New York Department of Financial Services Vows to Expand Investigation of Nonbank Mortgage Servicers
In a May 20, 2014, speech before the Mortgage Bankers Association, Superintendent Benjamin Lawsky of the New York State Department of Financial Services (“DFS”) announced that DFS would expand its ongoing investigation into “ancillary services” used by nonbank mortgage servicers. Superintendent Lawsky’s remarks stem from two ongoing investigations of the servicing industry that were launched amid growing concerns from both state and federal regulators that nonbank servicers lack the capacity to adequately service newly acquired servicing rights and were engaged in business practices that posed substantial risks to borrowers and investors.
Background
DFS’ probe into the industry coincides with the expansion of servicing portfolios of nonbank mortgage servicers – a direct response to the national servicer settlement and more stringent capital requirements for banks. According to Superintendent Lawksy, the “offloading” of servicing rights to “lightly regulated” mortgage servicers warrants that “state regulators stay vigilant about risks [associated with] moving outside the traditional banking system and into to the shadows at non-banks.” To that end, Superintendent Lawsky launched extensive investigations into the business practices of the industry’s largest nonbank mortgage servicers and their vendors, and the industry should expect that DFS will continue to aggressively pursue the industry well into the foreseeable future.
Practical Implications
Recurring themes in the Superintendent Lawsky’s investigations to date include concerns about potential conflicts of interest between servicers and ancillary service providers and what the DFS describes as the “explosive growth” of servicing portfolios that potentially put homeowners and borrowers at risk. Taken together, the industry should anticipate that investigations into servicer business practices will include inquiries into the business relationships between servicers and vendors and whether servicers are making the requisite investments into their compliance and consumer response infrastructure commensurate with the volume of newly-acquired mortgage servicer rights.
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