Mortgage Servicing Rules Could Consolidate Market


Analysts are warning that, if implemented, the new mortgage servicing rules proposed by the Consumer Financial Protection Bureau could lead to further market consolidation triggered by higher costs and lower returns.

According to Fitch Ratings, similar to other servicing-focused initiatives the CFPB rules will add new financial burdens on servicers of securitized loans. As a result, regulatory efforts to improve the consistency and quality of mortgage servicing may come with a higher price tag to the smaller banks and nonbanks.

It is a known fact that the mortgage servicing market has been experiencing a continued consolidation trend in the recent past. However, Fitch warns, mounting operational cost pressures and limits on fees could “drive further consolidation” among small to midsize servicers.

“For a servicing operation to remain viable,” argues Fitch’s managing director, operational risk group, structured finance, Diane Pendley, “it would seem that their portfolio needs to be relatively substantial in volume, and to have been priced (at least a substantial part) with the industry changes factored in.”

If indeed there will be “additional casualties within the small to midsize servicer entities,” she said, their sites and staff could become either the new primary site or an additional remote site for the acquiring company.

There is a lot of experienced staff at many of these servicers, and the preference is that they will continue to be utilized as companies position themselves for the future, she added. “However, our fear is that either the servicer or its parent will find the current environment presents too much risk, with less opportunity to see returns on investment.”

Ultimately, it remains to be seen whether the benefits of setting consistent standards for all U.S. residential mortgage servicers, “including smaller nonbank entities that have thus far avoided the mandated changes,” will outweigh certain unavoidable consequences.

The CFPB proposal further expands the residential mortgage servicing requirements so far implemented under the consent orders and the settlement agreement between the nation’s five largest banks and state attorneys general.

Now the CFPB has extended the scope of the servicing rules to govern both banks and nonbanks of all sizes and types. In addition, it has indicated that it is considering additional standards yet to be disclosed.

Fitch finds these changes have the potential to drive further consolidation and uncertainty in the industry because the new rules will affect servicers in different ways—depending on the size of their operations.

If due to increased scrutiny and compliance risks larger entities will focus on scaling down their market presence, smaller entities are likely to exit due to higher compliance costs and insufficient returns, Fitch said.