Fitch: Potential Impact of CFPB’s New Servicing Rules

The new servicing rules recently ""issued"":http://dsnews.comarticles/cfpb-establishes-new-servicing-rules-to-prevent-foreclosure-2013-01-17 by the Consumer Financial Protection Bureau (CFPB) will benefit the mortgage servicing industry by creating uniform standards, but it will also increase compliance costs for the servicers, which will put pressure on smaller-sized entities, according to a report from Fitch Ratings.

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""[T]he rules are a positive step toward improving the consistency and quality of servicing in the industry and may ultimately foster greater confidence in the sector,"" the rating agency said. ""However, similar to other servicing-focused initiatives, the CFPB rules will further increase compliance costs for the industry, extend timelines, and potentially drive further consolidation within mid to smaller servicers.""

The final servicing ""rules"":http://files.consumerfinance.gov/f/201301_cfpb_servicing-rules_summary.pdf, which were released January 17, include rules on communication procedures with borrowers and loss mitigation practices for homeowners facing foreclosure, among other requirements and restrictions.

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The rules will take effect January 10, 2014, but there are certain exemptions for small servicers, which CFPB defines as servicers who service 5,000 or fewer loans and service only mortgage loans that they or an affiliate originated or own.

While the largest servicers have already ""implemented"":http://dsnews.comarticles/major-servicers-report-implementing-320-servicing-standards-2012-10-02 a number of servicing requirements due to the $25 billion national mortgage settlement with federal and state officials, as well as ""consent orders"":http://dsnews.comarticles/regulators-hand-down-enforcement-actions-to-servicers-and-their-vendors-2011-04-13 from regulators, a key change to the CFPB's rules is the ""greatly extended scope, as they will govern both banks and nonbanks of all sizes and types,"" Fitch explained.

""While these changes should be manageable for larger servicers, Fitch believes their impact will be most directly felt by mid-sized to smaller institutions due to the greater impact of compliance costs,"" the rating agency stated.

As smaller and mid-sized servicers get squeezed, they may also feel pressure to leave the servicing business due to the raised compliance costs coupled with insufficient returns. Large banks, on the other hand, are expected to focus on core prime servicing while substantially decreasing their nonprime presence as a result of increased scrutiny and compliance risks, according to Fitch.

Fitch also says some of the provisions of the final rules could potentially lead to longer timelines for resolving distressed loans. For example, one rule requires servicer to wait more than 120 days after a missed payment before initiating the foreclosure process. Another protects borrowers who are facing a foreclosure sale date. If a borrower submits a loan modification application at least 37 days before going to sale, the servicer must review all loss mitigation options availabe for the borrower and can't proceed with the sale if the servicer and borrower agree upon an alternative to foreclosure.