The Consumer Financial Protection Bureau (CFPB) last week released proposed rules for RMBS servicers. If these were implemented, they would set consistent standards for all residential mortgage servicers, Fitch Ratings said in a note released today.
On Aug. 10, the CFPB released two notices of proposed rulemaking (NPR). These new rules will include all the provisions required by the Dodd-Frank Act, the Truth in Lending Act, and the Real Estate Settlement Procedures Act. They are set to be finalized by January 2013.
However, Fitch said that like other servicing-focused programs, the bureau's rules will further increase compliance costs and can result in more consolidation among midsized and smaller servicers.
According to the rating agency, the CFPB proposal builds on many of the changes to servicing implemented under the consent orders and settlement that large banks came to with several state Attorneys General about residential lending practices. They included a lot of shifts or enhancements to procedural, staffing, and technology procedures. But, those rules only governed the largest banks' actions in the agreements. Furthermore, the bureau indicated that it is considering added standards yet to be disclosed.
A crucial change with the CFPB rules is their extended scope as they will govern both banks and nonbanks of all sizes and types, Fitch said. The smaller ones have thus far avoided being covered.
Although the bigger institutions can manage these changes, the agency thinks their effect will be most directly felt by smaller institutions given the higher impact of compliance costs. Because of this, the agency believes these changes can boost the number of consolidations and result in industry uncertainty.
The larger entities are expected to scale down with the increased scrutiny and compliance risks, while smaller entities should leave given the more prohibitive compliance costs and insufficient returns.
Overall, Fitch views the proposed rules positively as they should improve the consistency and quality of servicing in the industry and might encourage more confidence in the sector.
Meanwhile, Bank of America Merrill Lynch analysts said in a research note that many of the proposed rules seem "potentially burdensome" for servicers upfront.
They might also be redudant. Many of the NPRs' rules have already been implemented by servicers as part of the Office of the Comptroller of the Currency Consent Order in 2011 and the 2012 Attorney General Settlement with the nation’s five largest servicers.
The bank analysts added that the rules can make servicing more expensive and could increase the penalties for mortgage fraud and other mortgage-related crimes.
