Study: Community Banks Persist in Mortgage Servicing

Community financial institutions have expanded their share of the mortgage servicing market since 2008, even as new servicing rules and the Basel III capital treatment of mortgage service rights have made servicing home loans more expensive, according to a study released yesterday by the Government Accountability Office. Since 2008, community banks’ share of the servicing market has doubled to 6.8 percent. Community banks’ persistence in the market comes in spite of significantly higher compliance costs and, for a few banks, a need to raise more capital. The GAO found that these costs are outweighed for community banks by the customer connection, fee revenue and cross-selling opportunities.

“Many community lenders noted that they and their customers benefit from the close relationship maintained when these institutions service mortgages,” the report found. “Representatives at several institutions we interviewed emphasized that they were well positioned to work directly with customers experiencing hardship to mitigate losses.”

However, some institutions have had to limit customer-friendly products in response to regulatory burden. For example, the GAO said, community banks have reported ending home equity lines of credit and bridge loans. “Several institutions noted that they no longer offered customers certain products because offering them would require additional compliance testing to meet regulatory requirements,” the GAO said.

Responding to industry concerns that Basel III’s treatment of MSRs would require banks to shed servicing, the GAO found that just one percent of banks have had to make deductions from regulatory capital in the third quarter of 2015. However, the GAO cited ABA’s 2015 Real Estate Lending Survey showing that 5 percent of banks had sold MSRs, with 14 percent considering selling them.

The GAO rapped the Consumer Financial Protection Bureau for its “incomplete” plans to review the servicing rule after five years, as required by the Dodd-Frank Act. The first review would be due by January 2019. “Without a completed plan, CFPB risks not having enough time to perform an effective review,” the GAO said.