As regulators struggle to find consensus on servicing rules, a growing number of voices want Congress to help settle the debate.
The agencies have for weeks argued about the right vehicle to establish standards, whether through authority granted by, or separate from, the Dodd-Frank legislation.
But with the issue unresolved, some lawmakers, industry insiders and consumer advocates say a legislative role is needed to ensure rules are binding and combine various state and federal policies into a single solution. At the least, observers said, a congressional presence could motivate regulators to act.
"If I were a servicer I would be concerned about regulators deciding the entire new landscape of the servicing industry all on their own, without any statutory framework whatsoever," said Pete Mills, a principal at Mortgage Banking Initiatives.
At issue are servicers' poor marks for their handling of foreclosures, modification and buyback requests and any number of other issues stemming from the mortgage mess. The Federal Deposit Insurance Corp. has pushed for standards as part of a rulemaking, mandated by Dodd-Frank, on risk retention for securitized loans. But other agencies oppose using the Dodd-Frank process, favoring a track distinct from the statute. Meanwhile, the yet-to-be-launched Consumer Financial Protection Bureau could get involved, and various states have their own approaches.
Some said legislation could be the only way establish uniform standards across the board.
Robert Gnaizda, a counsel for the Black Economic Council, said that excepting FDIC Chairman Sheila Bair he is skeptical the regulators are serious. Other regulators — with clearer authority over large servicers — are better equipped to act than the FDIC, he said.
"I always prefer regulation to legislation if there is authority … because I think regulators generally know more about the issue than the legislature as a whole," Gnaizda said. "But unfortunately there's no regulator, and I say that because, except for Sheila Bair, no one has indicated any interest in regulating servicers, and she is not in the position to do so.
"I think we need legislation, not because I would prefer it. The [Office of the Comptroller of the Currency] has been an ineffective operation for a long time, and the Federal Reserve doesn't seem intent on making this a high priority."
There are powerful voices in Congress that agree Capitol Hill needs to be involved, but it is unclear whether any legislation would garner the votes.
"It needs to be done by legislation," said former House Financial Services Committee Chairman Barney Frank, now the panel's ranking Democrat. "You do have a mix of state and federal [requirements]. … The law should say that for every mortgage, there is a designated entity that has the ultimate decision about modifying that mortgage, and for when you buy or invest in a mortgage, you do so subject to knowledge that that entity has the right to modify it, not in a way that totally abuses you but that has the discretion to do it.
"I think that can only be done legislatively."
Yet it is unclear if the Republican leadership is interested in the issue. In outlining his plans for the panel, Chairman Spencer Bachus, R-Ala., said the committee "will continue its review of deficiencies in mortgage servicing practices" and "assess whether comprehensive national servicing standards are necessary and appropriate and if so how such standards should be implemented."
But Frank, who said the issue would have been high on his agenda had Democrats retained control, said the "Republicans aren't going to act on it and there are a lot of [other] things to do."
Some said that a regulatory approach, which includes the various state stakeholders, is more desirable, or that at least the agencies need to be given a chance to finish their process before Congress gets involved.
John Ryan, the executive vice president of the Conference of State Bank Supervisors, warned that legislation could end up being too rigid for a servicing industry and regulatory landscape with so many players.
"We need a little more flexibility than hardwired legislation," he said.
Michael Calhoun, the president of the Center for Responsible Lending, favors the FDIC's approach of including servicing in the risk-retention rule, since it subjects servicing standards to a statutory timetable, and the rule must be completed by agencies across the regulatory spectrum. Dodd-Frank said the rule — which must define a safe class of "qualified residential" mortgages that can skip risk retention — is due in April.
"We think you should put it in QRM in part because there is a deadline and it's joint," he said. "Absent a hard deadline any agency can have veto power. The QRM [rule] is a good opportunity."
Others said Congress could get involved through means other than legislation, or lawmakers may want to judge the effectiveness of a regulatory outcome before deciding their move.
"We encourage the Congress to be engaged on this because it's such an important issue and to have oversight of that conversation and that debate, but we don't think you have to expressly have legislation in order to accomplish this mission," said Bill Killmer, the Mortgage Bankers Association's senior vice president of legislative and political affairs.
Michael Barr, a former Treasury assistant secretary for financial institutions, said while regulation is less messy than a fight over legislation, he could foresee a multipronged approach.
"A lot of things can be done using existing authority, and that's always better than having to go see the Congress," said Barr, a University of Michigan law professor. "But I do think that national servicing standards may also be an important part of whatever Congress ultimately does with respect to housing and finance reform."
Paul Leonard, the vice president of legislative affairs for the Financial Services Roundtable's Housing Policy Council, said servicing standards could be done "either way," through regulation or legislation.
"I think initially we have to wait and see what the state AGs and what the regulators may do. Then I think after that Congress would look at that and say, 'Is there anything else that needs to be done?' " he said.
Laurence Platt, a mortgage finance expert with K&L Gates, said that whether standards come from legislation or regulation is less important than making the policy meaningful. He said there is concern either process could overpoliticize servicing.
"The bigger issue is what's the public policy," he said.