On August 2nd, Oregon Governor Katherine Brown signed legislation that provides for the licensing of residential mortgage loan servicers, Senate Bill 98 (“S 98”), the Oregon Mortgage Loan Servicer Practices Act (the “Servicer Act”). S 98 provides for a dedicated mortgage loan servicer license, separate from the license as a mortgage banker or mortgage broker obtained under the Oregon Mortgage Lender Law. With the enactment of the Servicer Act, Oregon joins the majority of states that license residential mortgage loan servicers. (A number of states still do not license residential mortgage loan servicers, including New Jersey, and Pennsylvania which is considering a mortgage loan servicer licensing law.) Although the Oregon Servicer Act was effective upon the Governor’s signature, the legislation expressly provides that the Servicer Act will become operative on January 1, 2018, and that it will apply “to service transactions for residential mortgage loans that occur on or after [the] operative date.
Licensing Obligations Under the Servicer Act
The Servicer Act provides that “a person may not directly or indirectly service a residential mortgage loan in this state unless the person obtains or renews a license under section 4 of this 2017 Act.” Under the Servicer Act, the term “service a residential mortgage loan” means to:
(a) Receive a scheduled periodic payment from a borrower under the terms of a residential mortgage loan, including any amounts for deposit into an escrow account the lender establishes in accordance with the Real Estate Settlement Procedures Act, 12 U.S.C. 2609;
(b) Pay to the lender or another person principal, interest and other amounts associated with a residential mortgage loan in accordance with the terms of any contract or agreement for servicing the residential mortgage loan; or
(c) Pay an amount to a borrower, if the residential mortgage loan is a home equity conversion mortgage or a reverse mortgage.
The Servicer Act does not expressly define a residential mortgage loan servicer as one who purchases or holds mortgage loan servicing rights. However, the licensing obligation extends to one that indirectly, as well as directly, services a residential mortgage. In certain other states that license residential mortgage loan servicers, a licensing obligation for those who indirectly service residential mortgage loans has been applied to those who acquire and hold mortgage loan servicing rights and do not actually service mortgage loans. In reply to our inquiry, Oregon regulators essentially indicated that they are working on a rulemaking that would clarify when a master servicer would be viewed as “indirectly” servicing a residential mortgage loan to need a license as a residential mortgage loan servicer.
As we understand, Oregon regulators are considering whether a license should be required if a master servicer becomes visible to the consumer either through direct contact with the consumer, through some other process in which the master servicer’s name is used in the servicing process, or when the master servicer is a critical financial component of the servicing process. Suffice it to say that, for now, whether an entity that merely holds the servicing rights to mortgage loans will need a license under the Servicer Act is an unsettled issue. Entities that only hold mortgage loan servicing rights should try to follow whether a servicing rule is proposed and comment on any such proposal published by Oregon regulators.
In addition to defining a residential mortgage loan servicer as one that (i) receives scheduled periodic mortgage payments, or (ii) pays principal, interest, or other amounts related to residential mortgage loans to lenders or others to whom such payments are due, the Servicer Act also imposes a licensing obligation on those who make payments to borrowers of home equity conversion mortgages (“HECMs”) or reverse mortgage loans. With the Servicer Act providing for the licensing of those who advance funds to borrowers of HECMs/reverse mortgage loans, Oregon is following most of the other state mortgage loan servicer licensing laws enacted in the last few years.
The Servicer Act also provides for the regulation of entities engaged in loan modification activities, as it separately defines a “residential mortgage loan modification service.” The term “residential mortgage loan modification service” is broadly defined to mean:
(a) A negotiation or arrangement, or an offer or attempt to negotiate or arrange, a change in the repayment obligations for or the terms and conditions of a borrower’s residential mortgage loan, including but not limited to:
(1) A forbearance in collecting one or more payments due;
(2) A change in the interest rate;
(3) A change in the payment or repayment schedule;
(4) A substitution of different loan terms and conditions;
(5) A substitution of a different classification of loan;
(6) A capitalization of any arrearages; or
(7) A reduction in principal.
(b) Collecting or attempting to collect data to submit to a person that performs a residential mortgage loan modification service.
Although the Servicer Act regulates conducting a residential mortgage loan modification service, the Servicer Act does not expressly require licensing of those entities that only do so. In reply to our inquiry, Oregon regulators indicated that those that only conduct residential mortgage loan modification services now must be licensed as mortgage lenders or as debt management service providers. Consequently, a license as a residential mortgage loan servicer should not be required to perform residential mortgage loan modification services, but the applicable provisions of the Servicer Act that regulate residential mortgage loan modification services may need to be followed. Note that merely collecting or attempting to collect data to submit to a person that performs a modification service would constitute providing a residential mortgage loan modification service.
Exemptions from Licensing as a Residential Mortgage Loan Servicer
The Servicer Act provides for certain exemptions from licensing, some of which are clear, while others are written ambiguously and raise questions as to how they will be applied. The Servicer Act also provides authority for the Director of the Oregon Department of Consumer and Business Services (the “Director”) to designate by rule or order parties exempt from servicer licensing, not otherwise exempt from licensing. The exemption provisions in the Servicer Act are only from licensing, so a licensing-exempt entity will need to comply with those practice provisions of the Servicer Act that generally apply to those who service mortgage loans.
A “financial institution,” as defined under Oregon Revised Statutes (“ORS”) section 706.008, is exempt from licensing under the Servicer Act. Among others, a financial institution under section 706.008 includes a national bank, or a state-chartered, FDIC-insured bank, but not a subsidiary or affiliate of such institutions. Subsidiaries or affiliates of financial institutions are not otherwise exempt. A person that holds a license under ORS section 725.140, which section is found in the state’s Consumer Finance Act, is exempt from licensing of the Servicer Act, but a licensee under the state’s Mortgage Lender Law, ORS 86A. 095, is not exempt from licensing as a mortgage loan servicer.
However, a licensed mortgage banker in Oregon may be able to avail itself of an exemption from licensing not found under other state mortgage loan servicer licensing laws. The licensing obligations of the Servicer Act do not apply to “a person, or an affiliate of the person, that in all operations within the United States during the calendar year services fewer than 5,000 residential mortgage loans, excluding loans that the person or the person’s affiliate originates or owns.” The term “affiliate” is defined as “a person who controls, is controlled by, or is under common control with another person.” The term “control” is not defined. This exemption provision is awkwardly written, and arguably could be read to apply more broadly than may have been intended. Consequently, clarification from state regulators as to how this exemption provision will be applied in different situations is warranted.
Minimally, it appears reasonable to conclude that an entity servicing fewer than 5,000 residential mortgage loans throughout the United States during a calendar year would not need to be licensed. Given the wording of that provision, it also would appear that an entity would not need to be licensed as a residential mortgage loan servicer to service residential mortgage loans (i) it originates or otherwise purchased and owns, or (ii) that were originated or purchased and owned by an affiliate, regardless of whether the number of these mortgage loans exceeds 5,000. Therefore, although the Servicer Act does not exempt a mortgage banker licensed under the Oregon Mortgage Lender Law, an Oregon-licensed mortgage banker should be able to annually service up to 5,000 mortgage loans nationwide that it or its affiliate originated or purchased, without also needing to hold a license under the Servicer Act, unless the licensed mortgage banker annually services 5,000 or more residential mortgage loans nationwide for third parties. Oregon regulators have confirmed this view.
The Servicer Act also exempts “a financial holding company or bank holding company, both as defined in ORS 706.008, if the financial holding company or bank holding company does not do more than control an affiliate or a subsidiary, as defined in 12 U.S.C. 1841(d), and does not engage in business as a residential mortgage loan servicer.” The purpose of that exemption is unclear. If a financial holding company or bank holding company does not engage in business as a residential mortgage loan servicer, it would not need an exemption. In reply to our inquiry, Oregon regulators confirmed that nothing more is intended by this exemption provision other than reiterating that such holding companies are not subject to servicer licensing provided they do not service residential mortgage loans.
Licensing under the Servicer Act
As the Servicer Act becomes operative on January 1, 2018, state regulators have indicated that they will expect that those who service residential mortgage loans to be licensed by January 1, 2018. The Servicer Act provides the Director with authority to decide by rule as to whether an applicant for a servicer license will apply for a license through the Nationwide Mortgage Licensing System and Registry (“NMLSR”) “instead of, or in addition to, submitting the application to the director.” State regulators, however, told us that all applications will need to be submitted through the NMLS. According to state regulators, (i) applications will be open for submission in the NMLS on November 1, 2017, and (ii) a checklist should be available by October, if not earlier. Regulators are working on a rulemaking that is needed under the Servicer Act before certain requirements for licensing, such as the application fee and the amount of the surety bond, can be set. Look for information to be posted on the Department’s website.
The Servicer Act provides authority for the Director to evaluate the applicant, and the applicant’s “controllers,” among others, in determining whether to issue the applicant a license. The term “controller” is defined broadly to include not only an officer, director, general partner or managing member of a business entity, but also:
(i) a person that has a direct or indirect right to vote 10 percent or more of the securities of a business entity that have voting rights or the power to sell or cause the sale of 10 percent or more of any class of a business entity’s securities,
(ii) a person that has contributed 10 percent or more to a partnership’s capital or has the right to receive a distribution of 10 percent or more of a partnership’s capital or assets upon dissolution, or
(iii) a person that, under the terms of a contract or because the person has an ownership interest in another person, has the power to manage or set policies for the other person, or otherwise direct the other person’s operations or affairs.
A licensee must either designate and maintain a principal place of business from which the licensee services residential mortgage loans in Oregon and also designate a registered agent in the state, or if a licensee does not maintain a principal place of business in Oregon, the licensee must nevertheless designate a registered agent in the state. (State regulators have confirmed that an in-state office will not be required to obtain a license as a residential mortgage loan servicer.) The Director is deemed to be the licensee’s registered agent if a registered agent is not designated or cannot be located through reasonable diligence.
A licensee must maintain, in accordance with GAAP, sufficient liquidity, operating reserves, and tangible net worth, which the Director is authorized to specify by rule. A licensee approved by Fannie Mae, Freddie Mac, or Ginnie Mae to service residential mortgage loans is deemed to comply with the Servicer Act’s liquidity, operating reserves, and tangible net worth requirements.
The Servicer Act also sets forth certain practice requirements applicable to those who service mortgage loans, including the assessment of fees, escrow accounts, and written notices to consumers. Those practice requirements are not limited to licensees, but would apply to any entity that services Oregon residential mortgage loans. As noted above, the Servicer Act regulates residential mortgage loan modification services. Those who perform those services for compensation are subject to the Servicer Act’s practice requirements governing those services.