Landmark mortgage servicing regulations, designed largely to protect consumers from abusive and costly practices, ironically could add to the cost of a mortgage.
Smaller banks could struggle with the costs of implementing the rules and pass those costs on to consumers.
They could also leave the mortgage market or consolidate with larger lenders, effectively reducing competition that helps keep costs down.
Fitch Ratings, which rates the financial strength - or weakness - of financial services companies, says new mortgage-servicing rules were necessary to protect consumers.
The rules should help restore confidence in an industry that shoulders a large share of the blame for bringing down the housing market and the Great Recession that followed.
The Fitch warning call comes after the Consumer Financial Protection Bureau (CFPB) released a host of new rules to protect consumers from abusive mortgage servicer behavior that contributed to prolonging the mortgage meltdown and the housing hangover.
Announced Jan. 17, 2013 by CFPB, the rules implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) regulating mortgage servicing for struggling homeowners.
The CFPB proposal effectively codifies provisions of the National Mortgage Settlement agreement between large banks and attorneys general.
But the new rules and the settlement address a now-outlawed culture of systematic abuse by mortgage servicers.
"Our rules will provide a fairer and more effective process for troubled borrowers who face the potential loss of their homes," said Richard Cordray CFPB's director.
The rules prevent dual tracking (servicer simultaneously pursuing a mortgage modification and foreclosure) and mandate foreclosure alternatives disclosures; a review of all foreclosure alternatives prior to foreclosure; easy access to mortgage servicing personnel; clear monthly mortgage statements; early warnings for interest rate adjustments; options to "force-placed" insurance; promptly credited payments; prompt response to requests for payoff balances; errors quickly addressed and corrected and accurate and easily-accessible mortgage documents and information.
Fitch says "While these changes should be manageable for larger servicers, Fitch believes their impact will be most directly felt by mid-sized to smaller institutions due to the greater impact of compliance costs."
Even larger banks are likely to scale back nonprime lending due to the increased scrutiny and compliance requirements and instead focus more on prime servicing.
Fitch also said some of the provisions have the potential to add more time to the already lengthy distressed mortgage resolution process and more time is more money.
That "more money" likely will be passed on to consumers.