Letter to CSBS – Proposed Regulatory Prudential Standards for Non-bank Mortgage Servicers

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2101 Wilson Boulevard, Suite 610
Arlington, VA 22201
(571) 527-2601

June 23, 2015

CHLA Comment Letter to CSBS — Proposed Regulatory Prudential Standards
for Non-Bank Mortgage Servicers
MSR Task Force
Conference of State Bank Supervisors
1129 20th Street, NW, 9th Floor
Washington, DC 20036

The Community Home Lenders Association (CHLA) is writing to convey our comments about CSBS’ proposed prudential standards for non-bank servicers. We write in our capacity as the only national association exclusively representing non-bank mortgage lenders.

CHLA commends the CSBS and its member state supervisors for its strong work in regulating non-bank mortgage lenders. In the wake of the 2008 housing crisis, enhanced state regulatory standards and supervision, including SAFE Act implementation, have increased confidence that non-bank mortgage lender/servicers are financially viable, operationally sound, and fully comply with consumer protections.

We also appreciate financial concerns related to the rapid growth of specialty servicers, including large purchasers of Mortgage Servicing Rights (MSRs) from banks, as well as concerns related to the increased complexity of regulating mega-servicers and protecting consumers from dislocations caused by failure of any one large servicer.

However, CHLA does not believe that concerns about mega-servicers justify imposing new CSBS prudential standards on smaller mortgage servicers – particularly on firms that grow servicing portfolios organically through origination of loans predominately guaranteed by federal agencies, which already have extensive net worth, liquidity, and operational requirements.

Imposition of additional largely duplicative regulatory requirements on smaller servicers will exacerbate other factors that are driving firms out of the servicing business, thus increasing industry concentration. This would result in less personalized services, fewer choices, and higher prices for consumers – as well as an increased overall systemic and financial risk of further concentrating servicing in a few mega-servicers.

Therefore, CHLA recommends that servicers that meet one or more of the following criteria be exempted from the newly proposed CSBS prudential standards:
* Firms for whom more than 95% of serviced loans are federal agency (GNMA or GSE) loans,
* Firms with less than 2,500 serviced loans which are non-agency (agency (PLS and portfolio), or
* Firms with less than $500 million in serviced loans which are non-agency (PLS and portfolio).

We believe such an exemption is justified for the following reasons:

1. New state prudential servicing standards would be duplicative and unnecessary for servicers who overwhelmingly service GNMA and the GSE loans. GNMA and FHFA already have significant net worth, liquidity and other prudential servicing requirements.

2. The failure of any single smaller servicing firm does not pose a systemic or consumer risk – unlike the failure of large or specialty servicers that are experiencing rapid growth.

3. Imposition of such standards on smaller firms would exacerbate factorsexacerbate factors making it harder for smaller servicers to economically service loans – in turn leading to further industry concentration, reduced access to credit, fewer consumer choices, and higher prices.

4. A reduction of risk, if any, from an imposition of duplicative prudential standards on smaller servicers would be negligible, and would be dwarfed by the increase in systemic and financial risk that would result from increasing servicer industry concentration.

Following is a more detailed explanation of these issues:

1. New Standards Duplicative of GNMA/GSE Servicing Requirements

The FHFA has just completed its adoption of new stringent net worth and capital servicing requirements, which apply to the servicing of all Fannie Mae and Freddie Mac loans. These are in addition to extensive financial and operational regulation of firms that originate and service Fannie Mae and Freddie Mac loans. These requirements address questions both about a firm’s ability to survive as a going concern, as well as the ability to meet repurchase and servicing advance responsibilities.

Similarly, GNMA has long had extensive financial and liquidity regulations related to the financial obligations of servicers of loans in GNMA pools (FHA, VA, RHS loans). GNMA is in the middle of strengthening these requirements. FHA also has significant financial and operational requirements, including detailed Quality Control (QC) requirements with respect to non-bank lenders, in order to ensure that lenders can meet their indemnification responsibilities.

In light of these requirements, imposing an additional set of prudential servicing requirements on non-bank servicers for whom the overwhelming percentage of their loans are GNMA or GSE serves no real purpose.

We do acknowledge that for firms that service measurable dollar amounts or percentages of non-agency Private Label Securities loans or loans held in portfolio, there is value in imposing new prudential standards to ensure that there are adequate financial and prudential controls for such loans.

2. Failure of a single small servicer poses no real systemic or consumer risk

CHLA fails to understand the rationale for applying these new prudential standards to small servicers.

First, we would note that prudential standards have been developed for banks in order to address taxpayer risk through the FDIC guarantee. No such taxpayer risk exists for non-bank lender/servicers. In fact, we would argue there is more market discipline from being non-FDIC insured. Non-bank lender/servicers are accountable to their warehouse lenders, who impose their own financial requirements. Moreover, non-bank owners put their net worth on the line every day when they originate and service loans.

A second rationale for new prudential standards might have to do with concerns about counterparty risk with respect to servicing advances and to indemnification and repurchase obligations. However, both GNMA and the GSEs/FHFA already have their own financial standards to address these financial risks on their own loans – and it is not reasonable to conclude that they are insufficient. Therefore, we are unclear what the counterparty risk is for small servicers whose loans are predominately GNMA and GSE, and what purpose is served by imposing new largely duplicative prudential standards on such servicers…..

A final rationale for new prudential servicer standards might have to do with consumer and other dislocations resulting from the failure of a servicer. However, there are no systemic risk concerns related to the failure of a small servicer, as the servicing can easily be transferred, and the impact of a failure of a smaller servicer would be very limited.

Finally it is important to note that consumer protections regarding servicing are already governed by federal laws (RESPA, TILA) and subject to both CFPB and state supervision – so this is not an issue.

3. Additional Largely Duplicative Requirements Increase Competition, Hurt Consumers

One issue of growing financial and consumer concern is the increasing concentration in the servicing industry – both as a result of the economies of scale of increased regulatory compliance costs in recent years and as a result of the large amounts of MSRs being sold by banks to big specialty servicers.

CHLA believes that consumers are better served by servicers that originate the loans they service and thereby have a better relationship with the borrower. Unfortunately, as noted above a number of economic factors make it harder for smaller servicers to cost efficiently carry out servicing.

Adding additional duplicative prudential requirements on small servicers would impose additional significant compliance costs, which would further drive smaller servicers out of the servicing business. This would lead to more industry concentration – and in turn result in reduced access to credit, less personalized service, fewer consumer choices, and higher costs to consumers.

4. Minimal Small Servicer Risk Reduction Outweighed by Risk of More Concentration

As outlined above, we do not see any measurable reduction in risk through imposition of new prudential standards on smaller servicers for whom the overwhelming majority of loans are already subject to GNMA and GSE requirements.

At the same time, increased concentration in the servicing industry as a result of driving additional smaller servicers out of business could significantly increase the systemic risk from failure of one of the big mega-servicers, who might be growing as a result of small servicers’ exit from the business. This increases the harm that could be done to consumers by the failure of any one mega-servicer, as authorities try to unwind the finances of a large servicer and find a new home for the servicing of large number of mortgage loans. Depending on who the servicer is, there could also be increased financial risk to other entities, including taxpayers in the case of large banks.

Finally, CHLA would like to respond to two of the questions posed by CSBS that are not covered by our proposal for a small servicer exclusion.

Question 1. Should all non-bank mortgage servicers be required to have a full financial statement audit conducted by an independent certified public account?

CHLA RESPONSE: This is a basic provision that enhances reliability of the financial statements of lender/servicers, and is already required by Fannie Mae, Freddie Mac, and GNMA. Therefore such a requirement makes eminent sense.

Question 5. What is a reasonable ownership percentage threshold to trigger a change in control event?

CHLA RESPONSE: The trigger should be 50% + (a controlling interest).

We thank you for your consideration of these views.

Sincerely Yours,