Statement by CFPB Director Rohit Chopra on the Financial Stability Oversight Council’s Nonbank Mortgage Company Report

For most households, the family home is their most important asset. A safe and stable mortgage market that provides affordable credit and reliable servicing to households is critical for our economy. When policymakers fail to safeguard this market, the American dream becomes a nightmare.

Regulators’ failure to prevent the 2008 mortgage crisis led Congress to create both the Consumer Financial Protection Bureau (CFPB) and the Financial Stability Oversight Council (FSOC). Consumer protection and financial stability are complementary goals. Many years ago, the CFPB established a suite of new rules to clean up the worst abuses in the mortgage market. We’ll soon propose a rule to strengthen certain homeowner protections. But consumer safeguards must be accompanied by strong financial stability guardrails that ensure the financial system can effectively serve small businesses and households over the long term, especially in times of stress.

Today, the FSOC is publishing a report and recommendations on the financial stability risks posed by nonbank mortgage companies.

Over the last 15 years, nonbanks have significantly increased their share of the mortgage market. They now originate roughly 65% of all mortgages and service more than 50% of outstanding mortgage balances. The top 10 nonbanks service almost $5 trillion in mortgages and originate trillions of dollars of mortgages annually.

Regulators are concerned about the fragile nature of these firms. They are not subject to the same federal financial requirements as banks, even though they pose similar risks. Mortgage activities are often the sole business line for these firms, which leaves them vulnerable to swings in the market. They also don’t have much cash on hand and borrow heavily from banks that can pull the funding at a moment’s notice.

The CFPB has found that servicing transfers by healthy firms can be difficult and disruptive, even in the best of times. If one or several large nonbank mortgage companies failed in a period of stress, their lights might shut off.¹ It could take a while to transfer the servicing activities to a new company, if one was even available.² In the meantime, it would be chaotic for consumers. Millions of borrowers may have issues transmitting their payments and may not have anyone in customer service to contact with problems. Distressed borrowers may not be able to access or continue under loss-mitigation plans, which could lead to a wave of avoidable foreclosures. Nonbank failures could also reduce access to credit, especially for low- and moderate-income households that disproportionately rely on nonbank mortgage companies.³

While state and federal agencies have made some progress on this issue, the report recommends that Congress act to improve the resilience of individual firms and the sector as a whole. The report also acknowledges that extending any public privileges to nonbanks should be accompanied by direct improvements to existing protections for distressed homeowners.

The report is silent on what, if any, tools the FSOC itself should use to address these risks. That must be the next phase of our work. In line with the 2023 Analytic Framework and Nonbank Designation Guidance, we should carefully consider whether any large nonbank mortgage companies meet the statutory threshold for enhanced supervision and regulation by the Federal Reserve Board.

The CFPB will do its part to improve the functioning of this market. We will be undertaking a rulemaking to strengthen our foreclosure protections for borrowers. The existing rules leave too many borrowers exposed to foreclosure and junk fees while they struggle to meet seemingly endless paperwork requirements. The proposed rule we are considering would shift the focus from a check-the-box compliance exercise to getting distressed homeowners in loss mitigation quickly.

Under the proposal, foreclosure protections would start from when the borrower first asks for help, even if the servicer doesn’t yet have all the documents. These changes, if ultimately finalized, would permit servicers more flexibility in helping mortgage borrowers struggling to make their payments in a variety of circumstances.

The CFPB and FSOC must remain vigilant against the very risks that prompted the creation of our agencies in the first place.

References

1. Once a mortgage company files for bankruptcy, it may lose its state license to continue operations. Even if this can be avoided, continuing operations while reorganizing under Chapter 11 of the Bankruptcy Code may be impossible if the company lacks the assets to secure debtor-in-possession financing. The alternative would be an immediate Chapter 7 liquidation.
2. It is important to note that there are few, if any, examples of servicing transfers at the scale of the largest nonbank mortgage companies’ current portfolios. Even the largest transfers associated with 2008 financial crisis were for less than $100 billion.
3. The Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5323 (a)(2)(E)) directs FSOC, in the context of evaluating whether to designate a nonbank financial company for additional supervision, to consider “the importance of the company as a source of credit for low-income, minority, or underserved communities, and the impact that the failure of such company would have on the availability of credit in such communities.”