New York State Taking A Closer Look At Non- Bank Servicers

May 21, 2014 at 8:38 am Leave a comment

Benjamin Lawsky, Superintendent of New York’s Department of Financial Services, used a speech before the Mortgage Bankers Association’s Secondary Market Conference in New York City yesterday to highlight the DFS’s concerns with the outsourcing of mortgage servicing rights to nonbank servicers and the impact that this trend could be having on the quality of consumer services.

According to the Superintendent, larger banks are getting out of the mortgage servicing business in part because of new capital requirements. (Let’s also keep in mind that servicing just may not be worth the headache for these banks following multi-billion dollar legal settlements related to their servicing and foreclosure practices).

What harm is New York State witnessing as a result of this trend of selling mortgage servicing rights? “One of the things we’re concerned about as a regulator is whether these MSR sales trigger a race to the bottom that puts homeowners at risk.  Remember, in most cases, the compensation to be paid for servicing is fixed by the PSA; it cannot be diminished. So the cheaper a servicer can service those mortgages, the more profit it expects to earn from the fixed servicing fees, and the more it can offer the banks to buy these MSRs,” Lawsky said. He went on to explain that “it should be no surprise that borrowers tend to be the losers here. When we at DFS take a closer look at some of these non-bank servicers, we find corners being cut to the disadvantage of homeowners.”

New York is particularly concerned about the growth of fee based a-la-carte services whereby servicers or their affiliates provide a consumer with fee based services such as assisting in short-sales and inspecting property. While the Superintendent stressed that there is nothing inherently wrong with add-on services, given the close relationship that many of the service providers have with the companies providing the mortgage servicing and the fact that a typical consumer does not widely shop for such services, the DFS sees the potential for higher costs and conflicts of interest.

Of course, regulations governing servicers have already been promulgated by the CFPB, specifically to address problems with the mortgage servicing model exposed over the last six years. Although New York’s focus is specifically on nonbank servicers, these regulations tend to result in increased disclosure requirements on all institutions in the mortgage process. My hope is that New York limits its regulatory review to areas not addressed by federal regulations so that we don’t end up with duplicative disclosures that amount to trip wires for litigation.

Also let’s make a distinction between mortgages sold by credit unions and larger banks. Servicing has gotten a justifiably bad name as a result of the slicing and dicing of mortgages into mortgage-backed securities with little regard for the consumers who took out the mortgages in the first place. But for many credit unions, servicing provides a cost-effective means for smaller institutions to offer mortgages when they don’t have the resources to service mortgages on their own.

Entry filed under: Mortgage Lending, New York State, Regulatory. Tags: , , , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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