Credit unions. Servicing is a part of holding mortgage loans in portfolio, but the right to  service a mortgage generally becomes a distinct asset—an MSR—when  contractually separated from the loan if the loan is sold or securitized. 1). The Share of Mortgages Serviced by Community Lenders Has Increased Since 2008

Based on our analysis, the total share of all U.S. residential mortgages  serviced by community lenders increased between 2008 and 2015. Nationwide, regional, and other banks continue to service more than half  of the market. Many Community Lenders Reported Spending More in Response to Regulatory Requirements and Some Adjusted Business Activities, Potentially Affecting Customers

Many community lenders that we interviewed noted that they continued to  service mortgages in their portfolio or to hold MSRs on loans sold to the  secondary market in spite of increased compliance costs of mortgage- related requirements resulting from new rules instituted pursuant to the  Dodd-Frank Act. Most Community Banks and Credit Unions Hold Limited MSRs and Have Sufficient Capital to Cover Them

Regardless of type or size, banks with large concentrations of MSRs may  need to raise capital as a result of the new risk-based capital treatment of  MSRs, but our analysis and most community banks we spoke with  confirmed that these new rules were currently not an issue for them. Additionally, our analysis showed that about 19 percent of community  banks held MSRs and about 1 percent made MSR-related deductions  from capital due to the amount of these assets they held as of the third  quarter of 2015 (see fig. Most community banks we interviewed confirmed that they did not need  to make changes to their capital because of these rules, but those with  large concentrations of MSRs were considering changes to their capital. Institutions with large concentrations of MSRs may choose to raise  additional capital or sell MSRs to meet required minimum capital  amounts, depending on banks’ holdings of other types of assets. One credit union told us that it was well capitalized and that the risk- based capital rule would likely not affect it. Regulators Estimated Impacts of New Rules Using Public Input and Data Analysis, but CFPB’s Plans for Reviewing Rules Have Limitations

CFPB used several methods to estimate the impact of its mortgage  servicing rules prior to finalizing them in 2013, and banking regulators  incorporated changes to the treatment of MSRs when they estimated the  overall impact of new regulatory capital rules in 2013. CFPB also considered the potential costs and  benefits for consumers and all banks and credit unions, as required by  the Dodd-Frank Act. CFPB’s Plans for Conducting Retrospective Reviews of the Mortgage Servicing Rules Are Incomplete, and Banking Regulators’ Reviews of Capital Rules Are Ongoing

CFPB’s plans for retrospectively reviewing its mortgage servicing rules  are incomplete, as the agency has not finalized its planned approach. CFPB officials said a specific plan for reviewing the mortgage servicing  rules had not been completed because it was too soon to identify the  relevant data and because the agency wanted the flexibility to design the  most effective method to analyze the rules. However, we found in a  2007 report on retrospective reviews that agencies are better prepared to  perform effective reviews if they identify potential sources of data and the  measures that would be needed to assess effectiveness of the rules. In addition to these planned reviews, banking regulators said that they  often conducted other informal reviews as needed to evaluate the  effectiveness of rules. Conclusions

Mortgage servicing is a substantial business for many community banks  and credit unions, and the value of their MSRs exceeded $3 billion as of  September 30, 2015. For the  mortgage servicing rules, this review must be completed by January  2019. Without a completed plan, CFPB risks not having enough time to perform  an effective review. Recommendation for Executive Action

To enhance the effectiveness of preparations for conducting a  retrospective review of its mortgage servicing regulations, the Director of  the Consumer Financial Protection Bureau should complete a plan to  identify the outcomes CFPB will examine to measure the effects of the  regulations, including the specific metrics, baselines, and analytical  methods to be used. In its written comments, CFPB agreed to take steps to complete its plan  for conducting a retrospective review of the mortgage servicing rules. Key contributors to this report are listed in appendix V.

Appendix I: Objectives, Scope, and Methodology

The objectives of our report were to examine (1) community lenders’  participation in the mortgage servicing market and potential effects of the  Bureau of Consumer Financial Protection (commonly known as the  Consumer Financial Protection Bureau or CFPB) mortgage servicing  rules on those lenders, (2) potential effects of the risk-based capital  treatment of mortgage servicing rights (MSR) on decisions about holding  or selling MSRs, and (3) the process regulators used to estimate the  impact of regulations addressing mortgage servicing requirements and  the risk-based capital treatment of MSRs.
Why GAO Did This Study

As of September 30, 2015, community lenders held about $3.1 billion in MSRs on their balance sheets. Servicing is a part of holding all mortgage loans, but an MSR generally becomes a distinct asset when the loan is sold or securitized. In response to the 2007–2009 financial crisis, regulators have implemented new rules related to mortgage servicing and regulatory capital to protect consumers and strengthen the financial services industry. GAO was asked to review the effect of these rule changes on U.S. banks and credit unions, particularly community lenders. This report examines (1) community lenders' participation in the mortgage servicing market and potential effects of CFPB's mortgage servicing rules on them, (2) potential effects of the treatment of MSRs in capital rules on community lenders' decisions about holding or selling MSRs, and (3) the process regulators used to consider impacts of these new rules on mortgage servicing and the capital treatment of MSRs.
GAO analyzed financial data, reviewed relevant laws and documents from regulatory agencies, and interviewed 16 community lenders selected based on size and volume of mortgage servicing activities, as well as industry, consumer groups, and federal officials.

What GAO Found

Community banks and credit unions (community lenders) remained active in servicing mortgage loans under the Consumer Financial Protection Bureau's (CFPB) new mortgage-servicing rules. Among other things, these rules are intended to provide more information to consumers about their loan obligations. The share of mortgages serviced by community lenders in 2015—about 13 percent—remained small compared to larger lenders, although their share doubled between 2008 and 2015. Large banks continue to service more than half of residential mortgages. Many lenders GAO interviewed said changes in mortgage-related requirements resulted in increased costs, such as hiring staff and updating systems. However, many also stated that servicing mortgages remained important to them for the revenue it can generate and their customer-focused business model.
Banking and credit union regulators' new capital rules changed how mortgage servicing rights (MSR) are treated in calculations of required capital amounts, but GAO found that these new rules appear unlikely to affect most community lenders' decisions to retain or sell MSRs. For example, GAO found that in the third quarter of 2015, about 1 percent of community banks had to limit the amount of MSRs that counted in their capital calculations due to the amount of these assets they held. This may result in some institutions choosing to raise additional capital or sell MSRs to meet required minimum capital amounts, depending on banks' holdings of other types of assets. A few banks with large concentrations of MSRs that GAO spoke with said they were considering selling MSRs or other changes to their capital but market participants told us that the MSR capital treatment was only one of several factors influencing their decisions. Separate capital rules for credit unions also are unlikely to affect most credit unions. For example, credit unions told GAO they did not expect to make changes to their MSR holdings and one credit union explained that it is because MSRs represented a small percentage of their overall capital.
Banking regulators and CFPB estimated the potential impacts of their new rules prior to issuing them by, for example, estimating potential costs of compliance. Banking regulators included the capital rules in a retrospective review of all their rules required by statute, although this review is to be completed before the MSR requirements are fully implemented by the end of 2018. Banking regulators also said they often conduct other informal reviews as needed to evaluate their rules' effectiveness. CFPB also has a statutory retrospective review requirement, but its plans for retrospectively reviewing its mortgage-servicing rules are incomplete. CFPB has not yet finalized a retrospective review plan or identified specific metrics, baselines, and analytical methods, as encouraged in Office of Management and Budget guidance. In addition, GAO found that agencies are better prepared to perform effective reviews if they identify potential data sources and the measures needed to assess rules' effectiveness. CFPB officials said it was too soon to identify relevant data and that they wanted flexibility to design an effective methodology. However, without a completed plan, CFPB risks not having time to perform an effective review before January 2019—the date by which CFPB must publish a report of its assessment.

What GAO Recommends

CFPB should complete a plan to measure the effects of its new regulations that includes specific metrics, baselines, and analytical methods to be used. CFPB agreed to take steps to complete its plan for conducting a retrospective review of the mortgage servicing rules and refine the review's scope and focus.