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Mortgage Servicing: Community Lenders Remain Active under New Rules, but CFPB Needs More Complete Plans for Reviewing Rules

GAO-16-448 Published: Jun 23, 2016. Publicly Released: Jul 25, 2016.
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What GAO Found

Community banks and credit unions (community lenders) remained active in servicing mortgage loans under the Consumer Financial Protection Bureau's (CFPB) new mortgage-servicing rules. Among other things, these rules are intended to provide more information to consumers about their loan obligations. The share of mortgages serviced by community lenders in 2015—about 13 percent—remained small compared to larger lenders, although their share doubled between 2008 and 2015. Large banks continue to service more than half of residential mortgages. Many lenders GAO interviewed said changes in mortgage-related requirements resulted in increased costs, such as hiring staff and updating systems. However, many also stated that servicing mortgages remained important to them for the revenue it can generate and their customer-focused business model.

Banking and credit union regulators' new capital rules changed how mortgage servicing rights (MSR) are treated in calculations of required capital amounts, but GAO found that these new rules appear unlikely to affect most community lenders' decisions to retain or sell MSRs. For example, GAO found that in the third quarter of 2015, about 1 percent of community banks had to limit the amount of MSRs that counted in their capital calculations due to the amount of these assets they held. This may result in some institutions choosing to raise additional capital or sell MSRs to meet required minimum capital amounts, depending on banks' holdings of other types of assets. A few banks with large concentrations of MSRs that GAO spoke with said they were considering selling MSRs or other changes to their capital but market participants told us that the MSR capital treatment was only one of several factors influencing their decisions. Separate capital rules for credit unions also are unlikely to affect most credit unions. For example, credit unions told GAO they did not expect to make changes to their MSR holdings and one credit union explained that it is because MSRs represented a small percentage of their overall capital.

Banking regulators and CFPB estimated the potential impacts of their new rules prior to issuing them by, for example, estimating potential costs of compliance. Banking regulators included the capital rules in a retrospective review of all their rules required by statute, although this review is to be completed before the MSR requirements are fully implemented by the end of 2018. Banking regulators also said they often conduct other informal reviews as needed to evaluate their rules' effectiveness. CFPB also has a statutory retrospective review requirement, but its plans for retrospectively reviewing its mortgage-servicing rules are incomplete. CFPB has not yet finalized a retrospective review plan or identified specific metrics, baselines, and analytical methods, as encouraged in Office of Management and Budget guidance. In addition, GAO found that agencies are better prepared to perform effective reviews if they identify potential data sources and the measures needed to assess rules' effectiveness. CFPB officials said it was too soon to identify relevant data and that they wanted flexibility to design an effective methodology. However, without a completed plan, CFPB risks not having time to perform an effective review before January 2019—the date by which CFPB must publish a report of its assessment.

Why GAO Did This Study

As of September 30, 2015, community lenders held about $3.1 billion in MSRs on their balance sheets. Servicing is a part of holding all mortgage loans, but an MSR generally becomes a distinct asset when the loan is sold or securitized. In response to the 2007–2009 financial crisis, regulators have implemented new rules related to mortgage servicing and regulatory capital to protect consumers and strengthen the financial services industry. GAO was asked to review the effect of these rule changes on U.S. banks and credit unions, particularly community lenders. This report examines (1) community lenders' participation in the mortgage servicing market and potential effects of CFPB's mortgage servicing rules on them, (2) potential effects of the treatment of MSRs in capital rules on community lenders' decisions about holding or selling MSRs, and (3) the process regulators used to consider impacts of these new rules on mortgage servicing and the capital treatment of MSRs.

GAO analyzed financial data, reviewed relevant laws and documents from regulatory agencies, and interviewed 16 community lenders selected based on size and volume of mortgage servicing activities, as well as industry, consumer groups, and federal officials.


CFPB should complete a plan to measure the effects of its new regulations that includes specific metrics, baselines, and analytical methods to be used. CFPB agreed to take steps to complete its plan for conducting a retrospective review of the mortgage servicing rules and refine the review's scope and focus.

Recommendations for Executive Action

Agency Affected Recommendation Status
Consumer Financial Protection Bureau To enhance the effectiveness of preparations for conducting a retrospective review of its mortgage servicing regulations, the Director of the Consumer Financial Protection Bureau should complete a plan to identify the outcomes CFPB will examine to measure the effects of the regulations, including the specific metrics, baselines, and analytical methods to be used. For example, in developing such a plan, CFPB could seek public input for information and perspectives to improve the quality of its review through feedback on available data or improvements on proposed methodologies.
Closed – Implemented
In May 2017, CFPB developed a plan to assess certain mortgage servicing regulations and identified specific metrics, baselines, and analytical methods as part of its assessment plan. Agency officials indicated that CFPB expects to complete its assessment by January 2019, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The act states that CFPB must retrospectively review all of its significant rules within 5 years of the rules taking effect. CFPB's May 2017 assessment plan described methods to measure changes in servicer activities to comply with the mortgage servicing rule, consumer actions that may be enabled by the rule, and consumer outcomes potentially affected by the rule, such as changes in consumers' fees. CFPB's plan included analyzing de-identified data from selected servicers to assess servicers' participation in required mortgage-servicing activities and related consumer outcomes and reviewing national mortgage data to measure changes in, for example, the volume of delinquent loans and how long servicers take to resolve delinquencies. The plan also includes interviews with mortgage servicers and a review of public comments about the servicing regulations. CFPB published a notice for comment in the Federal Register on May 11, 2017 and received 35 comments during the 60-day comment period.

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Mortgage loansMortgage marketCredit unionsCommunity banksMortgage programsBanking regulationCapitalCost analysisLending institutionsMortgage servicersCompliance costsCommunity lending