ALEXANDRIA, Va.–The NCUA board has voted 2-1 in favor of putting out for 30-day comment proposed rules related to mortgage servicing rights (MSRs).
NCUA Board Member Todd Harper cast the dissenting vote, calling the proposal “half-baked.”
Credit unions have been prohibited for more than two decades from buying and selling mortgage servicing rights from other credit unions. But credit unions have done $1.9 billion in overall MSR business with other entities, noted NCUA staff, which told the board credit unions have the “market expertise” to engage in MSRs with each other. “The current prohibition is outdated,” staff told the board, saying they believe the proposal will give federal credit unions “the flexibility to operate their mortgage service business in ways that fit their strategic vision.”
NCUA Chairman Rodney Hood said credit unions have come a long way since the prohibition was put in place.
Originating and servicing mortgage loans is an important activity for many credit unions,” said Hood. “The time has come to permit FCUs to purchase mortgage servicing rights from other credit unions.”
Hood said the change will create liquidity for credit unions and that both sellers and purchasers will benefit.
Harper Opposes Proposal
Harper said he opposes the rulemaking at this time because “this proposal puts the cart before the horse.”
“We should have incorporated important guardrails into the base proposal,” said Harper. “We should have also ensured that we have an effective compliance program in place to monitor the compliance risk at those federal credit unions that purchase mortgage-servicing rights.”
Harper said there are numerous risks associated with mortgage servicing, including interest rate risk, price risk, compliance risk, operational risk, liquidity risk, concentration risk, reputational risk, default risk, and legal risk, and further noted the text of the proposed rule “details how mortgage-servicing rights have certain inherent attributes that can have an impact on a federal credit union’s financial condition.”
The result, said Harper, is potential for exposure to reputational, legal, and compliance risk, and for servicers, exposure to liquidity risk—as certain mortgage loans that have been sold to investors require the servicer to remit payments to the investors even if borrowers do not make the monthly mortgage loan payments.
‘Half-Baked’ Proposal
“And the value of mortgage-servicing rights is highly dependent on prevailing interest rates. In a rapidly increasing or decreasing rate environment, this can introduce extreme volatility to a credit union’s financial condition, as the rights are periodically valued for accounting and reporting purposes,” said Harper. “A federal credit union in poor financial condition may be unable to withstand the financial impact of a significant loss due to a write-down in the value of its mortgage-servicing rights, especially if the credit union were highly concentrated in the business line. That is why the yet-to-be-implemented risk-based capital rule imposes a 250% risk weight on mortgage-servicing rights.”
Harper said the new rule does not address any of the risks and instead “merely asks questions.” Those questions, he said, should have been addressed earlier.
“As a result, this proposed rule is just half-baked. The proposed rule should have instead included substantial guardrails,” he repeated.
New NCUA Board Member Kyle Hauptman, participating in his first NCUA board meeting, did not offer comment.