Congress should consider giving direct authority over nonbank mortgage servicers to the Federal Housing Finance Agency, according to a report released Monday by the Government Accountability Office.
The report was a response to a letter from Rep. Elijah Cummings, D-Md., and Sen. Elizabeth Warren, D-Mass., who asked in October for an investigation into the financial stability of nonbank servicers.
The GAO said there should be "parity" among financial regulators in the oversight of regulated entities and third parties they do business with. But the FHFA, which oversees Fannie Mae and Freddie Mac, "lacks statutory authority to examine" nonbank servicers, the report found. It has indirect oversight over third parties that service loans on behalf of Fannie and Freddie.
"A regulatory system should ensure that similar risks and services are subject to consistent regulation and that a regulator should have sufficient authority to carry out its mission," the GAO said. "Without such authority, FHFA may lack a supervisory tool to help it more effectively monitor third parties’ operations and the enterprises’ actions to manage any associated risk."
Though banks continue to dominate mortgage servicing with about 75% market share last year, nonbanks’ share has grown dramatically. Nonbanks now account for 25% of the servicing market, up from 7% in 2012, the report found.
However, the report did not distinguish between loans backed by Fannie and Freddie versus the Federal Housing Administration, where large banks have largely ceded market share to nonbanks.
The 102-page GAO report also said that the Consumer Financial Protection Bureau should collect more data on the identity and number of nonbank mortgages servicers.
The CFPB directly oversees nonbank servicers as part of its responsibility to ensure compliance with federal mortgage lending and consumer financial protection laws. But the CFPB does not have a full record of entities under its purview, the report found.
"As a result, CFPB may not be able to comprehensively enforce compliance with consumer financial laws," the GAO said.
The report included a list of 641 nonbank servicers that was supplied by Fannie and Ginnie Mae, the wholly-owned government corporation that provides liquidity to Fannie and Freddie. Policing nonbanks also has fallen to Ginnie, which has asked Congress for increased its funding to better monitor the financial condition of nonbank servicers.
Though nonbank servicers have grown rapidly in the past few years, their use of advanced operating systems or effective internal controls to handle larger portfolios has not always kept pace, the report found.
Nonbanks may lack robust compliance systems, have liquidity problems and present higher risks than banks, the report found.
"Weaker liquidity and capital positions at nonbank servicers could increase the risk of disruption in services to customers," the GAO said. "Some nonbank servicers might face funding liquidity risks, in part due to market volatility because of several features of their business models and expensive external funding alternatives."
Still, the failure of a large nonbank servicer would likely have a far smaller effect on the market than the failure of a large bank servicer, the report found.
"Large nonbank servicers are still relatively small and as not interconnected" with the financial system as large banks are, the GAO said.