Alston & Bird Consumer Finance Blog

Mortgage

FHA Updates Credit Score Methodology to Accommodate FICO 10T and VantageScore 4.0: What Mortgage Lenders Need to Know

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On October 8, 2026, the Federal Housing Administration (FHA) issued Mortgagee Letter 2026-11 (ML 2026-11), updating FHA’s Minimum Decision Credit Score (MDCS) methodology to facilitate the use of alternative credit scoring models. Most notably, the new framework accommodates FICO 10T and VantageScore 4.0 alongside Classic FICO and establishes a methodology for determining a borrower’s score when a mortgagee submits more than one credit score model. The changes apply to all FHA-insured Title II Single Family mortgage programs and are effective for FHA case numbers assigned on or after January 1, 2027.

What Happened?

FHA revised Handbook 4000.1 to establish a new framework for calculating the MDCS when one or more credit score models are submitted. ML 2026-11 expressly identifies Classic FICO, VantageScore 4.0, and FICO 10T as examples of a “Credit Score Model Type.”

The change reflects FHA’s adoption of FICO 10T and VantageScore 4.0 alongside Classic FICO. FHA explains that the newer models use trended credit data reflecting consumers’ credit behavior over time and also use non-traditional credit information such as rent and utilities. According to FHA, these features can provide greater predictive power and help expand access to homeownership.

Importantly, FHA will continue to require a tri-merge credit report, and its existing minimum credit score thresholds are not changing based on the Credit Score Model Type used.

Background

Historically, FHA’s MDCS methodology focused on selecting a score from the scores reported for each borrower and then, for a multiple-borrower transaction, using the lowest applicable score among the borrowers. ML 2026-11 modifies that framework to address a new circumstance: a lender may now submit scores generated under multiple Credit Score Model Types.

To accomplish this, FHA introduces a new concept, the “Borrower-Level Score,” meaning the credit score selected for each borrower after evaluating the scores from each Credit Score Model Type submitted. The MDCS is then the lowest Borrower-Level Score among all borrowers on the transaction.

How Will the New MDCS Methodology Work?

Under the revised methodology, the mortgagee must first determine a score for each Credit Score Model Type submitted for each borrower. Within each model:

  • If three differing scores are reported, the lender uses the middle score.
  • If two differing scores are reported, the lender uses the lower score.
  • If only one score is reported, the lender uses that score.

The lender then compares the selected scores across the different model types submitted for that borrower. The lowest of those scores becomes the Borrower-Level Score. Finally, where there are multiple borrowers, the lender uses the lowest Borrower-Level Score among all borrowers as the transaction’s MDCS.

In other words, submitting multiple scoring models does not allow a lender to select whichever model produces the most favorable score. FHA’s methodology effectively applies a “lowest of the selected scores” approach at the model level, followed by another lowest-score determination across borrowers.

For transactions involving multiple borrowers where one or more borrowers have no credit score because of non-traditional or insufficient credit, the MDCS is the lowest Borrower-Level Score among the borrowers who do have credit scores.

Lenders May Submit Multiple Models, but Must Use Them Consistently

FHA permits a mortgagee to submit one or more Credit Score Model Types, but the same model type or types must be used for all borrowers. Thus, a lender could not, for example, submit FICO 10T for one borrower while submitting only VantageScore 4.0 for a co-borrower.

Moreover, the credit report retained in the FHA case binder must contain all Credit Score Model Types submitted in the final TOTAL Mortgage Scorecard submission; however, the credit report may contain additional scoring models that were not submitted to TOTAL.

FHA’s Existing Credit Score Thresholds Remain Unchanged

Despite the methodological changes, FHA is not altering the substantive MDCS thresholds.

A transaction remains ineligible for FHA financing if its MDCS is below 500. An MDCS of 500 through 579 generally limits a transaction to 90% LTV, while an MDCS of 580 or higher remains eligible for maximum financing. For applicable refinances, the existing 97.75% maximum financing threshold for an MDCS of 580 or above likewise remains unchanged.

What About HECMs?

ML 2026-11 also cleans up FHA’s Home Equity Conversion Mortgage (HECM) provisions. Because credit scores are not an underwriting component for HECMs, FHA is deleting the Handbook’s standalone “Borrower Minimum Decision Credit Score” provision for HECMs rather than carrying the new MDCS framework into the reverse mortgage program.

Why Does It Matter?

For FHA mortgagees, the primary impact is likely to be operational rather than a change in credit eligibility standards. The new methodology affects how lenders determine the operative score when multiple scoring models are used and establishes consistency and documentation requirements that will need to be reflected in the FHA origination process.

What Do I Need to Do?

FHA’s adoption of alternative credit scoring models represents a meaningful modernization of its underwriting framework. Although the underlying FHA credit score thresholds remain intact, mortgagees that elect to use multiple scoring models will need to ensure that their systems, documentation, and controls correctly implement FHA’s new method for translating those scores into a single MDCS. Specifically, FHA mortgagees should:

  • Review Credit and Underwriting Systems: FHA lenders should assess whether their loan origination, credit-reporting, and underwriting systems can identify multiple Credit Score Model Types, calculate a Borrower-Level Score under FHA’s prescribed methodology, and correctly determine the transaction-level MDCS.
  • Coordinate With Credit and Technology Vendors: Lenders planning to use FICO 10T or VantageScore 4.0 should evaluate vendor readiness and ensure that credit-reporting and underwriting integrations support the model types the lender intends to submit.
  • Update Policies, Procedures, and Quality Control: Written FHA underwriting procedures and QC testing should be reviewed for references to the existing MDCS methodology and updated as necessary to address model-level score selection, consistency across borrowers, and the new documentation requirements.
  • Prepare for January 1, 2027: The new requirements apply based on FHA case-number assignment, not application date or closing date. Mortgagees therefore should ensure that affected processes are ready for loans receiving FHA case numbers on or after January 1, 2027.

Alston & Bird’s Consumer Financial Services team is available to assist FHA mortgagees in evaluating and implementing the requirements of ML 2026-11.

CFPB Requests Input on TRID and Reverse Mortgage Disclosure Requirements: What Mortgage Industry Participants Need to Know

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On July 9, 2026, the Consumer Financial Protection Bureau (CFPB) published a Request for Information (RFI) seeking public input on potential changes to several mortgage disclosure requirements, including the TILA-RESPA Integrated Disclosure (TRID) rules and reverse mortgage disclosures. The RFI reflects the CFPB’s broader effort to identify regulatory requirements that may increase costs, create operational burdens, or unnecessarily impede access to mortgage credit while continuing to provide meaningful consumer protections. The RFI follows the President’s March 13, 2026, Executive Order (the “March EO”), which directed the CFPB to consider, as appropriate and consistent with applicable law:

(i) proposing amendments to Regulation Z that tailor the following requirements for smaller banks: ATR and QM requirements (including potentially a broader QM safe harbor for portfolio loans) and the requirements of the Truth in Lending Act, Public Law 90-321 (TILA), Real Estate Settlement Procedure[s] Act, Public Law 93-533 (RESPA), and TILA-RESPA Integrated Disclosure (TRID) rules;

(ii) replacing TRID timing rules with a materiality-based standard that preserves consumer clarity and reduces closing delays; [and]

. . . .

(vii) exempting rate-and-term refinancing (including cash-out refinancing) from rescission rights.”

For mortgage lenders, servicers, and reverse mortgage participants, this development may signal the beginning of a new round of regulatory reform in the mortgage disclosure space.

What Happened?

The CFPB issued an RFI requesting comments on whether existing mortgage disclosure requirements should be revised to reduce burdens on industry participants and consumers. The Bureau specifically seeks feedback regarding three areas:

  1. TRID disclosures;
  2. The right of rescission applicable to certain refinance transactions; and
  3. Reverse mortgage disclosures.

The comment period closes on August 10, 2026.

TRID Is Back on the Table

The TRID rules, which became effective in 2015, integrated disclosures required under the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA) into two primary forms: the Loan Estimate and the Closing Disclosure. The CFPB’s RFI asks whether certain aspects of the current framework create unnecessary burdens for lenders or confusion for consumers. Areas identified for comment include disclosure timing requirements, tolerance rules, electronic delivery requirements, and whether smaller institutions should be subject to different or more tailored requirements.

Although the CFPB has amended TRID several times over the last decade, industry participants have continued to identify operational challenges associated with disclosure redisclosures, timing requirements, cure processes, and technology implementation. The RFI provides stakeholders an opportunity to raise those concerns directly with the Bureau.

Reverse Mortgages Receive Particular Attention

The RFI also focuses on reverse mortgage disclosures, an area where the disclosure regime remains largely separate from the integrated TRID framework.

Unlike most forward mortgage products, reverse mortgages continue to rely on multiple disclosure forms and calculations, including Truth in Lending disclosures, Good Faith Estimates, HUD-1 settlement statements, and the Total Annual Loan Cost (TALC) disclosure. The CFPB is seeking comment on whether these disclosures continue to serve borrowers effectively or whether a more streamlined approach would improve consumer understanding.

Among other topics, the Bureau asks whether:

  • Reverse mortgage borrowers would benefit from a single integrated disclosure framework similar to TRID;
  • TALC calculations remain useful and understandable;
  • Alternative disclosures showing projected loan balance growth in dollar terms would be more meaningful than annualized cost metrics; and
  • Consumers would benefit from reverse mortgage-specific educational materials.

These questions suggest that the CFPB may be considering a significant modernization of reverse mortgage disclosures.

Why Does It Matter?

This RFI could represent the first step toward meaningful changes in mortgage disclosure regulation.

Potential Changes to Longstanding TRID Compliance Requirements

TRID compliance remains one of the most operationally intensive areas of mortgage origination. Loan origination systems, document preparation vendors, settlement service providers, and lenders have invested substantial resources in implementing and maintaining TRID compliance. Even relatively modest regulatory changes could require system modifications, vendor updates, revised procedures, employee training, and quality-control enhancements.

At the same time, many industry participants have argued that certain aspects of the rules create costs without providing corresponding consumer benefits. The CFPB appears interested in identifying those areas and assessing whether simplification is possible.

Reverse Mortgage Reform Could Be Significant

The reverse mortgage portion of the RFI may prove especially noteworthy. Reverse mortgage disclosures are governed by requirements that predate TRID and often present information differently than consumers encounter in forward mortgage transactions. Critics have long questioned whether the TALC disclosure is useful or understandable to borrowers. The CFPB’s willingness to revisit those requirements suggests that the Bureau may be open to a broader redesign of the reverse mortgage disclosure framework.

If the CFPB ultimately pursues a more integrated disclosure model for reverse mortgages, lenders and technology providers may face substantial implementation projects but could also benefit from a more streamlined and consumer-friendly framework.

The RFI May Signal Broader Deregulatory Efforts

The RFI was issued as part of a broader federal initiative—announced in the March EO—focused on promoting access to mortgage credit and evaluating regulations that may increase lending costs. As a result, stakeholders should view this development not simply as a disclosure review, but as part of a potentially larger conversation regarding mortgage regulation, operational burden, and consumer protection.

What Do I Need to Do?

Mortgage industry participants should not assume that regulatory changes are imminent, but they should take the RFI seriously.

Consider Submitting Comments

Lenders, servicers, investors, settlement service providers, and technology vendors should evaluate whether they have operational experience or data that could inform the CFPB’s review. The most persuasive comments will typically identify specific compliance burdens, quantify costs where possible, and propose practical alternatives that preserve consumer protections.

Identify TRID Pain Points

Organizations should take inventory of recurring compliance challenges, including: disclosure timing issues; redisclosure triggers; tolerance cure processes; electronic delivery requirements; secondary market impacts; and vendor and system implementation costs.

These issues may become particularly relevant if the CFPB moves beyond the information-gathering stage and begins considering proposed rule changes.

Reverse Mortgage Participants Should Engage Early

Reverse mortgage lenders, investors, and servicers should pay particular attention to the CFPB’s questions regarding TALC disclosures, integrated disclosure concepts, and consumer education. Stakeholders with direct experience observing borrower confusion—or disclosure practices that work particularly well—may have a meaningful opportunity to influence future policy.

Monitor for Next Steps

The RFI is only the beginning of the process. Following the comment period, the CFPB may decide to take no action, issue additional guidance, propose targeted amendments, or pursue broader rulemaking initiatives. Stakeholders should continue monitoring developments closely, particularly given the potential implications for mortgage origination systems, disclosure platforms, and compliance management programs.

For now, the message is clear: after more than a decade of living with TRID—and decades of operating under the current reverse mortgage disclosure framework—the CFPB is actively considering whether these requirements should be modernized. Industry participants have a limited window to help shape what comes next.

Fannie Mae Issues Governance Framework on Use of Artificial Intelligence and Machine Learning

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What Happened?

In a little-noticed, but important development, on April 8, 2026, Fannie Mae issued a governance framework for Fannie Mae Seller/Servicers’ use of artificial intelligence (AI) and/or machine learning (ML) in their origination and/or servicing practices. The requirements that Fannie Mae sets forth in this directive are considerable and apply to all approved single-family seller/servicers utilizing AI/ ML technologies within their loan origination or servicing practices. The directive becomes effective on August 6, 2026, 120 days after publication.

Why Does It Matter?

Fannie Mae observes that while AI/ML is fundamentally altering the mortgage landscape by improving efficiency, strengthening risk management, and delivering more personalized customer experiences, it warns that “as AI/ML models grow more complex and more deeply embedded in critical processes, seller/servicers must ensure these technologies are deployed safely, legally, ethically, and in alignment with Fannie Mae’s expectations.”

Toward that end, Fannie Mae directs all seller/servicers who use AI/ML in connection with the origination of loans sold to or guaranteed by Fannie Mae or serviced on behalf of Fannie to comply with applicable law and to:

  • Promulgate written policies governing the development, implementation, and lifecycle of AI/ML systems.
  • Review and update these policies at least annually by designated owners to align with industry best practices and legal updates.
  • Ensure that system structures incorporate characteristics of trustworthy, unbiased, and ethical AI/ML.
  • Subject third-party, outsourced, or subcontractor-provided AI tools to the same rigorous compliance standards as internal software.
  • Disclose the types of AI deployed, its intended purpose, and active risk safeguards upon request by Fannie Mae.

What to Do Now

AI/ML is already rapidly changing the mortgage market in unimaginable ways. The Fannie Mae directive augments similar developments across the mortgage industry to supervise automated systems. Notably, on December 3, 2025, Freddie Mac issued Guide Bulletin 2025 16 which promulgated a highly prescriptive set of requirements imposing detailed governance, audit and security requirements for seller/servicers using AI and ML systems. The Freddie Mac Bulletin’s effective date was March 3, 2026.

With Fannie Mae and Freddie Mac being a bellwether for the mortgage industry, mortgage originators and servicers should heed these directives, among others issued by governmental authorities.

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.

FSOC Issues Report on Nonbank Mortgage Servicing Highlighting Strengths, Vulnerabilities and Recommendations

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What Happened?

In May 2024, the Financial Stability Oversight Council (FSOC or Council) issued a Report on Nonbank Mortgage Servicing (the Report). The Report recognizes the strengths of nonbank mortgage companies (NMCs) and the important role they serve. However, the Council warns that the vulnerabilities of NMCs are more acute due, in part, to the mortgage market shift from banks to NMCs, the increasing federal government exposure to NMCs, financial strain of nonbank originators following the end of the refinance boom, and considerable liquidity risk from NMCs funding sources. The Council warns that it will continue to monitor such risks and take or recommend additional actions in accordance with its Analytic Framework (the 2023 Analytic Framework) and Nonbank Designation Guidance (the 2023 Nonbank Designation Guidance), which we discussed in a prior blog post. The Council also makes several recommendations, including asking Congress to establish a fund financed by the nonbank mortgage sector and administered by an existing federal agency to ensure there are no taxpayer-funded bailouts should a nonbank mortgage servicer fail.

Why Does it Matter?

Background

The Dodd-Frank Act empowers FSOC to designate a nonbank financial company subject to enhanced prudential standards and supervision by the Federal Reserve’s Board of Governors by a two-thirds vote of the Council. The Council is comprised of 10 voting members consisting of the U.S. prudential regulators, the Director of the Consumer Financial Protection Bureau (CFPB), the Director of the Federal Housing Finance Agency, the Chair of the Securities and Exchange Commission, the Chairman of the Commodity Futures Trading Commission, an independent member having insurance expertise, and five non-voting members with the Secretary of the Treasury serving as Chairperson of the Council.

This designation can be made upon the Council’s finding that:

  • Material financial distress at the nonbank financial company could pose a threat to the financial stability of the United States; or
  • The nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the nonbank financial company could pose a threat to the financial stability in the United States.

The Council’s 2023 Analytic Framework provides a non-exhaustive list of eight potential risk factors and the indicators that FSOC intends to monitor that include: (i) leverage, (ii) liquidity risks and maturity mismatches, (iii) interconnections, (iv) operational risk, (v) complexity of opacity, (vi) inadequate risk management, (vii) concentration, and (viii) destabilizing activities. Additionally, FSOC will assess the transmission of those risks by evaluating: (i) exposure, (ii) asset liquidation, (iii) critical function or service, and (iv) contagion. The 2023 Nonbank Designation Guidance, procedural in nature, defines a two-stage process the Council will use to make a firm-specific “nonbank financial company determination” pursuant to FSOC’s Analytic Framework. The Council also has the authority to make recommendations to regulators and Congress and engage in interagency coordination.

The 2024 Report on Nonbank Mortgage Servicing

At the outset, the Council recognizes that the NMC market share has increased significantly. Based on HMDA data, NMCs originate around two-thirds of mortgages in the United States and owned the servicing rights on 54 percent of mortgage balances in 2022 as compared to 2008 when NMCs originated only 39 percent of mortgages and owned the servicing rights on only four percent of mortgage balances. Moreover, in the 10-year period between 2014 and 2024, the share of Agency (i.e., Fannie Mae, Freddie Mac, and Ginnie Mae) servicing handled by NMCs increased from 35 percent 66 percent.

In 2023, NMCs serviced around $6 trillion for the Agencies and approximately 70 percent of the total Agency market.

FSOC recognizes that NMCs filled a void following the 2007-2009 crisis when banks exited the market due to several factors (such as the revised capital rules on banks, making MSRs less attractive, as well as perceived increased costs of default servicing resulting from the National Mortgage Settlement, the Independent Foreclosure Review, prosecutions under the False Claims Act, and private litigation.) According to FSOC, NMCs developed substantial operational capacity and embraced technology. The Council also recognizes NMCs’ strength in servicing historically underserved borrowers. In 2022, NMCs originated greater than 70 percent of mortgages extended to Black and Hispanic borrowers and more than 60 percent of low- and moderate-income borrowers.

While recognizing the strengths of NMCs, the Report also highlights several vulnerabilities. Of the eight risk factors identified in the 2023 Analytic Framework, FSOC focuses its concerns on the following four vulnerabilities:

  • Liquidity Risks & Maturity Mismatches: As provided in the 2023 Analytic Framework, a shortfall of sufficient liquidity to cover short-term needs, or reliance on short-term liabilities to finance longer-term assets, can lead to rollover or refinance risk. FSOC may measure this risk by looking at the ratios of short-term debt to unencumbered liquid assets and the amount of additional funding available to meet unexpected reductions in available short-term funds. FSOC reports “considerable” liquidity concerns from NMCs’ funding sources and servicing contracts. First, NMCs’ reliance on warehouse lines of credit can result in (i) margin calls, (ii) repricing or restructuring lines by raising interest rates, changing the types of acceptable collateral, or canceling lines, (iii) exercising cross default provisions, and (iv) the risk of multiple warehouse lenders enforcing covenants or imposing higher margin requirements at the same time. Second, NMCs face liquidity risk from margin calls on the hedges in place to protect interest rate movements while mortgages are on a warehouse line. Third, NMCs face liquidity risks from their lines of credit that are collateralized by mortgage servicing rights (MSRs), that can also result in margin calls. Finally, requirements to advance funds on behalf of the investor (particularly Ginnie Mae) or repurchase mortgages from securitization pools may result in liquidity strains.
  • Leverage: As provided in the 2023 Analytic Framework, leverage is assessed by levels of debt and other off-balance sheet obligations that may create instability in the face of sudden liquidity restraints, within a market or at a limited number of firms in a market. To assess leverage, the Council may look at quantitative metrics such as ratios of assets, risk-weighted assets, debts, derivatives liabilities or exposures, and off-balance sheet obligations to equity. The Report cites to data from Moody’s Ratings which requires an NMC to have a ratio of secured debt to gross tangible assets of less than 30 percent for its long-term debt rating to be investment grade. In the third quarter of 2023, 37% of NMCs met this standard and 35% of NMCs had ratios in excess of 60 percent which is considered a high credit risk. According to FSOC, equity funding by NMCs add to leverage vulnerability.
  • Operational Risk: As provided in the 2023 Analytic Framework, operational risk arises for the “impairment or failure of financial market infrastructures, processes or systems, including due to cybersecurity vulnerabilities.” The Report highlights that for NMCs operational risks include continuity of operations, threats from cyber events, third-party risk management, quality control, governance, compliance, and processes for servicing delinquent loans.
  • Interconnections: As provided in 2023 Analytic Framework, direct or indirect financial interconnections include exposures of creditors, counterparties, investors, and borrowers that can increase the potential negative effect measured by the extent of exposure to certain derivatives, potential requirement to post margin or collateral, and overall health of the balance sheet. Through warehouse lenders, other financing sources, servicing and subservicing relationships, NMCs are connected to each other. Because of such linkages, the Council is concerned that financial difficulties at one core lender could affect many NMCs.

Because of these NMC vulnerabilities, FSOC is concerned that NMCs could transmit the negative effects of such shocks to the mortgage market and broader financial system through the following channels discussed in the 2023 Analytic Framework:

  • Critical Functions and Services: As provided in 2023 Analytic Framework, a risk to financial stability can arise if there could be a disruption of critical functions or services that are relied upon by market participants for which there is no substitute. FSOC is concerned that if an NMC is under financial strain, it would not have the resources to carry out its core responsibilities, which could result in bankruptcy, borrower harm, operational harm, or servicing transfers mandated by state regulators.
  • Exposures: This refers to the level of direct and indirect exposure of creditors, investors, counterparties, and others to particular instruments or asset classes. Again, if an NMC faced financial strain that impacted the ability of the NMS to execute its functions, other counterparties could be harmed, including investors and credit guarantors. The Agencies could also experience high costs and credit losses and may have challenges in transferring servicing to a more stable servicer. The Report notes that “servicing assumption risk may be slightly less acute (though not less costly) for the enterprises, which have more preemptive tools available to them to assist a servicer in distress than Ginnie Mae does.”
  • Contagion and Asset Liquidation: While these are two separate risks, the Council grouped them together. As defined in the 2023 Analytic Framework, contagion is the potential for financial contagion arising from public perceptions of vulnerability and loss of confidence in widely held financial instruments. Asset liquidation is rapid asset liquidation and the snowball effect of a widespread asset selloff across sectors. The Council is concerned that because MSRs are a large share of NMCs’ assets, “changes in macroeconomic conditions or funder risk appetite” could depress MSR valuations resulting in rapid liquidation and have a material impact on NMC solvency and access to credit.

Because of the federal government’s financial support to Fannie Mae and Freddie Mac, and the direct responsibility for Ginnie Mae’s guarantee to bond investors, the federal government has an interest in addressing servicing risks. FSOC does not believe such risks, as identified above, are sufficiently addressed by the states or existing federal authority. First, “[n]o federal regulator has direct prudential authorities over nonbank mortgage servicers.” Second, the state regulators have prudential authority, however, only nine states (as of April 2024) have adopted prudential financial and corporate governance standards. To that end, the Council recommends:

  • State regulators adopt enhanced prudential requirements, further coordinate supervision of nonbank mortgage servicers, and require recovery and resolution planning for large nonbank mortgage servicers.
  • Federal and state regulators should continue to monitor the nonbank mortgage sector and develop tabletop exercises to prepare for the failure of nonbank mortgage servicers.
  • Congress should provide the Federal Housing Finance Agency and Ginnie Mae with additional authority to establish safety and soundness standards and directly examine nonbank mortgage servicer counterparties for compliance with such standards. Congress should also authorize Ginnie Mae and encourage state regulators to share information with each other and Council members.
  • Congress should consider legislation to provide more protections for borrowers to keep their homes.
  • Congress should consider providing Ginnie Mae with authority to expand its Pass-Through Assistance Program (PTAP) to include tax and insurance payments, foreclosure costs and or advances during periods of severe market stress.
  • Congress should through legislation establish a fund (financed by the nonbank mortgage servicing sector) to facilitate operational continuity of servicing for servicers in bankruptcy or failure to ensure the servicing obligations can be transferred, or the company is recapitalized or sold. The Council recommends that Congress provide “sufficient authority to an existing federal agency to implement and maintain the fund, assess appropriate fees, set criteria for making disbursements, and mitigate risks associated with the implementation of the fund.”

What Do I Need to Do?

Well, shortly after the Report was issued, CFPB Director Chopra issued a statement, indicating that: “The Report is silent on what, if any, tools the FSOC itself should use to address these risks. That must be the next phase of our work. In line with the 2023 Analytic Framework and Nonbank Designation Guidance, we should carefully consider whether any large nonbank mortgage companies meet the statutory threshold for enhanced supervision and regulation by the Federal Reserve Board.”

Given that warning, NMCs should pay careful attention to the statutory threshold for enhanced supervision and work on mitigating their liquidity and other risks. The Report points out that the CSBS enhanced prudential standards are enforceable by the states that have adopted such standards “including through multistate examinations that include at least one state that has adopted the standards or through referrals to states that have adopted these standards.” Thus, servicers should anticipate more state or multistate probes concerning liquidity and corporate governance. And, while stating the obvious, now is the time to double down on managing operational risks, including but not limited to continuity of operations, threats from cyber events, third-party risk management, quality control, governance, compliance, and processes for servicing delinquent loans.