On July 25, the GAO released a report titled “Mortgage Servicing: Community Lenders Remain Active under New Rules, but CFPB Needs More Complete Plans for Reviewing Rules.” At the request of the House Committee on Financial Services, the GAO report outlines and analyzes the effect of the CFPB’s 2013 mortgage-servicing rules and the banking regulators’ implementation of the Basel III framework on credit unions and community banks’ (collectively, community lenders) mortgage servicing activities. Specifically, the GAO report examines (i) community lenders’ participation in the mortgage servicing market, as well as the potential effect of the new mortgage servicing rules on them; (ii) the potential impact that the Basel III framework could have on community lenders’ decisions to hold or sell Mortgage Servicing Rights (MSR); and (iii) regulators’ processes for estimating the impact of the new regulations.

Overall, the GAO report suggests that community lenders’ decisions to sell or hold MSRs likely will not be affected by the new capital treatment of MSRs under the Basel III framework because their concentration of MSRs is limited: “Most representatives of community banks said that regulatory changes to the capital treatment of MSRs did not require them to sell MSRs or raise additional capital.” Although officials from two community banks with larger concentrations of MSRs suggested that “the rules would prevent the bank from growing as much as it would like,” the GAO concludes that community lenders’ participation in MSR sales is based on several factors other than MSR capital treatment, including volatility in the value of MSRs, compliance risk, and interest rates and prepayments.

According to the report, the new mortgage servicing regulations increased compliance costs for community lenders, but have yet to affect adversely their participation in the mortgage servicing market. In fact, the GAO found that, between 2008 and 2015, the share of mortgages serviced by community lenders doubled. The report states that community lenders continue to service mortgage loans held in portfolio or hold MSRs, despite the increase in regulatory requirements and compliance costs, because such activities generate income and help them to maintain strong customer relationships. Regarding profitability, representatives from one credit union noted that “servicing mortgages provides it with the opportunity to develop borrowers into full members with checking and savings accounts and car loans.” Community lenders further highlighted the significance of working directly with customers encountering errors or difficulty during the loss mitigation process: “Representatives at several industry associations and community lenders [told the GAO] that community banks and credit unions preferred to retain MSRs even if they sold the mortgages in the secondary market because they were able to maintain close customer contact should issues arise.” The report recognizes that, for community lenders servicing 5,000 or fewer mortgages, the CFPB’s exemptions for small servicers and creditors were helpful to their businesses and customers. Still, some community lenders reported having to adjust their business practices to manage increased compliance costs, highlighting increases in fees and interest rates, as well as changes to product offerings.

Pursuant to the Dodd-Frank Act, the CFPB must retrospectively review the effectiveness of its mortgage servicing rules by January 2019. According to the report, as of April 2016, the CFPB’s plans for retrospective review are incomplete because agency officials determined that, among other things, it was “too soon to identify the relevant data and because the agency wanted the flexibility to design the most effective method to analyze the rules.” The report states that, without having finalized a review plan, including outlining its proposed methodologies for seeking public input, the CFPB risks not having sufficient time to complete an effective review. As such, the GAO recommends that the CFPB “complete a plan to identify the outcomes [it] will examine to measure the effects of the regulations, including the specific metrics, baselines, and analytical methods to be used.”