The Mortgage Bankers Association (MBA) this week submitted a letter to the Financial Stability Oversight Council (FSOC) in the U.S. Department of the Treasury urging several additional considerations in its plans to classify more non-bank entities as systemically important financial institutions (SIFIs).
One of the points made in the letter, submitted by MBA President Bob Broeksmit, is that a SIFI designation on a nonbank entity could cause material harm to that company attempting to compete in the marketplace.
“In proceeding with a non-bank SIFI designation, FSOC should conduct a deep and thorough analysis, including weighing the cost and benefit of such designation to the U.S. financial system as a whole and the likelihood the financial company in question will experience material financial distress as a result of the designation,” the letter said.
If FSOC is concerned about the core banking activities taking place outside the purview of prudential bank regulation, FSOC’s should “reconsider the regulatory environment” that has caused more traditional depository institutions from competing in the marketplace such nonbanks are attempting to do business in, Broeksmit said.
“As a general matter, FSOC should consider less costly alternatives to designation of a non-bank financial entity – especially where such an entity is already subject to regulation by an FSOC-constituent member and the perceived risk to financial stability associated with that entity can be, or perhaps already has been, adequately addressed through targeted programmatic changes by that regulator,” he said.
FSOC should also consider the potential costs and benefits of designating nonbanks as SIFIs, since the current proposal “eliminates any evaluation of the costs and benefits of non-bank designation and dispenses with assessing the likelihood that a firm would experience material financial distress,” Broeksmit said.
Additionally, since many “core traditional” banking activities are now operating outside of regulatory purview, MBA urges FSOC to “consider and address whether existing regulations are driving core banking activities outside the regulatory perimeter,” the letter said.
“With respect to residential mortgage lending, banks’ share of origination and servicing volume has consistently declined during the fifteen years following the global financial crisis,” Broeksmit said. “Some of the decline may reflect a re-assessment of the economic returns available in mortgage lending and a shifting of resources into business lines that have better prospects.”
But based on conversations with MBA’s bank members, it also reflects “regulations specific to banks which reduce the returns on capital from mortgage lending,” Broeksmit said.
This has led to non-bank servicers becoming more prevalent in the servicing market, leading to increased scrutiny from FHFA and Ginnie Mae.
“This example highlights what is the critical question: if bank regulations are so punitive that they discourage banks from effectively competing in markets for core banking services, shouldn’t FSOC first re-examine the regulatory regime that caused this change?,” the letter said.
In its own letter on the topic, the Housing Policy Council (HPC) agrees with the MBA in that FSOC should retain its current “activities-based” approach while considering the costs and benefits of SIFI designations for nonbanks. HPC President Ed DeMarco — who has served on FSOC himself in the past — said the current approach can address risks that may have been created or exacerbated by government policies, citing a Ginnie Mae rule that can limit the amount of private financing that can be used by mortgage servicers.
Last November, Biden administration officials began a push that would target nonbanks with increased regulatory scrutiny. In an op-ed published by HousingWire, former FHA Commissioner David Stevens said that increased regulation of IMBs was not needed.
“The fact is that the invaluable role that IMBs play is deserving of a counterattack to push back against the ‘throwing the baby out with the bath water’ mentality that could be overtaking Washington,” Stevens wrote in November 2022. “The Mortgage Bankers Association authored a valuable piece on IMBs that should be required reading for all policymakers as they consider trying to fix something that is simply not broken.”
FSOC announced a proposal for tightening regulation of nonbanks in April.
Editor’s note: This story has been updated to include the perspective of the Housing Policy Council and its own letter submitted to FSOC on July 17.
