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Comparison of Consumer and Financial Regulation of Non-bank Mortgage Lenders vs. Banks



Single Family Mortgage Loans

Prepared by the Community Home Lenders Association [9/2/15]



                                                                NON-BANKS                                                                              BANKS

SAFE ACT:Loan Originator Qualifications Every individual Loan Originator at a non-bank must:* Be licensed* Complete SAFE Act  Mortgage  Competency Test
* Complete 20 hours SAFE Act Pre-licensing Courses
* Pass an independent criminal background check
* Do 8 hours/year of Safe Act Continuing Education


CFPB Exams All non-bank mortgage lender/servicers are subject to CFPB exams – covering compliance with RESPA, LO Comp, servicing, and other statutory requirements. EXEMPT – 99% of all banks are exempt from CFPB exams [All banks with under $10 billion in assets are exempt]


Consumer ComplianceExams Non-bank lender/servicers are subject to regulation and periodic consumer compliance exams (RESPA, LO Comp rules, servicing requirements, etc.) in every state in which they do business IDENTICAL  – except these exams are conducted by their banking regulator.  For state banks, this is either the states (In some cases, the same division as regulates non-banks) or the FDIC; for federally chartered banks, this is either the OCC or Federal Reserve.


Dodd/Frank Provisions Non-bank servicers are subject to ALL Dodd-Frank consumer protections – RESPA, TILA, LO Comp rules, predatory lending prohibitions, and Reg Z and X servicing requirements. IDENTICAL – except that the CFPB exempts some small servicers from Reg Z and X servicing requirements – which in practice are limited to banks holding portfolio loans


Servicing Net Worth/Liquidity Requirements
                                                                                         NON-BANKs                                                                            BANKS

* Net Worth Requirement – $2.5 million, plus .2% (20 basis points) of outstanding Ginnie Mae securities obligations [    [On 12/31/15, add-on changes to .35% (35 basis points)* Liquidity Requirement: Liquid assets of at least 20% of an Issuer’s Net Worth Requirement
   [On 12/31/15, replaced by greater of $1 million or .1% (10
   basis points) of Ginnie Mae securities obligations]
* Capital Requirement: 5% Net Worth/Total Assets Ratio
* Quality Control (QC): Required QC plan – underwriting, origination, servicing and secondary marketing
* Must meet Ginnie Mae requirements for bond administration, delinquency guidelines, and others
* Banks must meet different capital to assets ratios,  ranging from 5% to 10%


* Net Worth Requirement:  $2.5 million, PLUS .25% (25 basis point) of combined Fannie/Freddie serviced loans* Liquidity Requirement:  .035% (3.5 basis points on total agency (combined Fannie, Freddie, and GNMA) serviced loans PLUS 2% (200 basis points) of non-performing agency loans that exceed a 6% default ratio* Seller-servicer Agreement spells out origination and servicing responsibilities, including Quality Control
* Extensive audits of loan files
* Repurchase Obligation if underwriting rules not followed
* NO NET WORTH OR LIQUIDITY REQUIREMENTS [only generic bank capital standards] 


Non-Agency CSBS is proposing new prudential servicing standards for non-bank lender/servicers, comparable to FHFA standards. NO SERVICING NET WORTH OR LIQUIDITY REQUIREMENTS [Only generic bank capital requirements]

Loan Origination Net Worth and Operational Requirements
                                                                                 NON-BANKS                                                                            BANKS

* Net Worth Requirement of $1 million + 1% of FHA loans > $25m [up to max of $2.5 m]* FHA approval of a Quality Control (QC) Plan* Credit Watch – loan default performance must be within reasonable numerical bands
* Individualized loan (PETR) reviews
* Audits of FHA loans; and HUD IG audit authority.
* Indemnification of losses where lender did not follow FHA loan underwriting guidelines
* Enforcement authority over FHA requirements


 RHS * Must be approved for loan origination or servicing by FHA, VA, Fannie Mae, Freddie Mac, or the Farm Credit System* Must have a quality control (CQ) plan* Periodic compliance reviews * IDENTICAL – except banks also deemed approved if supervised by the FDIC, OTS, OCC, or FHLB* IDENTICAL* IDENTICAL


VA “Non-supervised” VA approved lenders must have a minimum net worth of $250,000 and have unrestricted credit lines of at least $1 million.                                                                IDENTICAL


Fannie/Freddie/FHFA * See previous Servicing section for their requirements, * See previous Servicing section for requirements.                                                                     


 Non-Agency * PORTFOLIO – No mortgage specific regulations – except few non-banks originate mortgages for portfolio.  *MBS – Subject to securities regulation * PORTFOLIO – no mortgage specific regulations * MBS – Subject to securities regulation.

Financial Regulation as a Going Concern
                                                                                NON-BANKS                                                                                BANKS

 Net Worth & Liquidity Requirements and Examinations * Non-bank mortgage lenders are subject to net worth, liquidity, and bonding requirements set by the states in which they do business, and periodic state exams.   These requirements are appropriate in light of their risk, and the fact that unlike banks, their deposits are not guaranteed by the FDIC, and ultimately federal taxpayers.
Moreover, non-bank mortgage lenders have a single product line – mortgage origination and servicing – and many predominately originate federally guaranteed loans.
* Impact of non-bank lender going out of business:
  1. Servicing advance obligations and MSR transfers– Per above, GNMA, FHFA/GSE, and CSBS regulations protect consumers and the agencies with respect to these obligations.
2. Indemnification/repurchase obligations Per above, GNMA and FHFA/GSE regulations protect agencies from counterparty risk, and aggregators and securitizers set standards for non-agency loans to address their counterparty risk.
3. Other Impacts: All losses are absorbed by private parties – the owner(s) of the firm (who may also have other assets at risk thru a personal guarantee) and other parties (warehouse lenders, counterparty entities).  There is no federal taxpayer impact.
Thus, the main impact of a non-bank mortgage lender failure is they will no longer be able to originate mortgage loans.
Banks are subject to net worth and safety and soundness regulations, and periodic bank examinations by their respective bank regulator.   These are driven by federal taxpayer exposure through a guarantee of their deposits by the FDIC.
These requirements also address risk of other products and activities that banks engage in, such as construction lending, small business loans, etc.
* Impact of bank going out of business:    
1. IDENTICAL, except CSBS requirements for non-agency loans don’t apply.
      2. IDENTICAL
3. Other impacts of bank failure:  FDIC resolution kicks in, to protect taxpayers in conjunction with the FDIC guarantee of bank deposits.


The comparison focuses on non-bank mortgage lenders that originate and service loans, and is not intended to

address risks and regulation of large non-bank specialty mortgage servicers, that have come under some scrutiny.