State regulator group offers guidance for mortgage servicing oversight

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WASHINGTON — The Conference of State Bank Supervisors unveiled a proposed set of best practices for state oversight of nonbank mortgage servicers.

The proposal, with public feedback due Dec. 31, pointed to “a changed nonbank mortgage market” as the driving force behind the plan.

“Given their credentialing, licensing and examination authority over nonbank mortgage servicers, state regulators play a central role in ensuring that these entities conduct servicing operations in a safe and sound manner and have strong consumer protections in place,” the CSBS said.

A national organization made up of financial regulators from each of the 50 states, D.C. and some U.S. territories, the CSBS does not have traditional rulemaking or regulatory authority. But the organization has led several efforts in recent years to streamline state supervisory regimes.

The proposal released Thursday “would only become effective through state law, rule or other formal undertaking,” the group said.

According to the CSBS, the proposal is structured around codifying existing best practices for supervising nonbank mortgage servicers. The plan would be modeled after federal servicing standards developed by the Federal Housing Finance Agency and other agencies and be used to oversee companies that currently are subject to state regimes.

While the proposal would ostensibly cover any business that services a mortgage under state supervision, the CSBS indicated it would be open to establishing some type of minimal threshold, even for requirements it described as “baseline.”

“Nonbank servicer coverage in this proposal is intentionally unspecific,” the CSBS wrote, but the group also included a question for comment about whether there should be "a de minimis threshold."

On data standards, the CSBS said that while most federal regulation requires only entities that service more than 5,000 loans in a given year to comply with certain requirements, such as those under the Truth in Lending Act, the states’ proposal would “apply to all nonbank mortgage servicers and all serviced loans.”

The organization’s proposal also distinguishes between “baseline” and “enhanced” supervisory requirements for more complex servicing operations, with mortgage servicing rights that total “the lesser of $100 billion or representing at least a 2.5% total market share.” Servicers meeting the definition of “enhanced” would be subject to more robust capital and liquidity requirements, in addition to stress testing and being required to have living wills.

Under their proposal, state supervisors would have the option of designating certain servicers as “complex” depending on "a unique risk profile, growth, market importance, or financial condition of the institution.”

On risk management, servicers would be required to “establish a risk management program under the oversight of the board of directors” with “appropriate processes and models in place to measure, monitor and mitigate financial risks and changes to the risk profile of the firm and assets being serviced.”

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