For years, state regulators have been considering whether the law that licenses residential mortgage loan servicers should be applied to entities that acquire and hold mortgage loan servicing rights (“MSRs”). As states enacted new laws to license mortgage loan servicers, one of the first questions we asked of regulators is whether the licensing obligation is applied to those who only hold the servicing rights for the mortgage loans. (For instance, Oregon’s new Mortgage Loan Servicer Practices Act, effective January 1, 2018, will require a license by those who hold mortgage loans servicing rights under certain conditions.) While states continue in that direction, they have not been quick to take action against companies that acquire and hold mortgage servicing rights without a license.

However, Arkansas recently joined California as a state prepared to sanction companies that acquire and hold MSRs without a license. On November 2, 2017, the Arkansas Securities Department, which administers the Arkansas Fair Mortgage Lending Act (“FMLA”), entered into a consent order with Aurora Financial Group, Inc. (the “Company”). The Department had concluded that Aurora was “operating as an unlicensed mortgage servicer in Arkansas by holding master servicing rights on 169 residential mortgage loans in Arkansas.” We understand this is the Department’s first such action. The fine was small, only $5,000, and the Company did not need to divest itself of its servicing rights, which may be because the Company self-reported its error. The Department required the Company to apply for a license under the FMLA and maintain its license until such time as it no longer conducts mortgage servicing activities under the FMLA.

Arkansas has licensed those who only hold MSRs without actually servicing mortgage loans since August 2013. At that time, amendments to the Arkansas FMLA became effective that changed the definition of “mortgage servicer” to mean a person that receives, or has the right to receive, from or on behalf of a borrower: (A) funds or credits in payments for a mortgage loan; or (B) the taxes or insurance associated with a mortgage loan. From our conversations with Arkansas regulators, we understand they apply the mortgage servicer licensing obligation to those that acquire and hold mortgage loans with the servicing rights, as well as those that only hold mortgage servicing rights.

Over 20 states now license entities that hold MSRs. The definition of a mortgage servicer under the Arkansas FMLA as a person that has the right to receive funds for a mortgage loan is a key component of the definition in some other states. However, other definitional language could impose a licensing obligation for holding mortgage loan servicing rights. For instance, in a few states (such as New Hampshire), the licensing obligation expressly applies to a person that holds mortgage servicing rights. Other states (such as Connecticut) define a mortgage loan servicer as a person that indirectly services a mortgage loan, and apply that definition and licensing obligation to a person that merely holds servicing rights. Then there is the California Department of Business Oversight, which has applied the licensing obligations of the California Residential Mortgage Lending Act (“RMLA”) to persons that only hold mortgage loan servicing rights, even though the RMLA defines “servicing” on the basis of receiving payments and performing services related to the receipt of those payments on behalf of the note holder.

It is unclear if the Arkansas action, and similar actions by California, signal that a long overlooked licensing obligation under the laws of many states may be coming into focus for enforcement actions. It is clear, though, that more states are moving to license entities that merely hold MSRs.