May 31, 2024 - Of Interest

What Happened?

Following the release of the Financial Stability Oversight Council (FSOC) Report on Nonbank Mortgage Servicing, Ginnie Mae announced in APM 24-08 that certain large nonbank Ginnie Mae Issuers will now be required to prepare and submit recovery plans to address the event of a material adverse change in business operations or failure. Such issuers will also be required to attest to the content in the recovery plans every to two years.

Why Does it Matter?

To understand why it matters, it is important to consider some interesting statistics. According to the recent report of FSOC (an interagency panel of regulators commissioned by the Dodd Frank Act to monitor financial stability) on nonbank mortgage servicing, the share of loans serviced by nonbank mortgage servicers for Ginnie Mae rose from 34 percent in 2014 to 83 percent in 2023. For the last several annual reports, FSOC has highlighted the vulnerabilities of nonbank mortgage companies. In its most recent report specific to nonbank mortgage servicing, FSOC has indicated that such concerns are becoming “more acute” because of government’s increasing exposure to nonbank mortgage companies, the strain on mortgage origination due to the high interest rate environment, and the fact that “vulnerabilities in mortgage origination can bleed into mortgage servicing.” FSOC is particularly concerned with the ability of nonbank mortgage companies to carry out their responsibilities in times of stress and provides, in relevant part, that “[t]he federal government has an interest in addressing servicing risks due to . . . the direct responsibility for Ginnie Mae’s guarantee to bond investors.” FSOC encourages Congress to provide Ginnie Mae more tools to manage counterparty risk. If and until that occurs, it should come as no surprise that Ginnie Mae is utilizing its existing tools for managing the failure of servicers (such as facilitating servicing transfers), by requiring its nonbank Issuers to document how they would proceed if an adverse event were to occur.

What Do I Need to Do?

First, it is important to determine if your company is subject to these new obligations. Generally speaking, nonbank Ginnie Mae Issuers whose portfolios equal or exceed a remaining principal balance of $50 billion at the end of December 31, 2024 will be required to prepare and submit recovery plans to Ginnie Mae by no later than June 30, 2025. Of note, the requirements do not apply to bank holding companies, banks, wholly owned subsidiaries of bank holding companies that are consolidated for purposes of regulatory oversight, thrifts, savings and loan holding companies, and credit unions.

Second, it is important to start developing a plan which, at a high level, must include:

Business Operations Description: For business operations relevant to the Ginnie Mae MBS Program (i.e., single-family, multi-family, manufactured housing and HECM), the plan must provide a detailed description of the company’s corporate structure, identify the interconnections and interdependencies among the company and its key stakeholders, related financial entities, and critical operations of the core business. The plan must also identify major counterparties, to whom the company had pledged MBS collateral, and the locations of its servicing operations.
Information Systems: In the event that Ginnie Mae must complete a servicing transfer, it is requiring companies to provide a detailed inventory and description of all key management information systems and applications in servicing Ginnie Mae loans along with a mapping of such systems and a description of how ancillary systems feed into the core servicing system.
Recovery Planning: Companies will need to consider and respond to a series of questions including but not limited to, providing a general framework for the order in which the company’s assets would be liquidated in the event of a material adverse event, identifying whether funding has been set aside to continue operations for a certain period. Ginnie Mae also requires how intercompany services would continue under such circumstances and to provide excerpts of its business continuity plan relevant to this recovery planning exercise.
Current Documentation: Ginnie Mae requires the plan to identify senior management official who will serve as a point of contact and a vendor directory for material vendors.

While the deadline for submitting recovery plans to Ginnie Mae is June 30, 2025, it is not too early to start gathering all the stakeholders, calendaring the deadline, and starting the framework for a thoughtful plan.

The latest edition of the Consumer Finance State Roundup features recently enacted measures of potential interest from Colorado and South Carolina:

Colorado: Effective May 17, House Bill 24-1011 (2024 Colo. Sess. Laws 189) adds new Section 38-40-106 to the Colorado Revised Statutes addressing requirements for mortgage servicers with respect to the disbursement of insurance proceeds in connection with mortgaged residential property.

First, the new section sets forth certain actions that mortgage servicers must take regarding disbursement of insurance proceeds to borrowers. Upon a borrower’s request, a mortgage servicer must promptly disclose to the borrower specific conditions under which it will disburse insurance proceeds to the borrower in the event a residential property subject to a mortgage is damaged or destroyed and an insurance company pays insurance proceeds to satisfy a claim for such damage or destruction. Next, upon receipt from a borrower of a “repair plan” or a “rebuild plan” (either of which the borrower must develop in consultation with a contractor), a mortgage servicer has 30 days to approve or deny such plan. A repair plan or rebuild plan must include specific milestones, enumerated in the new section, that require the mortgage servicer to disburse insurance proceeds in certain amounts upon meeting those milestones.

Second, immediately when it begins servicing a borrower’s mortgage and upon the borrower’s request thereafter, a mortgage servicer must disclose to the borrower the interest rate associated with the mortgage and provide the borrower with contact information of a primary point of contact for communication with the mortgage servicer.

Finally, the measure makes conforming amendments to the Non-bank Mortgage Servicers Act by adding new Section 5-21-107.5, and repeals Section 10-4-112 as it pertains to property damage and time of payment provisions.

South Carolina: Effective November 21, Senate Bill 700 enacts the “South Carolina Earned Wage Access Services Act,” (the “Act”), S.C. Code Ann. §§ 39-5-810 et seq. For purposes of the Act, “earned wage access services” means “the business of providing consumer-directed wage access services [“offering or providing earned wage access services directly to consumers”] or employer-integrated wage services.” In addition to administrative provisions (e.g., application, recordkeeping, and reporting requirements), we note the following:

First, the Act requires a “provider” – a business entity that will engage in the business of providing earned wage access services to consumers – to register with the South Carolina Department of Consumer Affairs (“Department”). However, the Act does not apply entities doing business under South Carolina or federal laws relating to banks, credit unions, savings and loan associations, savings banks, or trust companies.

Second, the Act sets forth compliance obligations for a provider. Among other requirements, a provider must: (a) develop and implement policies and procedures to respond to questions raised by consumers and address any consumer complaints in an expedient manner; and (b) offer a consumer at least one reasonable option to obtain proceeds at no cost to the consumer, and clearly explain to the consumer how to elect such no-cost option.

Third, the Act prohibits a provider from engaging in certain conducting, such as charging a late fee, interest, or any other penalty or charge for failure to repay outstanding proceeds.

Archives for May 31, 2024