New York's top financial regulator plans to aggressively expand his agency’s investigation into nonbank servicers and the firms' affiliates that provide ancillary services. Speaking at the Mortgage Bankers Association's Secondary Markets Conference in New York City on May 20, 2014, New York State Department of Financial Services (DFS) Superintendent Benjamin Lawsky told attendees that he continues to have serious concerns about the growth in nonbank mortgage servicing that has occurred as a result of traditional banks scaling back their mortgage servicing rights (MSR) business due to Basel III capital requirements.

Mr. Lawsky's remarks come on the heels of letters sent to certain nonbank servicers requesting information about the companies and their relationships with affiliates based on concerns that such relationships are increasing fees for borrowers.

"The potential for conflicts of interest and self-dealing here are perfectly clear," Mr. Lawsky said at the conference. "Servicers have every incentive to use these affiliated companies exclusively for their ancillary services, and they often do. The affiliated companies have every incentive to provide low-quality services for high fees, and they appear in some cases to be doing so."

In February, Mr. Lawsky told bankers at the New York Bankers Association Annual Meeting and Economic Forum that "it is appropriate for regulators, where warranted, to halt the explosive growth in the nonbank mortgage servicing industry before more homeowners get hurt." His focus on scrutinizing nonbanks continued at the Secondary Markets Conference, where he said that the DFS's review of nonbank servicers has found that the provision of ancillary services is another enormous profit center associated with MSRs that may put homeowners and mortgage investors at risk.

"Now, in most circumstances, there's nothing inherently wrong with companies and their affiliates providing a range of ancillary services," Mr. Lawsky said. "However, these are not ordinary circumstances where a customer has the opportunity to choose from a range of options and selects the option that meets the customer's requirements at the lowest price. Rather, this is the extraordinary circumstances where there effectively is no customer to select its vendor for ancillary services. Nonbank servicers have a captive (and often confused) consumer in the homeowner.

"So who makes the decision about where to procure these ancillary services, and how much of the investor's or the borrower's money to pay for them? It's usually the servicer, seemingly with no oversight whatsoever. The very same servicer that benefits—either directly or indirectly—from the profitability of the affiliated companies that provide these services," Mr. Lawsky said.

In closing, Mr. Lawsky stated that the DFS plans to expand its probe of ancillary businesses by nonbank mortgage servicers because homeowners and investors are at risk of becoming "fee factories."

"We've publicly highlighted our concerns about ancillary services with one particular nonbank servicer, but they are not the only industry player doing this. So you should expect us to expand our investigation into ancillary services in the coming weeks and months," he said.