As nonbank mortgage lenders hit record market share levels last year, the Conference of State Bank Supervisors is issuing model state regulatory standards for such organizations.
The CSBS published model nonbank mortgage servicers standards July 26 to help align state regulation of those entities, considered a growing sector responsible for approximately 24 million loans by the end of 1Q 2021.The model standards apply to nonbank mortgage servicers with portfolios of 2,000 or more one-to-four unit residential mortgage loans serviced or subserviced for others and operating in two or more states as of the most recent calendar year-end. States can choose whether and how to adopt these standards, and the model does not establish legal requirements or constitute official guidance. They do not apply to not-for-profit mortgage servicers or housing finance agencies, servicers solely owning and/or conducting reverse mortgage servicing, or the reverse mortgage portfolio administered by forward mortgage servicers that may otherwise be covered under the standards.
According to the CSBS, the model standards are intended to align with existing standards or leverage generally accepted business practices and minimize regulatory burdens for small, less complex servicing firms while establishing uniformity and standardization for the industry. The model standards feature six sub-supervisory areas, including capital, liquidity, board of directors, internal audit, external audit and risk management. Nonbank mortgage servicers are considered an important segment of the financial services community, servicing 60 percent of the agency mortgage market and roughly 45 percent of the $11 trillion single-family residential mortgage market.
Financial conditions
Under financial conditions, the supervisory areas of capital and liquidity for nonbank mortgage servicers would align with the Federal Housing Finance Agency’s eligibility requirements. However, the capital and liquidity standards apply FHFA’s requirements to a broader set of servicing by including non-agency servicing.
Liquidity
Based on FHFA eligibility requirements for enterprise single family seller/services, such organizations would need to have a minimum net worth of $2.5 million and tangible net worth divided by total assets being at least 6 percent. There is an additional requirement of 25 basis points of unpaid principal balance for total loans serviced, excluding reverse mortgage servicing, subservicing for others and interim servicing.
Board of Directors
Nonbank mortgage servicers must establish boards of directors to ensure the standards are met. The boards must establish a written corporate governance framework, including appropriate internal controls designed to monitor corporate governance and assess compliance with the framework; monitor and ensure institution compliance with the corporate governance framework; and allow for accurate and timely regulatory reporting, including the Mortgage Call Report.
For institutions that are not approved to service loans by Fannie Mae, Freddie Mac or Ginnie Mae, or where those federal agencies have granted approval for a board alternative, such institutions can establish a similar body constituted to exercise oversight.
Internal and external audits
The board of directors for nonbank mortgage servicers would need to establish internal audit requirements appropriate for the size and complexity and risk profile of the servicer, with appropriate independence to provide reliable evaluations of the servicer’s internal control structure, governance and risk management. For external audits and financial reporting, audited financial statements and audit reports conducted by an independent public accountant would be required, including annual financial statements with a balance sheet, statement of operations and cash flows, including notes and supplemental schedules prepared in accordance with generally accepted accounting principles; assessment of internal control structures, computation of tangible net worth, validation of MSR valuation and reserve methodology, if applicable. Other standards would include verifying adequate fidelity and errors and omissions insurance and testing of controls related to risk management activities, including compliance and stress testing if applicable.
Risk management
Nonbank mortgage servicers would need to establish a risk management program under the oversight of the board of directors that identifies, measures, monitors and controls risk sufficient for the level of sophistication of the servicer. The program would need to have appropriate processes and models in place to measure, monitor and mitigate financial risks and adjustments to the risk profile of the services and assets being serviced. The risk management program must be scaled to the complexity of the organization, but also be robust enough to manage risks in several areas, including credit, liquidity, operational, market, compliance, legal and reputation. A risk management assessment must be undertaken on an annual basis, concluding with a formal report to the board of directors. Evidence of risk management activities throughout the year must be maintained, including findings of issues and the response to address those findings.
ABA, ICBA: Standards needed to regulate growing industry
The American Bankers Association and Independent Community Bankers of America support the proposal. To the ABA, the standards “would promote stronger protections for mortgage borrowers and investors, while also enhancing the stability of our nation’s mortgage finance system.” According to the ABA, the previous decade has seen “punitive actions” such as False Claims Act allegations, Department of Justice actions and consent orders against bank-owned mortgage originators/servicers, and other adverse events.
“ABA concurs with the observations and concerns cited by the CSBS in the request for comments regarding expansions of nonbank mortgage servicing and the need for these entities to have greater oversight and be held to higher risk management standards,” the organization wrote.
However, there was pushback to the proposal: Various nonbank mortgage services industry professionals said the CSBS had established insufficient risk to warrant the standards and that no clear need for the rules had been established. Also, some expressed concern that CSBS lacked the authority to develop the rules. Other concerns included that applying the standards to “very small institutions” was not needed due to the institutions having lower levels of market risk. Others said applying “subjective enhanced requirements” to institutions with servicing portfolios of $100 billion or more unfairly burdened large servicers.