On May 10, the Financial Stability Oversight Council (FSOC) released a report analyzing the growing nonbank mortgage servicing sector. The report discussed the sector’s significant market share, strengths and vulnerabilities particularly in financial stress scenarios. The FSOC emphasized the potential for these vulnerabilities to affect financial stability including income, balance sheets, and access to credit simultaneously, and the need for enhanced resilience measures. To combat these issues, the FSOC suggested a series of recommendations to promote safe and sound operations, address liquidity pressures in the event of stress, and ensure continuity of servicing operations.
The FSOC’s recommendations included urging state regulators to improve oversight and prudential standards, suggesting Congress grant FHFA and Ginnie Mae greater authority to enforce safety and soundness standards. Furthermore, the report suggested that Congress would authorize Ginnie Mae and encourage state regulators to share information with each other and with Council member agencies. The Council also recommended that Congress would consider legislation to provide Ginnie Mae with the authority to expand the Pass-Through Assistance Program into a more effective liquidity backstop for mortgage servicers participating in the program during periods of severe market stress. The report further proposed the creation of a fund to support servicing continuity in times of servicer failure, including loss-mitigation activities for borrowers and the advancement of monthly payments to investors.
The Director of the CFPB, Rohit Chopra, released a statement in response to the FSOC’s report. Chopra emphasized the importance of the mortgage market to the economy, and the significant role played by nonbank mortgage companies. He expressed concern about the lack of oversight of nonbanks in comparison to banks and said that the Bureau will soon propose a rule “to strengthen certain homeowner protections.” He also mentioned that regulators were concerned about nonbanks’ lack of supervision and sensitivity to market volatility given their often-limited cash reserves and heavy dependence on bank borrowing.
If a large nonbank mortgage company were to fail, Chopra said that borrowers could face chaos: payment issues, no customer service, and foreclosure risks, as well as generally limited access to credit, especially for low- and moderate-income households. Chopra also mentioned that the report does not discuss specific measures for addressing these risks within the FSOC and suggested appropriate tools for managing such risks will be a future effort. Chopra expressed concern that current rules do not sufficiently protect borrowers exposed to foreclosure and “junk fees” and stated that the CFPB will conduct a thorough evaluation to determine if any significant nonbank mortgage firms would meet the criteria for heightened supervision and regulation by the Fed as well as work on a proposed rule to mitigate losses by including foreclosure protections from the earliest stage of mortgage servicing, even if the servicer does not yet have all the documents.
