(Reuters) - U.S. Treasury Secretary Janet Yellen on Friday called for Congress to give regulators more power to oversee the growing nonbank mortgage industry, which she said presented unique risks to financial stability.

Yellen spoke during a meeting of the Financial Stability Oversight Council, a regulatory body she chairs and which was created after the 2007-2009 financial crisis. It is tasked with managing risks to the financial system.

The council, whose members head other top financial regulators, voted unanimously to approve publishing a report and related recommendations on the issue.

THE TAKE

Regulators are moving to cover what they say is a gap in their power to address risk in what is now a large and growing majority of the mortgage market.

The proposal unveiled on Friday includes a recommendation that Congress establish an industry-financed fund to provide liquidity to failing nonbank mortgage services, addressing a problem that industry pointed to at the start of the COVID-19 pandemic.

KEY QUOTE

"Put simply, the vulnerabilities of nonbank mortgage companies can amplify shocks in the mortgage market and undermine financial stability," Yellen said in prepared remarks.

"We need further action to promote safe and sound operations, address liquidity risks, and promote continuity of servicing operations when a servicer cannot perform its critical functions."

CONTEXT

While they offer some advantages over traditional lenders, nonbanks also present unique challenges, according to Yellen.

Nonbanks can have high leverage, short-term funding and be more exposed than banks to fluctuations in the values of mortgage servicing rights and housing prices, as well as changing interest and delinquency rates, she said.

The failures of nonbanks could harm borrowers and leave the federal government to take on servicing obligations, with larger disruptions in the sector possibly restricting mortgage lending, according to Yellen.

She said the FSOC report would recommend that state regulators tighten prudential standards and that Congress consider legislation to ease coordination among regulators and give greater powers to the Federal Housing Finance Authority and the Government National Mortgage Association, or Ginnie Mae, among other changes.