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FSOC wants ‘consistent’ servicer oversight, says gov won’t bail out non-banks

By Will Caiger-Smith
22 Sep 2014

The deputy assistant secretary of the Treasury Department’s Financial Stability Oversight Council (FSOC), called for more ‘consistent’ regulatory oversight of the mortgage servicing industry during his keynote address at the ABS East conference in Miami on Monday.

Patrick Pinschmidt, who is also an executive director of the council, also reassured conference delegates that non-bank financial companies identified as posing risks to financial stability would not be be bailed out during an economic crisis.

Innovation, risk migration

Financial innovation and the migration of certain activities outside the traditional financial system was something FSOC felt it was “critical” to “remain attentive to”, said Pinschmidt during his speech.

Noting the transfer of mortgage servicing rights from banks to non-bank servicers over the past couple of years, he called on state regulators to step up their supervision of the sector.

“The council recommends that state banking regulators work with the Consumer Financial Protection Bureau and the Federal Housing Finance Authority to develop prudential and corporate government standards…and consistent oversight of these companies,” he said.

Transfer disruption

Non-bank special servicers like Ocwen Financial have found themselves under regulatory scrutiny, following their rampant acquisition of MSRs from banks eager to shift them off their books because of punitive regulation.

Top New York regulator Benjamin Lawsky’s decision to halt the transfer of $2.7bn in MSRs from Wells Fargo to Ocwen in February has put a stranglehold on the transfer market, potentially to the detriment of small regional banks that still have pools problem mortgages for which they want to outsource servicing, said panellists at ABS East on Sunday.

Non-banks not TBTF

Pinschmidt also responded to criticisms that FSOC’s singling out of large non-bank financial companies whose failure would risk damaging the economy.

Last summer the council made its first designations of non-bank financial companies that fit this description, choosing AIG, General Electric Capital Corp and Prudential Financial. The council also designated eight financial market utilities in July 2012.

That designation does not make those firms more likely to be bailed out in times of crisis, Pinschmidt said.

“Some out there refer to the council’s designation as identifying a new class of companies as too big to fail,” he said. “Let me explain why that is just plain wrong. The designation of a non-bank financial company does not create new abilities or the obligation for the government to bail out a company in distress.”

“Instead this authority addresses potential threats to the economy and the financial system by subjecting large complex and interconnected non-bank financial companies to Federal Reserve supervision and enhanced prudential standards.”

This will be accomplished in part by requirements for companies to submit living wills to regulators, as well as other measures aimed at mitigating the impact of their failure on the financial system, he said.

By Will Caiger-Smith
22 Sep 2014