Proposal described as conflicting with some processes
Bob Broeksmit, Mortgage Bankers Association’s (MBA) president and CEO, shared in a blog post his insights on the Financial Stability Oversight Council’s (FSOC) proposal in spring to remove procedural requirements and allow the fast-tracking of the designation of non-bank financial companies as systematically important financial institutions (SIFI), describing the proposal as unnecessary, noting it would negatively impact the mortgage market and consumers.
“FSOC’s plans are unnecessary and, should regulators use their authority to designate independent mortgage bank servicers as SIFIs, would negatively affect the mortgage market and consumers,” said Broeksmit.
He said banks’ share of mortgage origination and servicing volume has steadily declined for 15 years since the financial crisis. He said this has been driven largely by mounting bank capital and liquidity requirements and the “punitive” risk-based capital treatment of mortgage servicing assets.
“Non-bank servicers have filled this void, substantially increasing their share of the servicing market. As this share has grown, so has attention from FSOC members,” said Broeksmit.
“MBA is concerned about the way FSOC members are approaching the process. FSOC’s new proposed framework guts the previous requirement to conduct a cost-benefit analysis and any obligation to consider the likelihood that an entity might fail. These considerations seem central to the entire purpose of FSOC designation, and FSOC’s decision to jettison them squarely conflicts with recent case law.”
Regulating non-banks
In April this year, FSOC proposed new rules that would subject non-bank firms, including hedge funds, to Federal Reserve supervision.
US Treasury Secretary Janet Yellen saw non-bank financial institutions as concerning due to their lack of supervision and the potential for systemic spillovers from firms in distress, according to a Reuters report. She said the new guidance would remove “inappropriate hurdles” to designating non-bank firms, a process which could take up to six years.
“That is an unrealistic timeline that could prevent the council from acting to address an emerging risk to financial stability before it’s too late,” she said in an FSOC meeting she chaired.
Revisions to the guidance reverse some aspects of Trump-era changes in 2019 including dropping the requirements that FSOC assess the likelihood of a firm’s financial distress, apply an “activities-based approach” and conduct a cost benefit analysis prior to designation. A Treasury official said it was not a complete return to the 2012 guidance as in place, as a quantitative and qualitative analysis process would be added to determine whether “material financial distress at the company or the company’s activities could pose a threat to US financial stability.”
“Overall, I believe that the changes proposed by the council will create a balanced approach to addressing potential risks to US financial stability and ensure that all the tools available to the FSOC will remain on equal footing,” said Jerome Powell, Federal Reserve Chairman, at the meeting.
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