Inspector General Spells Risks of Nonbank Mortgage Servicers

The Office of Inspector General is seeking to establish more guidance on the Federal Housing Finance Agency’s dealings with nonbank mortgage servicers, according to an OIG audit report

Both the OIG and FHFA have expressed concerns about Fannie Mae and Freddie Mac selling the rights to service troubled loans to nonbank companies who handle them. As a result, OIG has developed practices that the FHFA must follow to ensure that borrowers are protected. 

New oversight would require the FHFA to issue guidance to Fannie Mae and Freddie Mac on the risk management process that should be employed to identify and mitigate risks related to nonperforming loans with nonbank servicers. In addition, the OIG recommends that FHFA develop a comprehensive, formal framework to mitigate the risks nonbank servicers pose to Fannie Mae and Freddie Mac, including reviews, routine FHFA examinations and capacity testing before taking on the servicing rights. 

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These new standards aim to reduce the misconduct sometimes committed by nonbank services, which have sparked a number of lawsuits in recent years. 

“While these specialized servicers claim to have helped save millions of homes from foreclosure, the CFPB has received thousands of complaints about servicing interruptions and failures to honor loan modifications,” the audit report states. 

Last month, Ocwen Financial Corp. (NYSE:OCN), the country’s largest nonbank mortgage loan servicer, agreed to pay $3.7 million to end a Massachusetts mortgage lawsuit claiming the company didn’t give homeowners required notices and illegally foreclosed on properties. The lawsuit followed an earlier $2 billion suit with the Consumer Financial Protection Bureau in 2013, which settled claims that Ocwen mistreated consumers and committed “systemic misconduct” throughout its mortgage servicing process. 

In response to OIG’s recommendations of additional nonbank oversight, FHFA generally agreed, writing, “FHFA has given significant supervisory attention to servicing operations performed by nonbank institutions and will continue to focus examination work on [Fannie Mae and Freddie Mac’s] risk management.” 

To view the full audit report, click here

Written by Emily Study

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