Various institutions, including banks, credit unions, nonbank entities, and subservicers, service mortgage loans. These institutions are defined as follows: Banks. Institutions of various types that may be chartered under federal or state law. One type of bank, community banks, is often associated with smaller banks (e.g., under $1 billion in assets) that provide relationship banking services to the local community and have management and board members who reside in the local community. In addition to mortgage servicing, banks offer a variety of financial products to consumers, including deposit products, loan products, such as mortgage and auto loans, and credit card products. Credit unions. Member-owned cooperatives run by member-elected boards with an historical emphasis on serving people of modest means. Like banks, credit unions offer a variety of financial, deposit, and loan products to consumers. Nonbank entities. Entities that are not financial institutions and may be involved in a variety of mortgage activities, including servicing and originating loans. Nonbank entities generally do not offer deposit or credit card products to consumers. Subservicers. Third-party servicers that have no investment in the loans they service. Banks, credit unions, and nonbanks may outsource loan servicing activities to a subservicer that performs the same administrative functions the bank, credit union, or nonbank would to service the mortgage loan. All U.S. depository institutions that have federal deposit insurance have a federal prudential regulator that generally may issue regulations and take enforcement actions against institutions within its jurisdiction. The federal prudential regulators, which are the Office of the Comptroller of the Currency (OCC), FDIC, and Federal Reserve, along with the credit-union- regulating NCUA, oversee depository institutions for safety and soundness purposes and for compliance with other laws and regulations that fall within the scope of the relevant prudential regulator’s authority (see table 1). Additionally, the Dodd-Frank Act transferred consumer financial protection regulation and some other authorities regarding certain federal consumer financial laws from other federal banking regulators to CFPB, to help foster consistent enforcement of federal consumer financial laws. CFPB has supervision and primary enforcement authority for most federal consumer financial laws for insured depository institutions with more than $10 billion in assets and their affiliates as well as certain nonbank entities. The prudential regulators—the Federal Reserve, Office of the Comptroller of Currency, Federal Deposit Insurance Corporation, and NCUA—have primary supervision and exclusive enforcement authority for federal consumer financial laws for institutions that have $10 billion or less in assets. CFPB also has rulemaking authority to implement provisions of federal consumer financial law. The Dodd-Frank Act authorized CFPB to exercise its authorities for a number of purposes, including ensuring that consumers are provided with timely and understandable information that will help them make responsible decisions about financial transactions; protecting consumers from unfair, deceptive, or abusive acts and practices and from discrimination; and identifying and addressing outdated, unnecessary, or unduly burdensome regulations. In the primary market, lenders make, or originate, mortgage loans that are secured by property or real estate. Originators can choose to hold mortgages in their own portfolios or sell them into the secondary market. Servicing is a part of holding mortgage loans in portfolio, but the right to service a mortgage generally becomes a distinct asset—an MSR—when contractually separated from the loan if the loan is sold or securitized. In the secondary market, the government-sponsored enterprises Fannie Mae and Freddie Mac purchase mortgages that meet their underwriting criteria and either hold them in their own portfolios or pool them into mortgage backed securities (MBS) and sell them to investors. Ginnie Mae guarantees the timely principal and interest payments to investors in securities issued by approved institutions through its MBS program. Once the loan origination process is complete, the loan must be serviced until it is paid in full or foreclosure occurs (see fig. 1). Servicers perform various loan management functions, including collecting payments from the borrower, sending monthly account statements and tax documents, responding to customer service inquiries, maintaining escrow accounts for property taxes and hazard insurance, and forwarding monthly mortgage payments to the mortgage owners. In the event that borrowers become delinquent on their loan payments, servicers may offer borrowers the loss mitigation options made available by the owners of the loan, which may include a workout or a loan modification that permits the borrower to stay in the home or other options, such as a short sale. In some cases, the servicer is the same institution that originated the loan. However, servicers may change over the life of a mortgage as MSRs are sold or transferred to other institutions. Mortgage Origination Rules. CFPB issued new rules related to underwriting of mortgage loans that became effective in January 2014. Generally, lenders making mortgage loans must make a reasonable, good faith determination of the borrower’s ability to repay the loan. This ability-to-repay determination requires lenders to meet minimum underwriting standards, including consideration and verification of a borrower’s income or assets, debt, and credit history. Lenders are presumed to comply with the ability-to-repay (determination) requirement when they make a qualified mortgage, which is a loan that meets specific product feature and underwriting criteria. Mortgage Servicing Rules. CFPB issued mortgage-servicing-related rules covering nine major topics that became effective January 10, 2014. According to CFPB, the goals of the servicing rules are to provide better disclosure to consumers regarding their mortgage loan obligations, and to inform and assist them with options that may be available if they have difficulty making their mortgage payments. The servicing rules also aim to ensure that borrowers are protected from harm in connection with the process of evaluating a borrower for a loss mitigation option or proceeding to foreclosure. The rules also address critical servicer practices relating to, among other things, correcting errors, imposing charges for force-placed insurance, crediting mortgage loan payments, and providing payoff statements. CFPB included a small servicer exemption from certain parts of the mortgage servicing rules. Generally, entities that service 5,000 or fewer mortgage loans, all of which they own or originated, are exempt, for example, from providing periodic statements. In general, entities that service one or more loans they neither originated nor own do not qualify as small servicers, even if they service 5,000 or fewer loans overall. Regulatory Capital Requirements for MSRs. The Basel III framework addressed MSRs as part of its effort to improve the banking sector’s ability to absorb shocks arising from financial and economic stress, whatever the source; improve risk management and governance; and strengthen banks’ transparency and disclosures. In 2013, the U.S. federal banking regulators adopted revised capital rules to implement many aspects of the Basel III capital framework and the Dodd-Frank Act that apply to banks, savings associations, and top-tier U.S. bank and savings and loan holding companies. The revised capital rules significantly changed the risk-based capital requirements for banks and bank holding companies, applied capital requirements to certain savings and loan companies, and introduced new leverage standards. These requirements include provisions related to MSRs that will be fully phased in by 2018, including: An amount equal to MSRs in excess of 10 percent of a bank’s common equity tier 1 (CET1) capital is deducted from CET1 capital. An amount equal to the sum of MSRs, certain deferred tax assets arising from temporary differences, and significant investment in the capital of unconsolidated financial institutions in the form of common stock in excess of 15 percent of CET1 capital is also deducted from tier 1 capital. MSRs that have not been deducted from CET1 capital are added to risk-weighted assets with a 100 percent risk-weight during the transition period and will be subject to a 250 percent risk-weight once the revised regulatory capital rule is fully phased-in. In October 2015, NCUA also issued risk-based capital regulations. However, unlike the banking regulators, which applied the MSR provisions to all supervised banks, NCUA exempted credit unions with $100 million or less in assets from its risk-based capital regulations. Also, all MSRs have a 250 percent risk-weight under the NCUA rule. According to NCUA’s final rule, the intent is to reduce the likelihood that a relatively small number of high-risk credit unions will exhaust their capital to cover their financial obligations and cause systemic losses under the Federal Credit Union Act, as amended. Under the act, all federally insured credit unions would have to pay through the National Credit Union Share Insurance Fund. NCUA’s risk-based capital rules will take effect on January 1, 2019. The CFPB and federal prudential regulators face several statutory requirements in the rule development process, including the Regulatory Flexibility Act (RFA), as amended by the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA), and the Paperwork Reduction Act of 1995 (PRA). The RFA requires that federal agencies consider the impact on small entities of certain regulations they issue and, in some cases, alternatives to lessen the regulatory burden on small entities. The PRA requires agencies to minimize the paperwork burden of their information collections and evaluate whether a proposed information collection is necessary for the proper performance of the functions of the agency. In addition, when promulgating any rule that would have a significant economic impact on a substantial number of small entities, CFPB must convene a review panel to collect the advice and recommendations of small-entity representatives about the potential impacts of the proposed rule prior to publishing the required initial regulatory flexibility analysis. Both CFPB and the banking regulators also have requirements to retrospectively review rules after rules are in effect.