How New Servicing Rules Affect Community Lenders

The Dodd-Frank Act, the Consumer Financial Protection Bureau (CFPB), and other post-crisis Wall Street reform actions were aimed at preventing larger banks from engaging in risky financial practices. Community institutions and credit unions have long complained that these reforms have adversely affected their businesses.

The Government Accountability Office (GAO) was asked to review the effect of the CFPB’s servicing rules enacted in January 2014 on U.S. banks and credit unions, particularly community lenders, which held about $3.1 billion in mortgage servicing rights (MSRs) on their balance sheets as of September 30, 2015. The new rules related to mortgage servicing and regulatory capital to protect consumers and strengthen the financial services industry.

In a report released on Monday, the GAO determined that community lenders (including community banks and credit unions) remained active in servicing residential mortgage loans in the era of the CFPB’s new servicing rules. Though community institutions service a small percentage of residential mortgages (13 percent) when compared with the larger banks, which collectively service about half of the country’s residential mortgages, the share of residential mortgages serviced by community lenders doubled in the years immediately after the crisis (2008 to 2015). The GAO's report found that the new servicing rules seemed unlikely to affect the decisions of most community lenders when it came to retaining or selling MSRs.

“Many lenders GAO interviewed said changes in mortgage-related requirements resulted in increased costs, such as hiring staff and updating systems,” the GAO’s report stated. “However, many also stated that servicing mortgages remained important to them for the revenue it can generate and their customer-focused business model.”

The GAO recommended that the CFPB create a more complete plan to measure the effects of the new servicing rules, including specific metrics, baselines, and analytical methods. The CFPB agreed to complete a plan for conducting a retrospective review of the new mortgage servicing rules, and also to refine the scope and focus of the review.

“The GAO report confirms our concerns that CFPB's mortgage servicing rules are impacting credit unions,” said Carrie Hunt, EVP of Government Affairs and General Counsel for the National Association of Federal Credit Unions. “Furthermore, the findings underscore the fact that increasing compliance costs have impacted customers’ costs and choices. The report notes that several institutions no longer offered customers certain products because offering them would necessitate additional regulatory requirements. For this reason, we continue to urge CFPB to provide greater guidance and clarifications on these rules to insure that credit unions can continue to serve their members' mortgage needs.”

Click here to view the GAO’s complete report, which includes the CFPB’s response at the end.