid capacity,” the regulatory body said.
It also wrote that examinations have revealed “significant failings” in corporate governance and board oversight. State examinations have also found that documentation problems led to foreclosures, unreconciled escrow accounts or incorrectly assessed fees.
The standards are meant to provide a consistent framework for nonbank servicers while providing standards for accountability, transparency and risk management.
“The standards provide states with uniform financial condition and corporate governance requirements for nonbank mortgage servicer regulation while preserving local accountability to consumers,” said CSBS CEO John Ryan.
After feedback from industry stakeholders, CSBS eliminated provisions for data standards, data protection, including cyber risk, and servicing transfer requirements in the final rule. Those requirements, it explained, already exist at the federal level, in Regulation X, CFPB bulletins and the Federal Trade Commission rules.
State financial regulators are the only regulators with the authority to holistically regulate nonbank mortgage servicers, although CSBS is not the only regulator mortgage servicers tangle with.
The Consumer Financial Protection Bureau only focuses on consumer compliance enforcement. State financial regulators, however, can also enforce financial condition and corporate governance requirements.
The government-sponsored entities, too, establish rules for participation in their servicing programs. But they do not directly regulate mortgage servicers.
The CSBS guidelines would not go into effect until individual state regulators implement them, either by legislation, regulation or policy guidance.
Bob Broeksmit, CEO of the Mortgage Bankers Association, said in a statement that it was important that the CSBS standards mirrored those of Fannie Mae, Freddie Mac and Ginnie Mae in order to have efficient regulation.
“Uniform standards, aligned with federal requirements that apply to GSE and government loan servicing, will ensure that independent mortgage banks are not subjected to conflicting supervisory standards across the states in which they operate,” said Broeksmit. “MBA looks forward to working with state regulators and legislators to drive adoption of the CSBS standards.”