Cenlar consent order is wakeup call for nonbanks

Final week, the world of mortgage servicing bought an disagreeable shock. Cenlar FSB, the nation’s largest subservicer of residential mortgages, was hit with a consent order by the Workplace of the Comptroller of the Forex alleging “unsafe and unsound” banking practices.

“The order requires the financial institution to take complete corrective actions to deal with recognized deficiencies and implement inner controls and danger administration practices which might be applicable to the financial institution’s danger profile and the dimensions of its mortgage subservicing operations,” notes the OCC.

Cenlar’s subservicing ebook has grown quickly up to now a number of years, together with the boarding of the loans owned by the CitiMortgage unit of Citigroup. Cenlar was persistently rated positively as a servicer by the most important credit standing businesses. S&P rated Cenlar “sturdy” in February of this 12 months. Fitch Rankings, in 2020 rated Cenlar ‘RPS2.’ Fitch stated that the score “displays Cenlar’s continued investments in its servicing operation, skilled administration staff and employees, extremely developed development technique, efficient enterprise danger administration controls, and the monetary power and assist of its mum or dad, Cenlar Capital Company.”

The OCC order means that vital weak spot exists within the financial institution’s inner methods and controls. Remember the fact that OCC discovered no client hurt and levied no financial high-quality on Cenlar. But, by accepting the OCC’s findings and not using a combat, Cenlar acknowledged an extended listing of operational deficiencies that have to be corrected earlier than the thrift holding firm is allowed to board new servicing.

The Cenlar case is uncommon for quite a lot of causes. First, Cenlar is a tiny financial institution, chartered over a century in the past as Centennial Financial savings. In Q2 2021, the thrift had simply $1.1 billion in whole belongings, about $300 million in principally non-interest income, and $8.2 million in web earnings. The financial institution lacks a diversified banking enterprise and deposit base, holds just about no escrow deposits or mortgage servicing rights, and as a substitute is totally centered on mortgage subservicing.

Cenlar FSB is definitely a really small financial institution that’s now being regulated as a big financial institution by the OCC, essentially the most prescriptive and problematic federal financial institution regulator. Why? As a result of Cenlar subservices three million of loans with over $750 billion in unpaid principal steadiness as of June 30, 2020. Greater than a business financial institution, Cenlar FSB appears an terrible lot like many massive non-bank servicers.

The OCC consent order limits “extreme development” and prioritizes remediation by requiring the financial institution to obtain no supervisory objection from the OCC earlier than including new subservicing purchasers and previous to declaring or paying dividends to shareholders whereas the order is efficient. But to grasp the actions of the OCC, we want slightly context.

Federal financial institution regulators have lengthy made clear to regulated establishments their distaste for reputational danger. Regulators are additionally not thrilled about monoline enterprise fashions centered on residential mortgage loans, once more due to the reputational danger. Dealing with customers on the planet of servicing 1-4 household mortgage loans is a chief supply of reputational danger, thus the OCC and different regulators have steadily raised the bar for establishments specializing in client finance in an effort to keep away from such danger.

One other information level comes from the current travails of Wells Fargo & Co., which has been in regulatory purgatory for years resulting from a breakdown in inner methods and controls in a number of areas of the financial institution. Wells has been beneath regulatory sanctions for nearly a decade to right deficiencies in its loss mitigation actions. However the big financial institution’s board and senior administration to this point has didn’t make progress in addressing these areas.

Because of this, the OCC simply imposed a $250 million high-quality on Wells primarily based on the financial institution’s “unsafe or unsound” practices associated to deficiencies in its house lending loss mitigation program and violations of the 2018 Compliance Consent Order. The financial institution was instructed to repair issues, failed to take action, and is now dealing with further fines and financial sanctions.

“Wells Fargo has not met the necessities of the OCC’s 2018 motion in opposition to the financial institution. That is unacceptable,” stated Appearing Comptroller of the Forex Michael J. Hsu. “Along with the $250 million civil cash penalty that we’re assessing in opposition to Wells Fargo, at this time’s motion places limits on the financial institution’s future actions till current issues in mortgage servicing are adequately addressed.”

Hsu continued: “The OCC will proceed to make use of all of the instruments at our disposal, together with enterprise restrictions, to make sure that nationwide banks handle issues in a well timed method, deal with prospects pretty, and function in a secure and sound method.” Translated into plain language, repair the issues at Wells Fargo or we’ll compel you to downsize and ultimately break up the financial institution.

Likewise, with Cenlar, the financial institution reportedly was instructed to make enhancements in lots of areas of its methods and controls. Cenlar had been making progress and added a number of senior executives to its administration staff. These modifications didn’t happen in a well timed trend, not less than as measured by the OCC, so now Cenlar faces a draconian consent order that limits the financial institution’s capability to do enterprise and locations limits on company actions. Sarcastically, the OCC motion has broken Cenlar’s repute and in addition carries a possible menace for non-bank servicers as properly.

The consent order from the OCC for Cenlar accommodates a laundry listing of points many banks and mortgage servicers have seen up to now. That stated, this motion is essentially the most stringent order relevant to a financial institution from OCC in a decade. Once more, whereas there was no high-quality or discovering of client hurt within the order, the Shopper Finance Safety Bureau and state businesses could resolve to impose related requirements on impartial mortgage banks.

The OCC motion in opposition to Cenlar FSB could also be thought-about a preventative motion to keep away from future errors, client hurt and fines as and when credit score loss ranges return to regular. The lesson to be taken from the instances of Wells and Cenlar FSB is evident: handle operational points recognized by regulators or face public shaming by way of an enforcement motion and the attendant reputational injury.

Many chief executives within the mortgage finance trade could take consolation from the truth that they aren’t depositories. However that could be a mistake. Once more, Cenlar appears an ideal deal extra like an IMB equivalent to sub-servicing big Dovenmuehle or personal servicer Lakeview than it appears like Wells Fargo, JPMorgan, Flagstar Bancorp, a big subservicer that can be among the many largest warehouse lenders within the trade.

The OCC’s give attention to operational dangers at Cenlar, even earlier than any client hurt has occurred, needs to be a wakeup name to all IMB’s with vital servicing or subservicing books.