Last month, Citigroup announced plans to exit the mortgage servicing business and sell off a $97 billion portfolio to a non-bank servicer and transfer their remaining mortgage servicing rights (MSRs) to another non-bank servicer by early 2018. Thus continues the trend of non-bank mortgage servicers capturing more market share year after year than their bank competition. Last year, the U.S. Government Accountability Office (GAO) issued a report which emphasized the fact that the share of mortgages serviced by non-banks increased from 6.8 percent in 2012 to 24.2 percent in 2015.
Multiple factors are driving this trend. First, the cost of compliance has recently begun to grow year after year and was fueled by the formation of the CFPB and their constant rule promulgation and amendments coming at a pace that was previously unseen in the mortgage market. According to the Mortgage Bankers Association (MBA), the average cost of serving a performing loan in 2008 was $59 and a defaulted loan was $482; that cost has risen to $175 for performing loans and $2,375 for a defaulted loan in 2015. This increase has become a drag on profits for most banks. Non-bank servicers seem to be more adept at managing these rising costs, but there is a counterargument that they have not had the same level of regulatory scrutiny that the banking institutions have dealt with to date.
Section 1024(a)(1)(A) of Dodd-Frank gives the CFPB authority to supervise all non-bank mortgage servicers regardless of size, meaning they are not required to define larger participant rules as they need to for debt collection and other markets. That said, the Bureau cannot supervise everyone in the non-bank servicing space as there are simply too many participants. When the CFPB began their supervision of non-bank entities, they stated that “when considering whether and how to supervise particular non-banks, we will consider several relevant factors, including the non-bank’s volume of business, types of products or services, and the extent of state oversight.” Please note that at this time, non-banks only had 6.8 percent of the markets and they couldn’t get to all participants. They now have more than 24.2 percent of the market and 23.6 percent of that non-bank market share is comprised of entities outside of the top ten non-bank servicers.