Regulator Steps in to Halt Loan Sale – an overstep or a leading indicator of things to come?

On Thursday, Feb. 6, the office of Benjamin Lawsky, Superintendent of Financial Services for NY State halted the sale of mortgage servicing rights (MSRs) on $39 billion worth of loans from Wells Fargo to Ocwen Financial Corp. The Superintendent has been investigating Ocwen regarding “alleged abusive behavior toward homeowners.” The action is based on the regulator’s concern regarding Ocwen’s ability to service additional loans.

Ocwen is one of several specialty servicers that have been growing at meteoric rates. Banks have been selling billions of dollars in MSRs to specialty servicers to conserve capital and reduce the expenses and headaches associated with servicing high-risk and delinquent loans. The specialty servicers, funded by shareholders and private investors, have been ready buyers of these assets because they have developed processes and systems especially designed to manage these loans. They are also not subject to the same capital requirements as banks. As a result, companies such as Ocwen, Nationstar  Walter Investments and Wingspan have become major players in mortgage servicing, acquiring over $1.0 trillion in mortgage loan unpaid balances.

While this growth has been staggering, is the move by the NY regulator a harbinger of things to come?   The Consumer Finance Protection Bureau (CFPB), the consumer protection authority created by Dodd-Frank, has already taken note of the enormous volume of loans changing hands and has received complaints from consumers who feel lost in the shuffle. On Feb. 11, 2013, the CFPB published a set of guidelines that could be affected as a result of MSR servicing transfers.  The CFPB has also announced that they will be scrutinizing all servicers, including non-bank specialty servicers, to ensure compliance with their guidelines.

How will the specialty servicers react to all this unwanted attention? While all claim to have the systems and controls in place to comply with the letter and intent of the regulators, it remains to be seen if this is good enough. These firms have, to this point, managed their growth internally, but it may now be prudent for them to bring external resources that can review policies and procedures, confirm the systems are in place, and instill an effective change management culture to ensure staff members are engaged and complying with changes. They need only to look to the banks to see what life is like under a regulatory spotlight.

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