States ramp up li­cens­ing for mort­gage ser­vicers

Ser­vicers and MSR in­vestors face in­creased reg­u­la­tion and over­sight as nearly all states now re­quire some form of li­cens­ing for firms re­spon­si­ble for mort­gage col­lec­tions.

National Mortgage News - - Contents - By Bon­nie Sin­nock

The lim­ited num­ber of places where mort­gage ser­vicers can op­er­ate with­out a li­cense is get­ting even smaller due to state reg­u­la­tors’ grow­ing con­cerns about Con­sumer Fi­nan­cial Pro­tec­tion Bu­reau dereg­u­la­tion and the in­creased market share of non­banks.

As re­cently as 2016, more than a dozen states did not re­quire non­bank to have a spe­cific li­cense for mort­gage ser­vic­ing, ac­cord­ing to a re­port that year by the Govern­ment Ac­count­abil­ity of­fice.

But to­day, all but four states im­pose one or more re­quire­ments on in­dus­try firms that can in­clude a gen­eral mort­gage li­cense that cov­ers ser­vic­ing, a stand­alone ser­vic­ing li­cense, or a gen­eral debt col­lec­tion li­cense.

“I would say there’s mo­men­tum in li­cens­ing in the last year and a half and I would say it’s build­ing up a head of steam,” said Stephen Orn­stein, a part­ner at law firm Al­ston & Bird.

Both Penn­syl­va­nia and Ore­gon added new ser­vicer li­censes this year.

The Key­stone State’s li­cens­ing in par­tic­u­lar ap­pears po­si­tioned to “ad­dress fears that fed­eral mort­gage ser­vic­ing en­force­ment may be re­duced” on the fed­eral level, ac­cord­ing to a re­port by law firm Reed Smith ear­lier this year.

As a re­sult, “I think some state reg­u­la­tors feel they’ve been left be­hind if they haven’t,” said Costas “Gus” Avrako­tos, an at­tor­ney at law firm Mayer Brown.

The only four states in the na­tion that still lack ap­par­ent li­cens­ing author­ity of some kind for non­bank mort­gage ser­vicers are Alaska, Delaware, North Dakota and Wy­oming.

Even in those states it might be best to dou­ble- check with an at­tor­ney or com­pli­ance of­fi­cer as to whether any li­cense or li­censes are needed be­cause the rules are com­pli­cated and been more dy­namic re­cently, said Ben Purser, chief risk of­fi­cer at RoundPoint Mort­gage Ser­vic­ing Corp.

“It is a very com­plex set of re­quire­ments some of which are con­sis­tent state to state, many of which re­ally aren’t,” Purser said.

Mort­gage ser­vic­ing rights hold­ers or mort­gage com­pa­nies that work with sub­ser­vicers need to be es­pe­cially care­ful about en­sur­ing they have all re­quired li­censes be­cause state guid­ance on whether “in­di­rect” ser­vicers need them has been known to change abruptly.

“All of a sud­den, you may need a li­cense,” said Tom Mil­lion, pres­i­dent and CEO of Cap­i­tal Mar­kets Co­op­er­a­tive.

Ken­tucky, for ex­am­ple, has said its guid­ance in this area is “sub­ject to change” in con­junc­tion with a memo re­leased in late 2016 that spec­i­fied both mas­ter ser­vicers and sub­ser­vicers re­quired li­censes.

And late last year, the Arkansas Se­cu­ri­ties De­part­ment fined Aurora Fi­nan­cial Group $5,000 for hold­ing mort­gage ser­vic­ing rights on 169 mort­gages in the state with­out a li­cense.

“It’s in­creas­ingly rare that states don’t re­quire an MSR owner to have a li­cense,” said Purser.

State li­cens­ing re­quire­ments also have been extended to off­shore sub­ser­vic­ing op­er­a­tions that save ser­vicers money by tap­ping into lower-cost la­bor. Ocwen, for ex­am­ple, agreed to stop us­ing un­li­censed af­fil­i­ate com­pa­nies to ser­vice loans in Wash­ing­ton state in or­der to re­solve a li­cens­ing dis­pute there.

And it’s not just at the state level. Some mu­nic­i­pal­i­ties, in­clud­ing Yonkers, New York, and Chicago have their own debt col­lec­tion li­cens­ing re­quire­ments that per­tain to ser­vicers, said Purser.

While the di­rect costs associated with a sin­gle state’s fine or li­cense can be

rel­a­tively small, the costs can add up for play­ers with lim­ited scale as well as for mul­ti­state com­pa­nies that lack the fed­eral pre­emp­tion af­forded by a na­tional bank char­ter.

The Con­fer­ence of State Bank Su­per­vi­sors brought to­gether state reg­u­la­tors to form the Mort­gage Ser­vic­ing Rights Task Force in 2014 due to con­cerns about the non­bank ser­vicers, which tend to have thin­ner cap­i­tal buf­fers and less tra­di­tional reg­u­la­tion than banks.

Dif­fer­ences in the struc­ture of non­banks can make them more sus­cep­ti­ble to volatile swings in MSR market val­ues. And with their orig­i­na­tion vol­umes and mar­gins thin­ning, there is in­creased con­cern about added strain to non­bank ser­vicers that also orig­i­nate mort­gages.

Ser­vic­ing mort­gages is of­ten used as a nat­u­ral hedge to the cycli­cal orig­i­na­tions busi­ness; when in­ter­est rates rise and loan orig­i­na­tion vol­ume falls, the value of ser­vic­ing rights tends to go up.

But atyp­i­cal market swings can and do hap­pen, which can ex­pose mort­gage firms to po­ten­tial losses in the event of a ir­reg­u­lar rate tran­si­tion.

The one type of ser­vic­ing in­vestor that may be ex­empt from li­cens­ing re­quire­ments is an ex­cess MSR holder.

In­vestors that hold the rights to fees that ex­ceed the ba­sic fee paid to ser­vicers are “not re­quired to be li­censed” un­less spec­i­fied through agree­ment, ac­cord­ing to a reg­u­la­tory fil­ing by mort­gage ser­vic­ing rights in­vestor New Res­i­den­tial In­vest­ment Corp.

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