FSOC Annual Report Calls For Heightened Scrutiny Of Nonbank Mortgage Servicers

CFPB Mortgage Servicing FSOC NYDFS

On May 7, following a short open meeting, the Financial Stability Oversight Council (FSOC)—the body established by the Dodd-Frank Act to identify and respond to risks to the stability of the U.S. financial system—released its 2014 annual report. As with past reports, this report reviews market and regulatory developments, and identifies emerging risks to the financial system. Among several new risks identified by the FSOC are those related to the increase in the transfer of mortgage servicing rights (MSRs) from banks to nonbank servicers. The report asserts that many nonbank servicers “are not currently subject to prudential standards such as capital, liquidity, or risk management oversight,” and that where mortgage investors’ ability to collect on mortgages is dependent on a single mortgage servicing company, “failure could have significant negative consequences for market participants.” The FSOC recommends that, in addition to continuing to monitor risks associated with transfers to nonbanks, state regulators should work together and with the CFPB and the FHFA on prudential and corporate governance standards for nonbank servicers. The report elevates and reinforces recent regulatory scrutiny of MSRs and nonbank servicers. Earlier this year, the CFPB's deputy director detailed the CFPB's expectations with regard to the transfer of MSRs and compliance with the CFPB's mortgage servicing rules, and New York financial services regulator Benjamin Lawsky expressed his view that nonbank mortgage services are insufficiently regulated and that state regulators need to intervene on the front end of MSR transactions to prevent undue harm to homeowners before it occurs.