IRVINE, Calif.-The "good intentions" of new mortgage servicing rules proposed by the CFPB may ultimately lead to more consolidation, according to one forecast.
Loren Morris, SVP of Retreat Capital Management, a provider of advisory services to mortgage servicers, told Credit Union Journal the "devil is in the details" when it comes to the new rules, adding, "[The rules] go beyond the practicality of providing good customer service."
"The new regulations are very far-reaching, with most of them designed to assist from the borrower's perspective," he assessed. "Because there is a 5,000-loan threshold for the bulk of the requirements, many smaller lenders will be exempt. The issue still in play is the level of service offered. Credit unions would argue they have always had a member-centric focus."
Retreat Capital Management is hearing concerns from servicers that the new rules will have a "big impact" systemically, Morris reported. Servicers are saying they will have to make major technology changes, as well as rewrite their policies and procedures.
"The bigger the ship the harder it is to turn," said Morris. "For those that fall above the threshold but were not part of the national mortgage settlement, a servicer that does 5,000 to 10,000 loans is still a relatively small servicer. The impact is lenders will look for others to service for them. They will outsource to those who have invested in the technology and the resources to do this."
Big Banks Leaving Servicing?
According to Morris, this change could put a strain on the mortgage servicing industry, especially given all the issues in recent years with delinquencies. "There may be fewer choosing to stay in the business or get into the business," he predicted.
Morris believes the new rules may mean consolidation in the industry, especially among firms providing default servicing. Moreover, he believes the largest banks may step back and allow "next-tier servicers" to deal with delinquent mortgage portfolios.
"This frees up capacity for the big banks to originate loans and service new loans," he suggested.
Mortgage servicing was not a hot topic for the industry prior to 2007-08, Morris pointed out. Prior to the economic downturn and housing crash, "hardly any servicers did loan modifications-borrowers either paid their mortgage or the lender foreclosed."
Contesting Foreclosures & Other Pitfalls
Another consequence of the CFPB's new rules, in Morris' estimation, is "it appears it provides a private right of action where one was not intended."
He said the Dodd-Frank Act did not specifically intend a violation of a mortgage servicing rule as being something a borrower could use as a contest to a foreclosure action, yet he noted that if borrowers allege the lender violated a rule, it is a defense to foreclosure.
"This will impact large servicers," he said.
The concept of early intervention with delinquent borrowers likewise has its pitfalls, said Morris. Under the new regulations servicers have to establish contact by the 35th day after the loan becomes delinquent. Further, the continuity of contact provisions require lenders to assign personnel to the delinquent loan by 45th day.
Simplicty May Backfire
"There is a specificity in all these rules that might not work well with a delinquent borrower," he said. "The industry certainly agrees early intervention is key and continuity of contact is good, but there is such a specific timeframe it might not work with the borrower's circumstances. The concept makes sense, but the interplay can cause issues."
Morris foresees similar problems going forward due to the CFPB mandating specific procedures for error resolution and information requests. He said most servicers have documented protocols on handling incoming inquiries, and is worried the process can be thrown off when a borrower makes a complaint that is verbal.
One more possible unintended consequence: consumers with shaky credit may find mortgages difficult to obtain.
"There are those who predict the new rules will restrict credit due to costs," he said. "There is a cost to doing more than less. I think companies will stay in servicing, but the risk of default will be examined more closely. Because the lower credit spectrum has a higher risk of default, it will cause lenders to think twice about making a mortgage to someone with poor credit because the rules are so focused on the process after the loan becomes delinquent."
