BLOG VIEW: Should federal regulators take up loan servicing standards as part of the Qualified Residential Mortgage (QRM) rulemaking process? That's the question confronting the Securities and Exchange Commission, the Federal Deposit Insurance Corp. (FDIC) and other parties involved in determining QRM criteria.
Such an approach to establishing national servicing standards appears to have first been broached by FDIC Chairwoman Sheila Bair. In a Senate Banking Committee hearing last month, Bair explained the FDIC's position on the QRM-servicing overlap:
‘We believe that the QRM rules should authorize servicers to use best practices in mitigating losses through modification, require compensation structures that promote modifications and direct servicers to act for the benefit of all investors.’
Bair's sentiments were echoed in a Dec. 21, 2010, letter to regulators (pdf). The letter, co-signed by 50-plus economists, analysts and policy wonks, argued that the QRM definition ‘should be the gold standard in all areas’ of the residential mortgage business, servicing included. While stating that servicing standards ‘need not be overly complex,’ the signatories unleashed a far-reaching list of proposed requirements – among them, the mandated transfer of severely delinquent loans to special servicers and additional disclosures of servicers' ownership interests in second-lien loans.
One dissenting voice in this, one of the several ongoing QRM debates, belongs to the Mortgage Bankers Association (MBA). According to MBA NewsLink, the trade group's electronic newsletter, the MBA, again in a letter to federal regulators, expressed ‘deep concern’ about proposals to incorporate servicing into the QRM conversation. The MBA letter suggested that, with the deadline for new risk-retention rules (April 17) quickly approaching and the idea of national servicing standards ‘very much in the conceptual stage,’ regulators would have too much on their plates if they were to consider both lending and servicing standards in one fell swoop.
Ellen Harnick, senior policy counsel with the Center for Responsible Lending (CRL), disagrees. Although the CRL and the MBA have made for strange bedfellows recently in some respects – both groups signed a written plea to regulators this week asking the agencies to avoid too narrowly defining the QRM – the CRL is in favor of wrapping servicing into the QRM. ‘People understand what needs to be done,’ says Harnick.
‘What needs to happen for servicing isn't that complicated when you consider other things that regulators do,’ she says. ‘This is well within their competency and expertise. If there's a will to come to a consensus, I think they'll be able to get through it.’
Harnick's point – that people understand what needs to be done – is spot on. It's been well documented for years, now, that the traditional compensation model in servicing, which is based off laughably outdated assumptions for delinquency rates, does not suffice. And unless you've been living under a rock, the conflicts of interest that exist when servicers (or their parent companies) own a second lien on a property for which they service the first lien are obvious.
Although the challenges have been clearly identified, the solutions are less well defined. At least that's how the MBA frames the situation.
‘We urge policy-makers to work with MBA and other stakeholders to ensure that these different policy dimensions are understood before rushing forward with a rulemaking,’ the MBA's letter states.
The MBA sent its letter in advance of its summit next week on servicing. The Jan. 19 event, to be hosted by the MBA's newly formed Council on Residential Mortgage Servicing for the 21st Century, ‘will bring together industry leaders, consumer advocates, economists, academics and policy-makers who will take a detailed look at the issues that have challenged the industry and identify the essential building blocks for the future of servicing,’ according to a press release announcing the council.
Just as Harnick is correct in saying, ‘People understand what needs to be done,’ the MBA is sensible in wanting to avoid hasty rulemaking. Of course, the argument could be made that the MBA is just insanely late to the party – launching a servicing-themed council in 2011 is about as prescient as projecting box-office success for The Dark Knight.
Regardless of whether regulators decide to bring servicing into the QRM fold, one thing is abundantly clear: Servicing standards are on their way, and the sooner the industry can land on pragmatic solutions to the many shortcomings, the better.
– John Clapp, editor, Servicing Management
(Please address all comments regarding this opinion column to clappj@sm-online.com.)
