United States: Consumer Finance Update: Fannie And Freddie Issue Updates To Seller/Servicer Eligibility Requirements, And To Servicing Standards And Operating Procedures

On May 20, 2015, both Fannie Mae and Freddie Mac issued updates (Fannie Mae Servicing Guide Announcement SVC-2015-08 and Freddie Mac Bulletin 2015-8, respectively) regarding the Eligibility Requirements for Seller/Servicers and regarding the institutions' respective guidelines and definitions for servicers.

The updates to the net worth and liquidity requirements will materially increase the current requirements for approved Government-Sponsored Enterprise ("GSE") servicers. As you are aware, the current net worth requirement is an adjusted net worth of at least $2.5 million, plus a dollar amount that represents 0.25% of the unpaid principal balance ("UPB") of the seller/servicer's total portfolio of mortgage loans serviced for Fannie Mae/Freddie Mac. The new requirements take this $2.5 million plus 25 basis points requirement of GSE UPB servicing, and now tie it to the servicer's entire servicing portfolio, and not just the GSE portfolio. Thus, now the servicer needs $2.5 million plus 25 basis points of the UPB of the servicer's entire servicing portfolio (and not just the GSE portfolio). Note, however, that the servicer will only need to include those assets for which it owns the mortgage servicing rights ("MSRs"), and does not need to include in the calculation any mortgage for which it is engaged by another entity to subservice the loan. Presumably, this expansion will be felt most greatly by non-depository servicers, should they hold large jumbo and other non-GSE MSR portfolios. The new requirements also add a tangible net worth/total assets threshold and liquidity requirement for non-depository servicers.

Besides the updates to the net worth requirements, the announcements provide more specific operational guidance for servicers and subservicers approved to service Freddie Mac and Fannie Mae loans. This policy update is consistent with the Consumer Financial Protection Bureau's ("CFPB") recent focus on increasing the level of responsibilities of servicers, pre-and post-transfer, and setting forth more specific requirements for both master and subservicers in an effort to increase efficiency and ensure consumer protection. This includes the requirement for servicers to implement quality control programs and to ensure that the GSEs are apprised of any issues that could negatively impact either Freddie Mac or Fannie Mae.

Eligibility Requirements Updates

Eligibility Requirements: Effective date of December 31, 2015 for both Fannie Mae and Freddie Mac.

Freddie Mac's New Eligibility Requirements

  • Depository Institutions: Must maintain Acceptable Net Worth of $2,500,000 plus a dollar amount equivalent to 25 basis points of the UPB of all mortgages secured by 1-4 unit residential properties that the depository institution directly services, regardless of whether the mortgages are owned by the Servicer or a third party investor.
    • Note that Freddie Mac will exclude the UPB of any mortgage for which a servicer is engaged by another entity to service those mortgages as a subservicer from the calculation of the institution's Acceptable Net Worth.
    • Maintain compliance with applicable capital and liquidity requirements imposed by respective regulators.
  • Non-Depository Institutions: Must maintain the same Acceptable Net Worth as Depository Institutions, plus:
    • A Tangible Net Worth/total assets ratio greater than or equal to 6%; and
    • Liquidity equal to or exceeding 3.5 basis points times the aggregate UPB of all mortgages secured by 1-4 residential properties serviced for Freddie Mac, Fannie Mae, and Ginnie Mae, plus 200 basis points times the sum of non-performing (90 days or more non-delinquent) Agency Mortgage Servicing that exceed 6% of Agency Mortgage Servicing.
  • Freddie Mac also added definitions for:
    • Agency Mortgage Servicing (defined to mean: The aggregate UPB of all Mortgages secured by 1- to 4-unit residential properties serviced for Freddie Mac, Fannie Mae and Ginnie Mae (a quarterly Chief Financial Officer certification of this information will be required). The UPB of any Mortgages for which a Servicer is engaged by another entity to service those Mortgages as a subservicer will be excluded)
    • Tangible Net Worth (defined to mean: Total equity less receivables due from related entities, less goodwill and other intangible assets, less carrying value of pledged assets net of associated liabilities)
    • Liquidity [defined to mean: Cash and cash equivalents (unrestricted), certain investment grade securities that are available for sale or held for trade (including single-family mortgage-backed securities backed solely by Agency Mortgage Servicing, obligations of GSEs, and Treasury obligations), unused/available portion of committed Servicing advance lines (a quarterly Chief Financial Officer certification of this information will be required)]

Fannie Mae's New Eligibility Requirements

The same as Freddie Mac, with minor differences:

  • Depository Institutions: Must be classified as "well capitalized" by primary regulator;
  • Non-Depository Institutions: Liquidity definition varies from Freddie Mac's, and the liquidity calculation depends upon if the Agency Serious Delinquent Rate (SDQ) is 6% or less, or greater than 6%. If the SDQ is less than or equal to 6%, the minimum liquidity required is .035% of the UPB of the seller/servicer's portfolio of mortgage loans serviced for Fannie Mae, Freddie Mac, and Ginnie Mae. If the SDQ is greater than 6%, then the minimum liquidity requirement is .035% of the UPB of the seller/servicer's portfolio of mortgage loans serviced for Fannie Mae, Freddie Mac, and Ginnie Mae plus 2% of the UPB of the SDQ rate over 6%.

Servicing Operational Requirements and Definitional Updates

Amendments to Servicing Definitions and Standards: Effective for Freddie Mac on August 18, 2015 and for Fannie Mae on September 1, 2015.

Freddie Mac's Servicer Operational Requirements Updates

  • Outlining the Master Servicers' and Servicing Agents' respective responsibilities when Servicing will be undertaken by a new Servicing Agent or undertaken by Master Servicer.
    • Master Servicer must:
      • Disclose relevant Purchase Documents to its Servicing Agent;
      • Establish an oversight program to monitory Servicing Agent's compliance with Servicing requirements;
      • Maintain effective compliance management systems to ensure compliance;
      • Master Servicer remains responsible for compliance with all Servicing Requirements, including any act or omission by the Servicing Agent
  • Servicing Agents' Responsibilities
    • Guide updated to reiterate Servicing Agents' responsibilities and restrictions, for example, that they do not have the right to enter into a Transfer of Servicing with a third party.
  • Servicing Agent Oversight and Surveillance Best Practices
    • Available online to assist Servicers in complying with these requirements.
  • Revisions to Subsequent Transfers of Servicing
    • Transferor Servicer must evaluate the proposed transfer to determine if it will impact its ability to meet Freddie Mac's Seller/Servicer requirements;
    • Transferor and Transferee must conduct due diligence review of transferred mortgages;
    • As a best practice, Transferor and Transferee should adopt Freddie Mac's Servicing Transfer Best Practices, available online, which provides guidance for pre- and post-transfer compliance management controls and monitoring tools.
  • Notifications of legal proceedings or Regulatory Actions
    • Master Servicers, Servicing Agents, Transferor Servicers, and Transferee Servicers must notify Freddie Mac within 7 business days of any active or threatened (overtly and in writing) class action legal proceeding or regulatory or supervisory action, proceeding or investigation that could adversely affect the entity's ability to comply with the terms and conditions of the Purchase Documents or otherwise negatively impact Freddie Mac.
  • Servicer Quality Control Programs
    • Requires Servicers to implement a Quality Control ("QC") program specifically addressing the mortgages the Servicer services for Freddie Mac.

Fannie Mae Subservicing Arrangements Updates

  • Subservicer Responsibilities Updates
    • Among other things, must continue subservicing until acceptable disposition of subserviced portfolio is reached;
    • Must disclose to the Master Servicer any and all Fannie Mae assessments or reviews upon request;
    • Disclose to Fannie Mae if it discovers that itself or the Master Servicer in in breach of the Lender Contract or if either entity has been subject to any material legal, regulatory, or administrative proceeding or order relating to the subservicing arrangement for Fannie Mae loans;
  • Master Servicer Responsibilities Updates
    • Must maintain policies and procedures for selection of subservicers and to evaluate subservicer's compliance with the Lender Contract.
  • Both Master and Subservicer Responsibilities Updates
    • Provide to Fannie Mae copies of subservicing agreement, audits, QC reviews, and compliance management system policies and procedures for monitoring compliance with the Servicing Guide and performed of third party vendors;
    • Require any third party vendors to maintain policies and procedures for the contracted servicing activities;
    • Conduct audits and QC reviews on subservicers; and
    • Conduct operational assessments and reviews that measure the subservicer's performance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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