Regulation Outlook: New Rules Ahead for Debt Collection, HMDA Data

After years of new regulations and compliance requirements, the wave of new mortgage industry rules may be slowing, but that doesn't mean it's completely over yet.

Proposals for reform of the government-sponsored enterprises will likely continue to inch forward, with no end in sight. Regulators also show no signs of letting up when it comes to plans to reform collections practices and the entities that provide these services, particularly the historically less-regulated non-bank sector.

Many think the broadest GSE reform will continue to move at a glacial pace. Standard & Poor's recently conducted a survey at a commercial and multifamily real estate briefing where the options for answering a question about whether GSE reforms would come to fruition in the coming year were jokingly presented as "no" and "no."

But prognosticators expects more action in the coming year when it comes to rulemaking that could affect the way companies collect borrower payments on loans and actions they take if borrowers fail to pay — as well as how these entities fund and transfer rights to such work.

"A lot is still going to be coming down for servicing," said Joseph Flores, an attorney at Digital Risk. "Lenders are going to get a little relief, but there are obviously going to be a lot of adjustments."

The potential imposition of enhanced prudential standards for nonbank servicers is "first and foremost" among servicing proposals likely to move forward in the coming yet, he said. This has been proposed, but failed to gain traction, in legislation. But it has also been targeted in other rulemaking, where it's more likely to move forward from entities such as the Council of State Bank Supervisors, as well as Fannie Mae and Freddie Mac, Flores noted.

These proposed standards have implications for the larger market because if a servicer fails due to a lack of capitalization — something nonbank rulemaking targets — the transfer of that servicer's responsibilities to another firm can be disruptive to market participants like securitization investors, he noted.

Servicers' traditional "advancing" responsibilities, in which they take responsibility for passing on loan payments to investors when borrowers fail to pay, put particular strain on their finances and capital levels during the last financial meltdown in the market.

Banks have historically had capitalization standards, but nonbank servicers have not, and when loan performance tanked during the downturn, several servicers failed. This resulted in transfers — some from banks to nonbanks — that were often disruptive in part because of the time needed to on-board loans, as well as differences in individual servicers' practices. The size of some large transfers further complicated matters.

Another regulatory plan with implications for servicers and lenders are proposed Home Mortgage Disclosure Act reporting changes, according to Ghazale Johnston,a managing director with Accenture Credit Services. One complicated area of the proposal is a requirement to give each loan a "unique identifier" so it can be tracked throughout the life of the loan regardless of how many times it's sold or changed servicers.

HMDA could turn out to be the most significant rulemaking development for lenders in the coming year, said Jeanne Erickson, a senior attorney at Wolters Kluwer Financial Services. Rule makers have been trying to finalize it, but have faced challenges related to concerns about operational scope. The aim of the proposal is to expand HMDA data to improve its ability to more accurately measure lending activity to make sure charges for loans and access to home financing is above-board.

"It really expands the kind of data collected and reported under HMDA," said Erickson. Outside of 2014 final rules reaching their final stages in 2015, most notably the implementation of final integrated disclosure rules set for summer 2015, the HMDA proposal is "the big one to watch," she said.

The Consumer Financial Protection Bureau's HMDA proposal as written would require some significant operational changes involving both people and technology as the new protocols for collecting information not only include new data fields but also will create a need for retraining — particularly for loan processors, said Johnston. Decline codes, for example, could change and become more detailed with the aim of allowing regulators to better track not only when applicants have been denied loans but know more clearly why the denial occurred.

"There's just a lot more data to work with," said Brian Koss, an executive vice president at Mortgage Network in Danvers, Mass.

While there is still plenty to worry about when it comes to regulatory proposals, as well as final implementation details of 2014's rules, it's going to be a relatively easier year when it comes to developments to pertain only to lenders, Koss said.

"A lot of the heavy lifting has been done."