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From Banking and Finance Law Daily, May 21, 2014

Ancillary services provided by affiliates of non-bank mortgage servicers draws scrutiny

By Andrew A. Turner, J.D.

Noting potential for conflicts of interest and self-dealing, Benjamin M. Lawsky, Superintendent of the New York State Department of Financial Services (DFS), expressed concern that homeowners and mortgage investors are at risk of becoming “fee factories” in the non-bank mortgage servicing market. Lawsky told attendees at the Mortgage Bankers Association 2014 National Secondary Market Conference in New York City to expect expanded investigations into ancillary services provided by affiliates of non-bank servicers.

In other developments, the Independent Community Bankers of America called on federal banking regulators not to limit consumers’ mortgage-servicing options by imposing stricter mortgage-servicing regulations on community banks. In a comment letter to regulators, ICBA wrote that community banks should not be penalized for servicing the loans they originate for their customers. The association noted that stricter standards risk driving community banks out of mortgage servicing, which would lead to fewer choices and poorer service for borrowers.

Lawsky remarks on non-bank mortgage servicing. Review of non-bank servicers by the DFS found ancillary services to be a large profit center associated with MSRs that could pose risks because of lack of oversight over rapidly growing non-bank mortgage servicers. Lawsky noted incentives for cut-rate servicing, saying that regulators have a responsibility to question purported “efficiencies” at non-bank servicers.

“The potential for conflicts of interest and self-dealing here are perfectly clear,” according to Lawsky. “Servicers have every incentive to use these affiliated companies exclusively for their ancillary services, and they often do. The affiliated companies have every incentive to provide low-quality services for high fees, and they appear in some cases to be doing so.”

Lawsky said that it is the regulator’s role to monitor fees in the mortgage industry imposed through potentially conflicted arrangements. Strong scrutiny is required, he warned, when ancillary services are being provided either at a sub-standard quality or at inflated prices.

ICBA on treatment of mortgage servicing assets in regulatory capital. Imposing stricter mortgage-servicing rules under Basel III capital standards would drive community banks out of mortgage servicing, leaving the business to larger and riskier nonbank servicers, ICBA wrote. The association noted that these larger nonbanks view mortgage servicing as a commodity business driven by large volumes and economies of scale, which results in poor customer service and conflicts of interest. Larger mortgage servicers are often less sensitive to the needs of local communities, unlike community banks, ICBA wrote.

ICBA continues to support a community bank exemption from the Basel III treatment of mortgage-servicing rights. Specifically, ICBA is calling for financial institutions in the United States with consolidated assets of $50 billion or less to be allowed to continue to be subject to the current mortgage-servicing capital regulations and not the harmful provisions of Basel III.

Companies: Independent Community Bankers of America

MainStory: TopStory BankingOperations CapitalBaselAccords Mortgages

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