Improving the Safety and Soundness of Nonbank Mortgage Servicers Will Require More Than Prudential Regulation

Brief

Improving the Safety and Soundness of Nonbank Mortgage Servicers Will Require More Than Prudential Regulation

December 23, 2020

Abstract

In October 2020, the Conference of State Bank Supervisors (CSBS) proposed prudential regulatory standards for nonbank mortgage servicers. Given that nonbank servicers are already regulated by the Consumer Financial Protection Bureau and pseudo-regulated by Fannie Mae, Freddie Mac, and Ginnie Mae, the CSBS proposal raises several questions. In this brief, we explain how to structure nonbank regulation in a manner that makes the system safer while minimizing redundancy, duplication, and inconsistency. Specifically, we argue that nonbank regulation would be best handled by a single federal regulator with deep mortgage market expertise, as opposed to multiple state and federal regulators. We then examine key aspects of the CSBS’s proposal and explain why it will likely end up being inconsistent with Federal Housing Finance Agency (FHFA) requirements despite the alignment with FHFA’s topline standards. Finally, given nonbank risks are mostly liquidity in nature, we conclude that the most effective path forward is to pair prudential regulation with a permanent solution to the liquidity issue, perhaps through a federal liquidity facility.

 

This brief was revised on January 5, 2021. In a previous version, we accidentally used “net worth” on page 5 in a few places where we meant “liquidity.

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