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Non-bank mortgage servicers could see increased regulation over the next few years - especially if Hillary Clinton selects Sen. Elizabeth Warren, D-Mass., as her running mate and wins the presidency this fall.

Warren, along with Maryland Rep. Elijah Cummings, D-Md., in April urged the Consumer Financial Protection Bureau (CFPB) to increase its oversight of non-banks after the U.S. Government Accountability Office (GAO) issued a report saying that the CFPB has not been keeping formal track of them.

According to the GAO report, as of June 2015, about 24.2% of the $9.9 trillion in outstanding mortgages in the U.S. were serviced by non-banks - up significantly from about 6.8% in 2012. One of the main concerns for the GAO (and one that it shares with the CFPB) is that these non-bank servicers are failing to ramp up their investment in staff and technology in corresponding fashion when they take on additional portfolios and grow rapidly. This, in turn, could have a negative impact on service levels.

In order for the CFPB to properly monitor non-banks, however, it needs to be able to identify them. Currently, the bureau has no means by which it can track non-banks - apparently, it has no “running list” of the non-banks currently in operation, let alone basic information about how large they are or what their business models entail.

In a letter to Richard Cordray, director of the CFPB, Warren and Cummings argue that more oversight is needed as non-banks continue to absorb the servicing portfolios of the big banks, which basically no longer want to service mortgages due to the stricter rules related to capital reserves that fall under Basel III. The CFPB can’t do that if it doesn’t know who they all are.

In addition, left-leaning think tank Urban Institute released a report in February also detailing why non-banks need additional government oversight. In that report, authors Karan Kaul and Laurie Goodman argue that although government-sponsored enterprises Fannie Mae and Freddie Mac, along with Ginnie Mae, recently issued new capital, liquidity and net worth requirements for servicers of their mortgages, these requirements fail to offer adequate loss protection, given the risks that non-banks face.

The Urban Institute report - and, to a degree, the report from the GAO - offers support to a recent proposal by the Conference of State Bank Supervisors (CSBS) that would impose stricter capital and liquidity standards on non-bank servicers. That proposal, which was first introduced last year, would establish state-level baseline financial and operational standards for non-banks, including a requirement that they hold at least $2.5 million in capital reserves. It also calls for stricter liquidity requirements, formal risk management standards, data integrity and security standards, corporate governance, and new requirements related to servicing transfers, among other new requirements.

Naturally, non-banks are opposed to the CSBS proposal, as it would impose nearly the same level of regulation on them that bank servicers currently face under Basel III. The Mortgage Bankers Association (MBA) has come out against the proposal, arguing that the capital and liquidity requirements would likely drive many smaller, non-bank servicers out of business. Perhaps more importantly, the MBA asserts that the proposal is unnecessary because currently, no single non-bank is “systemically important” enough to warrant such extreme protections. The MBA says the bankruptcy of even the largest of non-bank servicers would likely cause little disruption in the mortgage market because existing regulations would predicate an orderly wind down of the defaulted institution, with little to no risk for taxpayers.

“Independent mortgage servicers are unlikely to create systemic risk either as financial intermediaries or moral hazard through insured deposits ...” Pete Mills, senior vice president of residential policy and member services for the MBA, wrote in a letter to the CSBS in July of last year. “Therefore, the proposal does not appear to be protecting a direct taxpayer or systemic financial stability interest.”

The MBA also points out that non-bank mortgage servicers are already regulated by the Federal Housing Finance Agency, Ginnie Mae, the CFPB and other federal regulators. Although the MBA says it is in favor of developing standards for state regulations, so as to avoid undue regulatory complexity, it calls into question whether the proposal is really necessary.

“It is not clear that non-bank mortgage servicers require the sort of prudential regulatory regime [outlined] in the proposal,” Mills wrote.

Besides that important point, the MBA and other mortgage entities have found multiple problems with the CSBS proposal, including the fact that it mostly would apply to non-bank, agency-approved servicers and, thus, would negatively affect non-banks that are not “agency approved.” This, in turn, could result in many smaller non-banks - including certain nonprofits - going out of business. What’s more, the proposed rules are in conflict with the licensing laws in some of the CSBS states.

Despite its many flaws, the CSBS proposal could still grow legs. As such, it is important for mortgage servicing executives to stay abreast of these developments and for their organizations to get more involved on the legislative front. As those at the MBA have said before, it’s time for non-banks to take control of their legislative destiny.

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