As a result of the 2008 financial crisis and the resulting increase in the number of delinquent mortgage loan borrowers, investors are calling for stricter operational, capital and liquidity requirements from the companies that service loans, according to a recent white paper jointly published by the Mortgage Bankers Association (MBA) and PricewaterhouseCoopers (PwC).
The white paper, “The Changing Dynamics of the Mortgage Servicing Landscape,” describes the role that servicers play in the mortgage banking industry and provides a summary of the regulatory framework that applies to both bank and nonbank servicers.
“In order for the mortgage servicing market to continue to function in an open, liquid and efficient fashion, prudential standards should be harmonized across regulatory entities to maintain consistency while reducing the cost of compliance, and restrictions on transfers should be limited to allow servicers the ability to adapt their portfolios to manage their balance sheets and strategic objectives,” the white paper states.
Loan servicing impacts consumers in two ways: First, they are directly impacted by the servicer’s ability to process their payments efficiently and manage their loan effectively; and secondly, they are impacted by servicing cost trends, which affect upfront loan pricing and rate-setting.
There are three prevalent business models in mortgage servicing:
- Historically, federal- and state-chartered banks that serve as depository institutions have retained servicing rights to maintain customer relationships.
- Nonbank mortgage companies, which operate within either an originator/servicer model or a servicer-only model, do not hold customer deposits and can be publicly traded, independent or private equity- or hedge fund-backed.
- Finally, subservicers, which are typically nonbanks, perform all servicing functions for the servicer of record and operate as third-party vendors.
Each of those entities is subject to supervision, oversight and regulation by various regulatory entities. At the federal level, they can be regulated by the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corp. (FDIC), the Federal Reserve, the Office of the Comptroller of the Currency (OCC) and the Federal Housing Finance Agency (FHFA). They can also be regulated by state-chartered banks, the Conference of State Bank Supervisors (CSBS), investors, Ginnie Mae and others.
“While new regulation has increased transparency and protects the rights of the consumer, there is also an opportunity to rationalize certain federal and state requirements in order to facilitate compliance and reduce cost,” the white paper states.
“A harmonized or aligned set of rules that can be enforced at both the federal and state levels would ensure that the rights of consumers and investors are protected and reduce the complexity of the operating model that is in place today at both small and large servicers.
Looking ahead, the white paper predicts that diversity in business models and industry challenges will drive new companies to enter the market, but notes that “several business model strategies have emerged that provide indications of where certain servicers are heading. There is certainly no ‘one-size-fits-all’ approach to success.”
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