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In this report, we assess today’s HFSC Oversight and Investigations Subcommittee hearing on mortgage servicing.  Democrats previewed their forbearance demands for the next COVID package.  Full Committee Chairwoman Waters (D-CA) reiterated the need for HEROES Act provisions expanding forbearance protections to private mortgages, automatically placing certain borrowers into forbearance, and prohibiting balloon payments (see Client Report RESCUE73).  However, she now also demands new sanctions on servicers that offer shorter forbearance periods and do not clearly disclose that balloon payments are not required.  Rep. Waters also asked whether additional legislation is needed to encourage loan modifications when forbearance ends, with Rep. Lynch (D-MA) supporting an investor liability safe harbor for servicers that modify private mortgages.

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As we noted yesterday, FSOC has officially begun the activity-and-practice designation of the secondary-mortgage market foreshadowed late last year in FSOC’s annual report.  Of course, a “market” cannot be designated – it is its entities or practices within it that can.  The most immediate targets are Fannie and Freddie post-conservatorship and mortgage servicing as it is conducted by nonbanks.

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Earlier this week, the American Banker spotlighted an experienced M&A hand’s prediction of “hundreds of fintech failures.”  Wirecard of course does not augur well for this sector, but many so far dismiss its strategic implications on grounds that the German fintech was essentially a fraud.  True, but while not all canaries are in the best of health when they go down the mine shaft, they at least start out singing the same song.  The weakest croak first, but even the fittest soon expire.  Wirecard succumbed due to the climate created by investors and regulators alike. It has somehow become a given that taking a financial activity and turning it into tech magically dematerializes risk.  As two FedFin papers demonstrate, here and here, of course it doesn’t – risk changes.  Sometimes it changes for the better, but often there turn out to be a lot of little bodies on the mine-shaft floor.  As a result, a regulatory reset is already under way in Europe and will soon be joined by one in the U.S.

To forecast the future of fintech regulation, one has first to create a risk taxonomy.  Fintech is of course a broad rubric, subsuming everything from Robinhood’s day-trading platform to P2P lending to payment-service firms such as Wirecard and to far more business models and product suites.  And, as we’ve noted, fintech is different not only in scope, but also scale.  An activity housed in an ambitious start-up partnering with a bank is materially different than one …

Moving cautiously to assess the extent to which large banks are no longer too big to fail (TBTF), the FSB has gone beyond a request for comment to a somewhat more specific solution that may lead to policy actions not yet spelled out for public comment in this report.  The FSB does, however, lay out what it describes as “gaps” in the anti-TBTF regime for consideration by its member agencies, with the Basel Committee principally targeted here since the report addresses only banks.  Looking only at the period before the pandemic and only at global systemically-important banks (GSIBs) and those designated as domestic SIBs, the FSB preliminarily concludes that many nations – and perhaps most notably the U.S. – have indeed quelled TBTF banking.

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The banking agencies, SEC, and CFTC have finalized a long-awaited, complex, and comprehensive proposal rolling back many of the restrictions on covered funds imposed in the 2013 rules implementing the Volcker Rule provisions of the Dodd-Frank Act.  Strongly opposed by those who fear greater integration of banking and “speculative” finance or commerce, the rule liberalizes the “Super 23A” inter-affiliate transaction restrictions on excluded covered funds that limited their ability to benefit from funding and operational capacity within affiliated insured depositories.

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In the final version of “Volcker 2.0,” the FRB, FDIC, OCC, SEC, and CFTC finalized a massive, controversial rewrite of the rules governing the funds which U.S. banks and foreign banks doing business here may hold, own, sponsor, or otherwise serve and even market across an array of asset classes.  These of course include housing finance, an arena of even more interest now in light of the FDIC’s recent safe-harbor liberalization and pending FHFA capital and conservatorship actions.  The new construct gives large banks an arsenal of new “credit fund,” securitization, and other tools with which to redesign private loan securitization and even their own mortgage portfolios.  Now, banks can organize funds that engage in mortgage securitization, credit-risk transfer or covered-bond issuance on their own, with other financial institutions, and in concert with the GSEs or Ginnie Mae.

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Reflecting strong industry pressure and growing concerns about market structure, the banking agencies have joined others with which they share jurisdiction to finalize proposed revisions reducing the capital cost of the 2015 margin rule for non-cleared derivatives.  This is accomplished via repeal of current inter-affiliate initial-margin requirements with a new limit intended to constrain insured depository institution (IDI) risk.  The rule also expands the class of swaps designated as legacy swaps grandfathered under current standards that retain their grandfather even if amended to replace LIBOR with a new benchmark rate.

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