On March 25, 2015, the Conference of State Bank Supervisors
("CSBS") and the American Association of Residential
Mortgage Regulators ("AARMR") issued for a 90-day public
comment period a proposed set of baseline prudential regulatory
standards for nonbank mortgage servicers and a set of enhanced
prudential standards for large complex nonbank mortgage
servicers.1
CSBS and AARMR believe increased state prudential regulation of
nonbank mortgage servicers would better protect borrowers,
investors, and stakeholders; enhance effective regulatory oversight
and market discipline; and improve standards of transparency,
accountability, risk management, and governance.
The proposal marks the culmination of the work of the CSBS's
Mortgage Servicing Rights Task Force, which was formed in October
2014 with regulators from several states,2 to develop
options for prudential standards for nonbank mortgage servicers.
The proposal also reflects the dramatic growth in the size,
complexity, and importance of nonbank mortgage servicers over the
past several years. Following the housing crisis, a significant
share of mortgage servicing rights ("MSRs"), particularly
those for troubled and nonperforming mortgage loans, shifted out of
commercial banks, which had traditionally dominated the mortgage
servicing market, and into nonbank mortgage servicers. This shift
was driven, in part, by increased compliance costs faced by banks
that service troubled or nonperforming loans and new bank capital
requirements that make it more costly for banks to retain
MSRs.
While the Consumer Financial Protection Bureau ("CFPB")
has responsibilities related to consumer protection for nonbank
mortgage servicers, and nonbank mortgage servicers are subject to
state licensing and bonding requirements, nonbank mortgage
servicers generally have not been subject to the same safety and
soundness standards that apply to commercial banks. Several federal
regulatory agencies, including the Financial Stability Oversight
Council ("FSOC") and the Federal Housing Finance Agency
("FHFA"), have expressed concerns about the lack of
prudential standards, given the dramatic increase in MSRs acquired
by nonbank mortgage servicers in recent years. In its 2014 Annual
Report, the FSOC recommended that "state regulators work
together to collaborate on prudential and corporate governance
standards to strengthen these companies, in collaboration with the
CFPB and FHFA, as may be deemed
appropriate."3
On January 30, 2015, the FHFA released a proposal to apply new
minimum financial eligibility requirements to sellers and servicers
that do business with Fannie Mae and Freddie Mac.4 The
FHFA's proposed financial eligibility requirements include
minimum net worth, capital, and liquidity requirements. While the
prudential standards proposed by the state regulators also include
new minimum net worth and liquidity requirements, they are not
limited to financial criteria but have a much broader application.
The proposal includes a set of baseline prudential standards
applicable to all state-licensed nonbank mortgage servicers in
eight areas: (i) capital, (ii) liquidity, (iii) risk management,
(iv) data standards, (v) data protection (and cybersecurity), (vi)
corporate governance (including auditing requirements), (vii)
servicing transfer requirements, and (viii) change of control
requirements.
It is not clear from the proposal how or when the new prudential
standards, if approved, will be made effective with respect to
nonbank mortgage servicers. The state regulators are requesting
public comment on all aspects of the proposed standards, and
specific questions, within the 90-day comment period. All comments
will be made public at www.csbs.org.
Baseline Prudential Standards
The proposal would apply the following baseline prudential
standards to all nonbank mortgage servicers regardless of asset
size or complexity. CSBS and AARMR intend to leverage existing
standards and generally accepted business practices.
Minimum Net Worth Requirement. All nonbank
mortgage servicers would be required to have a minimum net worth of
at least $2.5 million, plus 25 basis points ("bps") of
the value of the unpaid principal balance of all loans serviced.
This is the same standard proposed by the FHFA for Fannie Mae and
Freddie Mac servicers. Unlike the FHFA proposal, the baseline
prudential standards do not require servicers to meet a minimum
capital ratio. Under the FHFA's proposal, nonbank servicers
that service loans for Fannie Mae and Freddie Mac would be required
to maintain a minimum capital ratio of 6 percent calculated as
tangible net worth divided by total assets.
Minimum Liquidity Requirement. The proposed
baseline liquidity standard is the same standard proposed by FHFA
of 3.5 bps but would be applied to all loans serviced. Unlike the
FHFA's proposal, the baseline liquidity standard does not
include an additional incremental charge based on nonperforming
loans. Servicers would also be required to have a methodology to
determine the liquidity needs for non-servicing activities.
Risk Management. All nonbank servicers would be
expected to have a risk management program that is overseen by
their board of directors. The program should include appropriate
processes and models to measure, monitor, and mitigate financial
risks and changes to the risk profile of the firm and the loans
being serviced. The program should be scaled to the complexity of
the organization but be sufficiently robust to manage various
risks, including credit risk, transactional risk, operational risk,
financial risk, and affiliated/related party risk. In addition, a
servicer should ensure that a risk management assessment is
independently conducted on an annual basis, concluding with a
formal report to its board of directors. Servicers would be
expected to maintain evidence of risk management activities
throughout the year, including findings of issues and the response
to address those findings.
Data Standards. All nonbank mortgage servicers
would be required to comply with the CFPB's Mortgage Servicing
Rules with respect to all serviced loans, which will further the
effort to implement a set of uniform minimum national standards for
mortgage loan servicing.5
Data Protection. All nonbank mortgage servicers
would be required to implement information technology
("IT") policies approved by their board of directors,
develop an IT security risk assessment strategy, and engage in
routine IT security testing and monitoring. Nonbank mortgage
servicers would be expected to have strong controls over protection
of customer data to mitigate cyber attacks, security breaches, and
identity theft.
Corporate Governance. The board of directors of a
nonbank mortgage servicer would be expected to establish a sound
corporate governance framework, set minimum standards of acceptable
behavior for employees, and establish an appropriate set of
internal controls, as well as a method for independently validating
the accuracy and reliability of the financial and servicing
information of the firm. The proposal also provides that a
servicer's internal audit requirements should be appropriate
for its size and complexity. The proposal would require all nonbank
mortgage servicers to adhere to Ginnie Mae's reporting
requirements, which require all servicers to have audited financial
statements and audit reports conducted by an independent public
accountant.6
Servicing Transfers. The proposal would include
servicing transfer requirements aligned with existing guidance set
forth in the CFPB's Compliance Bulletin and Policy
Guidance: Mortgage Servicing Transfers,7 and the
FHFA's Advisory Bulletin 2014-06: Mortgage Servicing
Transfers.8
Change in Control. The proposal would require
prior notice to be provided to state regulators of a change of
control of a nonbank mortgage servicer. A "change of
control" would be liberally defined to include a change (i) of
10 percent or more in the ownership of a servicer, (ii) in the
ability of a person or group acting in concert to elect a majority
of the directors of the firm, or (iii) that results in a group that
can effect a change in policy of the firm, regardless of ownership
percentage.
Enhanced Prudential Standards
For larger, more complex nonbank servicers with higher-risk
profiles, the proposal would require enhanced prudential standards
concerning capital, liquidity, stress testing, and recovery and
resolution planning beyond the proposed set of baseline standards.
According to the proposal, state regulators see a need for certain
more complex firms to mitigate risk by deploying enhanced planning,
modeling, metrics, and audit in these areas. Independent
third-party assessments would be viewed as a key part of enhanced
prudential standards. The proposal does not establish any
bright-line test, such as a minimum asset threshold, for
determining when a servicer would become subject to enhanced
prudential standards.
Capital Requirements. A large, complex nonbank
servicer would be expected to maintain capital standards
commensurate with its overall risk profile. The management and
board of directors of a large, complex nonbank servicer would be
expected to develop a methodology for supporting the capital
adequacy of the entire firm and the capital planning process. The
methodology should be tailored to the servicer's overall risk
profile, taking into account the composition of its servicing
portfolio and the particular types of loans serviced. The
methodology would be subject to regulatory approval and would need
to be validated by an independent third party.
Enhanced Liquidity Requirements. The management
and board of directors of a large, complex nonbank servicer should
develop a methodology to measure and monitor the firm's
liquidity needs, including the amount of on-balance sheet liquidity
required to ensure normal operations during a moderate stress
environment. Large, complex nonbank servicers would be expected to
maintain on-balance sheet liquidity consisting of high-quality
liquid assets.9 The methodology would also need to
quantify off-balance sheet liquidity in the form of unfunded lines
of credit or other sources. Any forms of off-balance sheet
liquidity would have to be tested and would be subject to
regulatory review.
Stress Testing Requirements. A large, complex
nonbank servicer would be required to maintain a robust,
forward-looking capital and liquidity planning process that
considers the servicer's unique markets and risks. The servicer
would be expected to engage a third-party vendor, experienced in
validating modeling assumptions, to conduct an independent party
assessment of the firm's stress testing model. The third-party
vendor would be required to provide confirmation to the regulators
that the servicer's stress test model is appropriate, the
assumptions are valid, and the outcomes are realistic.
Resolution Plans. All large, complex nonbank
servicers would be required to develop a living will or resolution
plan subject to regulatory review, irrespective of whether they
were deemed to be systemically important by the FSOC. A typical
resolution plan would provide consolidated financial information;
describe the firm's principal lines of business, foreign
operations, and material management information systems; identify
the firm's principal officers and vendors; and outline a
recommended plan for purchase of servicing or the firm.
Footnotes
1 CSBS and AARMR Media Release, "State Regulators Propose Prudential Regulatory Standards for Nonbank Mortgage Servicers"(Mar. 25, 2015).
2 California, New York, Texas, Illinois, Massachusetts, Pennsylvania, Minnesota, South Dakota, and Washington.
3 FSOC, 2014 Annual Report (May 7, 2014).
4 FHFA, "Proposed Minimum Financial Requirements for Enterprise Seller/Servicers" (Jan. 30, 2015). FHFA anticipates that the proposed minimum financial requirements will be finalized in the second quarter of 2015 and will be effective six months after they are finalized.
5 CFPB, "Mortgage Servicing Rules under the Real Estate Settlement Procedures Act (Regulation X)" and "Mortgage Servicing Rules under the Truth in Lending Act (Regulation Z)."
6 Ginnie Mae MBS Guide, Chapter 3, "Eligibility Requirements—Maintaining Ginnie Mae Issuer Status." October 17, 2014.
7 CFPB Bulletin 2014-01 (August 19, 2014).
8 FHFA Advisory Bulletin 2014-06 (June 11, 2014),
9 High-quality liquid assets would be defined with reference to the banking agencies' final rule on Liquidity Coverage Ratio: Liquidity Risk Measurement Standards, 79 Fed. Reg. 61440 (October 10, 2014).
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