NEW YORK--()--Fitch believes the final rules published last week by the Consumer Financial Protection Bureau (CFPB) set uniform standards for all U.S. residential mortgage servicers, including smaller nonbank entities that have thus far not been subject to mandated changes. In addition, the 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. 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 rules are effective for all servicers on Jan. 10, 2014.
The CFPB final rules build on many of the changes to servicing practices implemented under the consent orders and the settlement large banks came to with several state Attorneys General concerning residential lending practices. All three require extensive changes or enhancements to processes, timing of actions, timing, and method for communication with borrowers, staffing, and technology. However, the prior orders and settlement requirements only governed the actions of the few largest banks.
Therefore, a key change with the publishing of the CFPB final rules is the greatly extended scope, as they will govern both banks and nonbanks of all sizes and types. Although the CFPB final rules do contain exemptions to some of the rules for some servicers, these are limited to the smallest of servicers. 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.
As such, Fitch believes these changes have the potential to drive further consolidation. Large banks are expected to focus on core prime servicing and substantially scale down their nonprime presence due to increased scrutiny and compliance risks. Likewise, smaller entities may be pressured to exit the business altogether due to higher compliance costs and insufficient returns.
In addition, Fitch believes that some of the provisions of the final rules have the potential to further extend the already excessive timelines for resolution of distressed loans.
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The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.