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Ed P.
Democrat CO 7

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  • Mortgage Servicing Asset Capital Requirements Act of 2015

    by Representative Ed Perlmutter

    Posted on 2015-07-14

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    PERLMUTTER. Mr. Speaker, to my friend from California, I thank Congresswoman Waters, Chairman Hensarling for allowing me to bring this forward, my friend from Missouri (Mr. Luetkemeyer), and I appreciate the remarks of the gentleman from Arkansas (Mr. Hill).

    So after years of working on this issue, I am glad to see our work is culminating with the passage of H.R. 1408 today.

    The language before us today represents a compromise simply requiring the Federal banking regulators--and by those I mean the Federal Reserve, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of Currency--to jointly study the capital treatment of mortgage servicing assets or mortgage servicing rights, and I will say MSRs or MSAs, under the Basel III Accords. It is nearly identical to section 116 of S. 1484, offered by Chairman Shelby in the Senate Banking Committee.

    Now, it differs from the original bill passed out of the Financial Services Committee on March 26 that included language to delay the current rule while regulators conducted a study and then proposed new appropriate capital requirements for MSRs. While many of us wish the bill included those provisions, the study is what is key. The study will be an important step in informing how we proceed with future actions establishing the appropriate capital requirements for MSRs.

    Now, what does H.R. 1408 require? Under H.R. 1408, regulators will have 6 months to study and report back to Congress many outstanding questions about the mortgage servicing industry, including: One, the risk to banks and credit unions of holding mortgage servicing assets, MSAs; Two, how the assets performed during the financial crisis; Three, the ability to establish a value and liquidity for MSAs; Four, the impact of imposing Basel III capital requirements on banks versus nonbank servicers; and Five, the impact to consumers and the ability of regulated banks to service mortgages that they originate.

    The mortgage servicing industry has shifted since the financial crisis of 2008, as Congresswoman Waters mentioned. We have seen a significant sale of MSRs and MSAs from banks to nonbanks, including to specialty servicers, private equity firms, and hedge funds.

    In 2013, about $1.03 trillion of mortgage servicing rights were sold, with a vast majority going to nonbank servicing companies. Moreover, the percentage of loans serviced by nonbanks has steadily increased from 12 percent to almost 31 percent.

    Now, why is the market shifting? While there are several factors for the growth in nonbank servicing activity, I believe the primary driver has been the capital treatment of MSAs under the Basel III Accords.

    Basel III was always intended to apply to the largest, most interconnected globally active banks, but the MSA capital treatment is actually having the greatest impact on our smaller community banks.

    Basel III caps the value of MSAs that depository institutions can count towards their tier 1 capital at 10 percent. Any MSAs that exceed the 10 percent threshold are subject to 100 percent risk weight, a standard that will increase to 250 percent by 2018.

    Why is this a concern? In addition to the capital treatment, there is a discrepancy between how banks and nonbank servicers are regulated. So there is additional regulation that comes down on the community banks while that same kind of regulation isn't seen by the nonbank servicers. And if there were to be another sudden market disruption or downturn, it is important we understand if nonbank mortgage servicers have the capacity or the expertise to manage defaults or modifications.

    The Financial Stability Oversight Council, the FSOC, in its 2014 annual report specifically named the transfer of mortgage servicing rights to nonbanks as a ``potential emerging threat.'' The report says: ``MSRs are increasingly being transferred to nonbank mortgage servicing companies. While the CFPB and State regulators have some authority over these companies, many of them are not currently subject to prudential standards such as capital, liquidity, or risk management.'' Adam Levitin, the Democratic witness at our hearing, spoke favorably and in support of the bill, saying: ``MSRs have traditionally been an important asset class for depositories, as their value provides a countercyclical offset to mortgage origination activity, and MSR accounting is subject-enough to give depositories room to smooth their earnings.

    ``Basel III changes make MSRs an unattractive asset for banks.'' Representative Luetkemeyer and I have questioned whether the prudential regulators struck the right balance between limiting risk exposure and ensuring that depository institutions can still compete with the nonbank entrants in the mortgage servicing arena. From the conversations we have had with the regulators, it is clear they did not study the specific capital treatment applied to MSAs and the impacts on consumers and the market.

    Banks want to continue servicing mortgages they originate and maintain these connections to their communities, as Mr. Hill mentioned. However, if the current capital requirements remain in effect, it would make it more and more difficult.

    Mr. Speaker, I will place in the Record two letters that we have received--one dated July 13 from the American Bankers Association, the other dated July 14 from the National Association of Federal Credit Unions--in support of H.R. 1408. I am glad that we were able to seek and reach a compromise on this bill. I urge the quick passage of H.R. 1408.

    American Bankers Association, July 13, 2015.

    Re: ABA Support for H.R. 1334, H.R. 1408 and H.R. 1529 Members of the House of Representatives: On behalf of the members of the American Bankers Association (ABA), I am writing to express our strong support for three banking related measures that are scheduled for consideration on the House suspension calendar on Tuesday, July 14.

    H.R. 1334, the Holding Company Registration Threshold Equalization Act, introduced by Representatives Steve Womack (R-AR), Jim Himes (D-CT), Ann Wagner (R-MO) and John Delaney (D-MD), would extend to savings and loan holding companies (SLHCs) the Securities and Exchange Commission shareholder registration and deregistration thresholds enacted under the JOBS Act.

    The JOBS Act did not expressly extend the new shareholder thresholds to savings and loan holding companies (SLHCs) as defined by the Home Owners Loan Act. However, Congress did not intend to treat SLHCs differently from bank and bank holding companies. H.R. 1334 would correct this oversight and extend the shareholder registration and deregistration requirements to SLHCs.

    This bill passed the House Financial Services Committee on May 20, 2015 by a vote of 60-0 and passed the full House last Congress by an overwhelming vote of 417-4. We urge the members to once again pass this legislation.

    In addition, the House will consider H.R. 1408, the Community Bank Mortgage Servicing Asset Capital Requirements Act of 2015 introduced by Representatives Ed Perlmutter (D- CO) and Blaine Luetkemeyer (R-MO). This ABA supported legislation would defer implementation of the Basel III rules on mortgage servicing assets (``MSAs'') until the impact of the new rules can be studied and alternatives explored.

    Many banks that make mortgage loans also engage in servicing, which primarily consists of collecting mortgage payments and forwarding them to the ``owner'' of the loan; collecting insurance and tax payments; and addressing problems such as late payments, delinquencies, and defaults. Banks commonly sell mortgage loans into the secondary market but retain the right to service the loan (called ``servicing retained''). This strategy is an important way for banks to maintain valuable connections with their [[Page H5140]] customers, while managing interest rate risk by selling long- term credit assets.

    Banks are retaining less mortgage servicing due to Basel III's unfavorable capital treatment of MSAs. As a result, Basel III is unintentionally increasing the concentration of servicing held by less regulated, non-bank firms such as mortgage companies, REITs, hedge funds, and private equity firms that are not subject to the new capital restrictions. The long-term relationships that banks and their customers have established should not be penalized by Basel III's punitive capital treatment of MSAs.

    Banks should be encouraged to service the loans that they make to their customers. This legislation stops the negative effects until the impact can be fully examined. The bill does not apply to the large international banks that Basel III was meant to address.

    H.R. 1408 passed the House Financial Services Committee on March 26 by a strong bipartisan vote of 49-9. ABA urges strong support for this legislation.

    The House will also consider H.R. 1529, the Community Institution Mortgage Relief Act of 2015, introduced by Representatives Brad Sherman (D-CA) and Blaine Luetkemeyer (R-MO). This bipartisan legislation, which passed the House Financial Services Committee by a vote of 48-10, would exempt from the escrow requirements imposed under the Dodd/Frank Act loans held by small creditors with less than $10 billion in assets. ABA supports the legislation's expansion of the Consumer Financial Protection Bureau's (CFPB) ``small servicer'' exemption to include servicers that annually service 20,000 or fewer mortgage loans. These important exemptions recognize the strong history of small institutions in providing high-quality mortgage servicing, even with limited staff and resources of smaller institutions.

    Given their track record, small servicers should be incentivized to continue to service mortgage loans. Unfortunately, existing regulations are having the opposite effect. The existing escrow rules have the potential to drive small creditors from the mortgage market because it is difficult, if not impossible, for them to provide escrow services in a cost effective manner. Further, imposing escrow requirements often runs counter to customer preference as many mortgage customers prefer to pay tax and insurance bills on their own and not establish escrow accounts. Without the exemptions provided in this legislation, customers of smaller institutions will face higher costs to offset the cost of compliance for a service which they do not in some cases even want. Worse, some customers will face fewer credit choices as small local lenders choose to exit the mortgage market rather than incur the added staffing and technical expenses of adding escrow services. This is an important piece of legislation and ABA urges the House to pass H.R. 1529.

    James Ballentine, Executive Vice President, Congressional Relations and Political Affairs.

    ____ National Association of Federal Credit Unions, Arlington, VA, July 14, 2015.

    Re: Support for the Mortgage Servicing Asset Capital Requirements Act of 2015 (H.R. 1408) Hon. John Boehner, Speaker, House of Representatives, Washington, DC.

    Hon. Nancy Pelosi, Minority Leader, House of Representatives, Washington, DC.

    Dear Speaker Boehner and Leader Pelosi: On behalf of the National Association of Federal Credit Unions (NAFCU), the only trade association exclusively representing the federal interests of our nation's federally insured credit unions, I write today to urge your support of the Mortgage Servicing Asset Capital Requirements Act of 2015 (H.R. 1408), as amended, when it comes to the House floor. This bipartisan measure introduced by Representatives Perlmutter and Luetkemeyer would, among other things, ensure that the National Credit Union Administration (NCUA) study its second risk-based capital proposal's impact on credit union mortgage servicing assets.

    As you know, NAFCU has concerns about many aspects of the NCUA's risk-based capital proposal including the portion relative to mortgage servicing assets which has a risk weight of 250 percent. NAFCU believes this is artificially high and a risk weight of 150 percent is more appropriate. This portion of the proposal is indicative of much larger issues with NCUA's proposal and NAFCU continues to believe it is a solution in search of a problem. In short, this entire proposal should be withdrawn until adequate cost-benefit analysis is done to determine the impact it will have on credit union lending and job creation. While NAFCU does not oppose a risk-based capital regime for credit unions, it must be done properly through statue with ample Congressional input.

    Not only does NAFCU urge passage of H.R. 1408 to look at the mortgage servicing assets portion of the NCUA's risk- based capital proposal, but we also encourage the House to support and schedule action on the Risk-Based Capital Study Act of 2015 (H.R. 2769). This bipartisan legislation, introduced by Representatives Fincher, Posey and Denny Heck, would require NCUA to study the full impact of the entire risk-based capital proposal on credit unions and report back to Congress before taking any final action on the proposal.

    Again, thank you for scheduling the consideration of the Mortgage Servicing Asset Capital Requirements Act (H.R. 1408) on the floor this week. We urge strong support for this legislation and hope the appropriate capital requirements for credit unions continue to be a focus in the House during this Congress.

    Sincerely, Brad Thaler, Vice President of Legislative Affairs.

    Ms. MAXINE WATERS of California. Mr. Speaker, I yield back the balance of my time.

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