Small Servicers Feeling Heat from New Rules

Many smaller servicers have worked feverishly to keep up with the changes handed down from the ""Consumer Financial Protection Bureau"":http://www.consumerfinance.gov (CFPB), but ""Fitch Ratings"":https://www.fitchratings.com/web/en/dynamic/fitch-home.jsp wonders is they'll run into trouble keeping up with the cost of servicing after the changes are implemented. Fitch finds in a new report that smaller residential mortgage servicers will be challenged by the increased costs of new servicing requirements as they seek to opportunistically grow through strategic acquisitions.

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Residential mortgage servicers have been working diligently to meet new the servicing requirements that take effect on Friday, January 10. They include important changes to how servicers handle borrower notifications and interaction, and key procedure and infrastructure improvements. While these changes are expected to be impactful in 2014, many large servicers have already made significant progress towards meeting the deadline, in particular those servicers subject to mortgage servicing consent orders issued previously by government regulators. However, smaller, independent, and non-bank servicers may not be as prepared, according to the report.

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Fitch acknowledges that many independent and non-bank servicers have adapted to the technological advances made in the industry, but compliance with the new rules will mean more recordkeeping and infrastructure improvements that could mean higher costs for these smaller firms. The cost of compliance with the new guidelines has likely raised the minimum number of loans that a company has to service in order to remain profitable.

The ratings firm also notes that in 2013, a notable amount of mortgage servicing rights transferred due to servicer consolidation and acquisitions. Larger servicers, and in particular commercial bank-held servicers, have been active in off-loading servicing rights on underperforming loans, which are difficult and expensive to manage effectively within regulatory guidelines.

Mortgage servicing is a cost-control and cost-competitive business function, and the new CFPB regulatory requirements will likely pressure this further. It is also expected that this environment will cause further pressure for consolidation in the servicing industry, and continue to create an increasingly competitive environment. Analysts anticipate that the cost of compliance and competition will turn into increased expenses for servicers.

All isn't lost for the small to mid-sized shops. If properly managed, the required changes can be implemented without major challenges. However, the change place higher fixed costs on servicer operations. Since larger servicers may more easily absorb higher fixed costs, smaller servicers may struggle as they seek to balance the cost of regulatory rule compliance with the need to maintain or grow their servicing portfolios, address their competitive position for new acquisitions, and manage their overall profitability.