A New Regulatory Hassle for New York Servicers?
All entities that engage in the business of servicing mortgage loans for any property located in New York are up for a new regulatory challenge.
Registration obligations the New York Department of Banking started implementing on an emergency basis in 2009 on holders of mortgage servicing rights have now been both renewed and expanded.
The regulator further expanded the scope of these requirements in August to include entities holding mortgage loan servicing rights who do not actually engage in the servicing of mortgage loans. And the new deadline is Oct. 15.
While New York is following the footsteps of the 35 states that currently require licensing of servicers, according to Costas Avrakotos, a partner at New York based K&L Gates, very few states have extended the licensing obligation to those who merely hold the servicing rights.
“It's rare,” he said, probably eight to 10 states have that requirement, including Georgia, Illinois and New Hampshire. It is more important who collects the payments and works with the customers to modify distressed loans, “because they are the ones who have the face-to-face contact with the customer, there has to be a greater amount of regulation of their activity.”
Since the July 2009 amendment of New York's “Mortgage Banking Licensing Law” to require the registration of mortgage loan servicers the state had to enact a series of “Emergency Regulations” reissued approximately every 90 days to be able to implement the requirement—before it becomes the law.
So far even the term “mortgage loan servicing rights” is not defined in the new regulations. “It is unclear what it means to hold servicing rights directly or indirectly, or to engage in servicing functions,” wrote K&L Gates legal advisors Avrakotos, Laurence Platt and Stacey Riggin.
After New York amended the law in 2009 to implement the change the state-issued emergency regulations, Avrakotos said, but has not issued “the formal notice and comment rulemaking,” and had to rely on emergency regulation that by law expires in 90 days because the companies that are affected by the regulation have not had the opportunity to comment on what the law proposes.
Hence, the state has renewed “mostly the same regulation” every three months until August when it added new language about what constitutes servicing mortgage loans.
Since there are differences between the entities that originate and hold loans, and those who also hold the loan servicing rights, the intention is that everyone, even the entities that merely hold the servicing rights or buy loans and their servicing rights are subject to registration obligation.
The new issue of the regulation suggested that if a company is subject to the rule, the company would have to file an application for registration within 30 days of issuance to be able to continue to be in operation until the application is processed and approved.
“In talking with the regulators they've indicated some increased flexibility about the companies in need of registering,” Avrakotos said. However, currently this flexibility clause applied to different companies is too generic and needs “a little more direction.”
The new mortgage loan servicer regulations also expanded the definition of “mortgage loan servicer” to reach an entity “exempted from such registration,” such as entities that merely purchase closed mortgage loans and are not required to be licensed as mortgage bankers under the New York Mortgage Banking Law.
In addition the financial responsibility requirements of mortgage loan servicers also have been amended.
Given the details of the New York Mortgage Loan Servicer Registration application, affected parties may need every hour of a full 30-day period to prepare and submit a "substantially complete application."
The language under the “transitional period” the K&L Gates legal advisors note, states that entities must apply for registration as a mortgage loan servicer. Under the New York Mortgage Banking Law, entities seeking the authority to make mortgage loans are required to obtain a license as a mortgage banker, “which license also provides the licensee with the authority to broker mortgage loans; and those seeking authority to only broker mortgage loans must register as a mortgage broker.”
In addition, on a separate but related matter, they write, the regulator has proposed rules to repeal the exemption for a wholly owned subsidiary of a bank from being licensed as a mortgage banker and/or registered as a mortgage broker.
The department anticipates adopting permanent regulations that reflect the changes in the new regulations “in the near future.”
“At least they seem to be willing to consider that not everyone who holds servicing rights would need to be registered,” Avrakotos said. But the conditions under which they would not be registered will be determined on a case-by-case basis.
It is not yet clear how this new rule may affect servicers large and small. Currently affected entities still are trying to sift through the requirements and their implementation before they evaluate the long-term effect they may have on their business.
“We have seen a couple of states move in this direction during the past few months,” he said, “but it's still early to tell whether it indicates the start of a wider trend,” or whether other states that require companies that merely hold servicing rights to also be licensed or registered in those states.
The robo sighing crisis has made state regulators a lot more cautious and aware of mortgage servicing risk adversity. State legislators also are trying to find a better balance between state-level independence and federal standards that would increase servicing uniformity.
At least now there is more talk about creating more uniformity in mortgage servicing, he said. In the last few years state representatives have met on a regular basis to discuss regulatory issues. “There’s more give and take amongst the states, more coordination and understanding of what the other states are doing, so they are not operating all on their own any more.” And that is obvious in the fact that more states are adopting laws that indicate they watch what the other states are doing and take notice, he said.