The Consumer Financial Protection Bureau's (CFPB) proposed new rules for mortgage servicing were written primarily for the largest players, but it is the small servicers that will have the hardest time absorbing the costs.
In all there are nine proposed rules, ranging from providing options for avoiding force-placed insurance to reviewing a loan modification within 30 days of receiving it.
Small servicers that already operate on razor-thin margins would essentially be subject to many of the same requirements that came out of the $25 billion mortgage settlement struck early this year between regulators and the five largest bank servicers: Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial.
"The rules that are being developed don't distinguish if you're a small servicer," said Ed Delgado, a former senior vice president at Wells Fargo and now the chief operating officer at Wingspan Portfolio Advisors, a Carrollton, Texas, specialty servicer. "It adds another layer to an already-stressed fee model that casts small servicers in the same light as large banks and it could further jeopardize the fee-for-service model."
Of particular concern are the CFPB's proposed requirements that servicers send borrowers periodic statements on residential loans and advanced notices when rates reset on adjustable-rate mortgages.
Terry Ryan, the president of Multi Financial Services in Tallahassee, Fla., which services roughly 4,000 loans for nonprofit housing groups like Habitat for Humanity, said that between the costs of drafting the statements, printing them and mailing them, that requirement alone would eat up 15% of his company's gross income.
"Why have a statement that's going to cost me $40,000 a year?" says Ryan, who already fired off a comment letter to the CFPB suggesting the rule be changed to allow borrowers to access the information online. "This would represent a significant expense that would naturally have to be passed along to lenders."
Stiffer timelines for resolving errors and providing direct access to foreclosure prevention programs also are expected to eat into small servicers' profits.
The CFPB did give an exemption from the periodic billing statements to small servicers that handle fewer than 1,000 loans. It also is considering whether to exempt small servicers from other parts of the proposed rules.
While many servicers applauded the proposed rules as common-sense requirements to address the weaknesses of large servicers, they are far more anxious about enforcement once the rules are finalized by January 2013. CFPB officials on a conference call with reporters last week declined to discuss any aspects of how they plan to enforce the rules.
"The more layers of complexity you add to the servicing model, the greater the costs and there is a point of diminishing returns," Delgado said. "As regulatory oversight increases, you'll have this trickle-down contagion to regional and small banks. The accountability standards will now have to be implemented by banks that have far less exposure than large banks."
Andy Dunn, a senior attorney at Wolters Kluwer Financial Services, said small servicers may struggle with the requirements to provide borrowers with options to avoid foreclosures that are part of the $25 billion national mortgage servicing settlement.
Ryan Zagone, a spokesman for the American Bankers Association, said small servicers may have trouble with the timeframes for gathering information early in the loss mitigation process.
"We're concerned how the timeframes fit within the business model of small institutions that have a high-touch servicing process, where the borrower can go into the branch and they know the person who made the loan," he said. "We want to make sure the regulations don't impose so many costs that high-touch servicers are not able to continue servicing."