NCUA Board Member Todd M. Harper Statement on the Notice of Proposed Rulemaking on Mortgage-Servicing Rights

As Prepared for Delivery on December 17, 2020

Thank you for your presentation, Lou, Rick and Ian. I greatly appreciate the staff time spent on this proposed rule to allow federal credit unions to purchase mortgage-servicing rights from another federally insured credit union.

That said, I must oppose the rulemaking at this time because this proposal puts the cart before the horse. We should have incorporated important guardrails into the base proposal. 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.

There are many risks associated with mortgage servicing — interest rate risk, price risk, compliance risk, operational risk, liquidity risk, concentration risk, reputational risk, default risk, and legal risk — just to name a few. In fact, the text of this proposed rule details how mortgage-servicing rights have certain inherent attributes that can have an impact on a federal credit union’s financial condition.

Specifically, mortgage-servicing rights can carry operational risks due to a multitude of statutes and regulations to protect consumers, which can expose federal credit unions to reputational, legal, and compliance risk. In addition, mortgage-servicing rights can expose servicers 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.

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. 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-percent risk weight on mortgage-servicing rights.

Rather than substantively addressing any of these risks, the proposed rule merely asks a series of questions. In my view, those questions should have been asked and answered as part of an earlier stage in the rulemaking process. As a result, this proposed rule is just half-baked. The proposed rule should have instead included substantial guardrails.

One of the many lessons we should have learned from the Great Recession and ensuing foreclosure crisis is that mortgage servicing is a complex and risk-laden business that not only impacts safety and soundness, but also consumers. Because I believe that the NCUA needs a stronger consumer compliance program, I am especially concerned about allowing federal credit unions to take on more risk without providing safeguards to manage the compliance issues and without having an effective NCUA compliance program to supervise that risk.

Think about the enforcement action one of our sister agencies brought earlier this month against a national mortgage servicer for engaging in unfair and deceptive acts and practices in violation of a number of consumer financial laws.¹ That mortgage servicer: “failed to identify loans on its systems that had pending loss-mitigation applications or trial-modification plans, and as a result failed to honor borrowers’ loan modification agreements. They also foreclosed on borrowers to whom it had promised it would not foreclose while their loss mitigation applications were pending.”

These violations of the law caused families to lose their homes and undercut their financial stability. Potentially putting people at risk without having a sufficient consumer compliance supervisory program in place is the last thing the NCUA should be expediting during the COVID-19 pandemic, with so many people teetering on the edge.

Finally, I am deeply concerned about mortgage servicing increasing liquidity risks for an institution. The NCUA has been working very hard throughout the pandemic to ensure that the credit union system has the tools it needs to ensure liquidity. This proposed rule without guardrails does nothing to bolster the credit union system from COVID-19 related economic fallout. In fact, it does the opposite. It increases liquidity risk in the system. To me, that is a step in the wrong direction.

In voting against this proposed rule, I am not necessarily signaling my opposition to moving ahead with a final rule. If the final rule contains appropriate and substantive guardrails to mitigate the inherent risks in mortgage servicing, I may find my way to support the final rule. Today, however, I must oppose this notice of proposed rulemaking.

Thank you, Mr. Chairman. I have no further comments.