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Consumer Finance

Enhanced Financial Monitoring of Nonbank Mortgage Servicers is Coming Soon

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What Happened?

On February 10th, the U.S. Government Accountability Office (the GAO) published a report on nonbank mortgage servicers’ financial risk due to their growing role in the U.S. housing finance system, titled “Nonbank Mortgage Companies: Ginnie Mae and FHFA Could Enhance Financial Monitoring” (the GAO Report). The GAO Report draws from the GAO’s prior work and from the Financial Stability Oversight Council’s 2024 Report on Nonbank Mortgage Servicing, which we discussed in a prior blog.

The GAO Report addresses (i) the growing role of nonbanks in the mortgage market since 2024, and (ii) Ginnie Mae’s and FHFA’s processes for assessing the financial condition of nonbank mortgage companies. The report includes several recommendations. Both Ginnie Mae and the FHFA agreed with these recommendations and signaled that changes may be coming later this fall.

Why Does it Matter?

For over a decade, the Conference of State Bank Supervisors and federal regulators have sought to impose financial condition requirements on nonbank servicers. Over time, regulators have issued multiple recommendations and have imposed enhanced capital and liquidity requirements on these entities. The GAO Report builds on that prior work and provides concrete recommendations to Ginnie Mae and the FHFA—the regulator for Fannie Mae and Freddie Mac (the GSEs).

Once implemented, the revised requirements will flow down to the nonbanks that service GSE and agency (e.g., HUD/FHA, VA, USDA) loans.

According to the GAO Report, “[f]inancial monitoring of nonbanks has become increasingly important because of nonbanks’ expanding market role and financial vulnerabilities.” Nonbanks now service the majority of federally backed mortgages, which secure more than $9 trillion in securities backed by Ginnie Mae, Fannie Mae and Freddie Mac—a market share that has increased from 27% in 2014 to 66% in 2024. The share of nonbank originations has also grown extensively in the past decade—from 51% in 2014 to 76% in 2024.

The GAO Report recognizes the benefits nonbanks provide to markets and consumers, including increased liquidity, adoption of new technology, and playing a large role in serving the needs of underserved borrowers. However, consistent with other reports, the GAO Report concludes that the federal monitoring framework does not fully capture the liquidity and funding risk due in part to (i) the lack of a federal prudential regulator, (ii) fragmented oversight that increases the likelihood that weaknesses go undetected, (iii) nonbanks’ reliance on short-term warehouse credit that may become unavailable during economic downturns, and (iv) the potential for substantial government exposure.

Key Recommendations

Given these vulnerabilities, the GAO Report identifies specific opportunities for FHFA and Ginnie Mae to improve how they assess nonbanks’ financial condition. The recommendations focus primarily on data reliability, warehouse lending risk, which is viewed as a key liquidity risk, and consideration of nonbank stress scenarios. Specifically:

Improve Reliability of MBFRF Data

FHFA and Ginnie Mae rely on the data reported by mortgage servicers on the Mortgage Bankers Financial Reporting Form (MBFRF) to monitor the financial condition of nonbanks. Both agencies have identified reliability issues in the data reported on the MBFRF. While Ginnie Mae has already implemented certain controls, the GAO Report recommends that FHFA develop procedures to improve the quality and reliability of MBFRF data.

Improve Qualitative Assessment of Nonbanks to Fully Address Warehouse Lending Risks and Stress Test Scenarios

The GAO Report identifies five key components of warehouse lending risk:

  • Diversification: Number of warehouse lines available to a nonbank;
  • Utilization: Portion of available credit in use;
  • Maturity: Credit line maturity dates;
  • Covenant violations: Financial or collateral breaches that could lead to termination of the credit line; and
  • Committed amount: Extent of committed versus uncommitted capacity (i.e., a lender may be able to reprice an uncommitted amount at any time whereas a committed line can be altered in limited circumstances).

Neither FHFA’s nor Ginnie Mae’s monitoring currently captures all five components. The GAO Report recommends that FHFA assess the “feasibility and utility” of including all five components in its risk scoring process. For Ginnie Mae, the GAO Report recommends developing guidance that requires analysts to consistently review warehouse lending risks—particularly committed funding amounts—as part of its manual credit review process.

Expand Stress Testing Framework to Consider Alternative Economic Framework

In monitoring counterparty risk, Ginnie Mae currently conducts stress tests, but those tests only simulate a protracted recession. The GAO Report recommends that Ginnie Mae expand its stress testing framework to address other economic stress scenarios, such as stagflation—a type of recession where delinquencies rise and interest rates remain high (which means lower originations).

What Do You Need to Do?

Regulators continue to focus on the potential vulnerabilities of nonbank mortgage lenders and servicers—a priority that has persisted across both Democratic and Republican administrations, signaling that these issues will remain an area of focus. Both FHFA and Ginnie Mae have accepted the GAO’s recommendations, and changes are expected later this year. As a result, now is a good time to conduct additional stress testing using a broader range of economic stress scenarios. Additionally, FHFA indicated that, by September 30, 2026, its Division of Enterprise Regulation (DER) will develop procedures for assessing the reliability of MBRFR data and handling potentially unreliable data. Accordingly, nonbanks should ensure they have appropriate controls in place to support accurate MBFRF reporting.

Consumer Finance State Roundup

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The latest edition of the Consumer Finance State Roundup highlights recently enacted measures of potential interest from two states:

New Jersey

  • Effective immediately upon approval by Governor Phil Murphy on January 12, Assembly Bill 4841 amends the Law Against Discrimination to prohibit discrimination based upon “source of lawful income used for rental or mortgage payments,” among other bases.  The measure – which focuses principally on discriminatory practices relating to the sale, rental, lease, assignment, or sublease of real property – defines “source of lawful income” as any source of income lawfully obtained or any source of rental or mortgage payment lawfully obtained including, but not limited to, any federal, State, or local public assistance or housing assistance voucher or funds, including Section 8 housing choice vouchers, temporary rental assistance programs or State rental assistance programs; rental assistance funds provided by a nonprofit organization; federal, State, or local benefits, including disability benefits and veterans’ benefits; court-ordered payments, including, but not limited to, child support, alimony, or damages; and any form of lawful currency tendered, without regard to whether the currency is tendered in the form of cash, check, money order, or other lawful means.

New York

  • Effective March 19, Senate Bill 1353-B adds a new article to the New York General Business Law to address actions involving coerced debt (meaning “debt incurred as a result of economic abuse, including but not limited to, by means of fraud, duress, intimidation, threat, force, coercion, manipulation, or undue influence, the non-consensual use of the debtor’s personal information”).  The measure: (a) prohibits all collection activities on a coerced debt once a creditor is notified that a debt may be considered coerced; (b) requires a creditor to review the debtor’s claim of coerced debt using the information in the notification within 30 days of receiving the notification; and (c) after completion of the review, required a creditor to inform the debtor within five days regarding whether it intends to continue collection activities. Further, the measure provides that a debt being coerced is also an affirmative defense in any action by a creditor to collect the debt.

  • Effective June 3, Assembly Bill 1820-A adds Section 327-a to the New York Real Property Law, requiring the removal of any covenants, conditions, or restrictions on recorded instruments that discriminate against any protected classes (except lawful restrictions arising under state and federal law) before a transfer of the property may be recorded. Specifically, the new section requires that a seller of real property must: (a) have the unlawful restriction removed; (b) provide the purchaser or title insurance applicant with a copy of the modified document prior to or at the closing of title; and (c) record the modified document.  The measure further imposes obligations on condominium, cooperative, and homeowners association leadership with respect to the deletion of amendment of any covenants or restrictions that so discriminate, as well as on any holder of an ownership interest in real property subject to an unlawfully restrictive covenant.

Structured Finance Spectrum | Winter 2026

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Alston & Bird’s Structured & Warehouse Finance Team has published the Winter 2026 edition of its Structured Finance Spectrum, which covers hot-topic issues in the structured finance markets in the U.S. and UK. This edition features shifts in loan-on-loan financing, the legacy of Bowie Bonds, and the return of the public RMBS deal.

You can read the current edition on the Alston & Bird website.

FHA Issues Mortgagee Letter Clarifying Declarations of Trust for FHA-Insured Mortgages

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What Happened?

On January 22, 2026, the Federal Housing Administration (FHA) issued Mortgagee Letter 2026-02 (the “Mortgagee Letter”), which formalizes FHA’s policy requirements on the use of Declarations of Trust in connection with the sale of beneficial interests in FHA-insured mortgage loans. The Mortgagee Letter will be incorporated into a forthcoming update of FHA’s Single Family Housing Policy Handbook 4000.1 and is intended to clarify FHA’s expectations for lenders engaging in secondary market transactions involving trust structures. The provisions of the Mortgagee Letter were required to be implemented by January 31, 2026.

Why Does it Matter?

Overview of the Mortgagee Letter

The Mortgagee Letter addresses situations in which an FHA-approved mortgagee proposes to sell a beneficial interest in a group of FHA-insured mortgages pursuant to a Declaration of Trust. A “sale of a beneficial interest” refers to the arrangement governing the mortgagee’s sale of a beneficial interest in a group of mortgages, where the interest to be acquired is related to all the mortgages as an entirety, rather than an interest in a specific mortgage.

FHA mortgagees must ensure that a sale of a beneficial interest complies with the following requirements: (1) mortgages may be sold to and held by only an FHA-approved mortgagee, (2) mortgages may be serviced or sub-serviced by only the mortgagee or another FHA-approved mortgagee for servicing, and (3) beneficial interest certificates do not provide the certificate holder any interest in individual mortgages or rights under the related contracts of insurance.

The Mortgagee Letter requires mortgagees to submit a Declaration of Trust package to FHA for review and approval prior to completing the sale of any beneficial interest. The package must be submitted as an Ad hoc request through the Lender Electronic Assessment Portal (LEAP) and contain all required documents, demonstrate satisfaction of the requirements for sale of a beneficial interest, and include provisions designed to ensure that future transfers, assignments, and pledges of interests in mortgages will continue to comply with FHA requirements. For example, the Declaration of Trust package must provide sufficient information for FHA to evaluate the trust structure, including the identity of all parties, their respective roles (e.g., purchasing mortgage holder and the servicer), and representations that the purchasing mortgage holder and servicer will maintain FHA approval, and the mortgages will continue to be held and serviced in compliance with FHA requirements.

The Mortgagee Letter also reaffirms longstanding FHA principles applicable to these transactions. Holders of beneficial interests do not obtain any rights against FHA or the U.S. Department of Housing and Urban Development (HUD) under the FHA insurance contract. FHA insurance remains associated with the approved mortgagee of record, and servicing must continue to be performed by an FHA-approved servicer. Any future transfers or changes affecting the mortgages or servicing arrangements remain subject to FHA approval.

Comparison to Prior FHA Policy

Prior to the issuance of the Mortgagee Letter, FHA permitted the use of Declarations of Trust and sales of beneficial interests under existing statutory and regulatory authority. However, FHA’s specific submission and approval expectations were not expressly set forth in FHA Handbook 4000.1. Instead, mortgagees often relied on a combination of regulatory provisions, legacy guidance, and FHA’s internal review practices. This lack of consolidated guidance created uncertainty regarding the documentation required for FHA review, the timing of approval, and the standards applied to trust arrangements.

The Mortgagee Letter does not materially expand or restrict the types of transactions that FHA permits. Rather, it formalizes and centralizes FHA’s existing practices by explicitly requiring pre-approval of Declarations of Trust and describing FHA’s expectations within FHA Handbook 4000.1.

What Do You Need to Do?

For FHA-approved lenders and servicers, the Mortgagee Letter provides increased clarity and predictability. By identifying when a Declaration of Trust must be submitted and outlining the scope of FHA’s review, the guidance should help reduce compliance risk and enable mortgagees to structure transactions with greater confidence.

Importantly, while the procedural requirements have been clarified, the underlying policy framework remains unchanged. FHA-insured mortgages must remain under the control of FHA-approved entities, FHA retains full oversight of servicing and insurance obligations, and beneficial interest holders remain outside of the FHA insurance relationship.

The Mortgagee Letter represents a clarification of existing FHA requirements, rather than a substantive policy shift. That said, FHA-approved mortgagees should review existing and proposed transactions to ensure alignment with the clarified submission and approval requirements.

UDAAP Update: New York’s FAIR Act Signed Into Law

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What Happened?

On December 19, 2025, New York Governor Kathy Hochul signed into law Senate Bill 8416, the Fostering Affordability and Integrity through Reasonable (FAIR) Business Practices Act, (the “FAIR Act”), which updates Section 349 of New York’s General Business Law (GBL). In our prior post we explained that following the law’s passage by the legislature, the FAIR Act expands the state’s consumer protection statute beyond just deceptive practices to also prohibit “unfair” and “abusive” business acts or practices, marking a major broadening of the New York Attorney General’s enforcement powers. Notably, the final law clarifies that only the Attorney General (“NYAG”) can bring claims for unfair or abusive practices, while private lawsuits remain limited to deceptive acts. The FAIR Act will take effect 60 days after signing, on February 17, 2026.

Why Does It Matter?

The FAIR Act represents a sweeping update to New York’s consumer protection law. Previously, New York law only prohibited deceptive acts and practices. The FAIR Act amends Section 349 of the GBL to also prohibit “unfair” and “abusive” acts or practices in the conduct of any business, trade, or commerce. In practical terms, this aligns New York with the consumer protection laws of almost every other state (47 of which already outlaw unfair practices) and with federal UDAAP standards. Key elements of the new law include:

Expanded Definitions

The statute now defines an “unfair” act as one that “causes or is likely to cause substantial injury” to consumers which is not reasonably avoidable and not outweighed by countervailing benefits. This definition is modeled on the Federal Trade Commission’s standard (15 U.S.C. § 45(n)). An “abusive” act is defined in line with the federal Consumer Financial Protection Act standard (12 U.S.C. § 5531(d)), i.e., something that materially interferes with a person’s understanding of a product or takes unreasonable advantage of someone’s lack of understanding or inability to protect their interests. These broad definitions mean practices that might not be outright deceptive could still be illegal if they unjustifiably harm consumers or exploit imbalances in knowledge or power.

Attorney General Enforcement & Private Rights

Importantly, the law limits enforcement of the new “unfair” and “abusive” provisions to the NYAG. Private plaintiffs can continue to sue under Section 349 only for “deceptive” acts, just as before – there is no new private right of action for unfair or abusive practices. This was a critical concession to avoid opening floodgates of litigation. However, the AG can now bring enforcement actions against businesses for unfair or abusive conduct, seeking injunctions, restitution, and civil penalties. We can expect the NYAG (which has been actively advocating for this law) to launch investigations and actions under the expanded provisions once the law is effective.

“Consumer-Oriented” Standard Preserved (for Now)

A contentious aspect of the FAIR Act was whether it would eliminate the judicially-created requirement that Section 349 cases be “consumer-oriented” (i.e. directed at the public at large, not private contract disputes). The version initially passed by the legislature removed the consumer-oriented limitation entirely, which would have meant the AG (and possibly private plaintiffs) could pursue claims even for one-off transactions or business-to-business dealings. However, in approving the law, Governor Hochul noted an agreement with legislators to ensure the act “does not override” existing case law on the consumer-oriented standard. In effect, this signals that commercial transactions and purely private disputes will not suddenly all become actionable under Section 349. The statute text still says an act can be unlawful “regardless of whether or not it is consumer-oriented” in an AG enforcement, but this may be revisited by a chapter amendment. For now, compliance should assume that private lawsuits still require a consumer-facing element (as before), while the NYAG might test the boundaries of targeting misconduct affecting small businesses or other non-consumer victims in the public interest.

What Do You Need to Do?

For banks, lenders, and other financial services companies operating in New York, the FAIR Act demands a thorough compliance review beyond the traditional focus on deception/fraud. Even though private litigation risk remains mostly unchanged (as it remains limited to deception claims), the NYAG can now act as a mini-CFPB, bringing the full range of UDAAP claims at the state level. Financial services companies must proactively ensure their products and practices meet these standards and should stay aware of any further regulatory guidance issued by the NYAG.