Nonbank servicers face new compliance demands in Rhode Island

Rhode Island has set new, formal rules for larger nonbank mortgage servicers that appear to align with those in more than one dozen other jurisdictions.

With the passage of the law Gov. Daniel McKee signed this week, nearly one-third or 16 out of 50 states now have standards for nonbank servicers' liquidity, capital and governance somewhat similar to those from the Conference of State Bank Supervisors.

The Rhode Island law, which is now in effect, generally applies to companies servicing or subservicing at least 2,000 traditional 1-4 family mortgages and operating in two or more states, in line with CSBS standards. 

The law also exempts servicers that only work with reverse mortgages, are not-for-profit entities or housing agencies. Exemptions also may apply to owned whole loans and interim servicing.

Broader trends

The Conference of State Bank Supervisors has found almost all jurisdictions' examiners are focused on its prudential standards, regardless of whether there's a formal law on the books.

"Even if certain nonbanks are not technically subject to these prudential standards, there is an expectation among some regulators that mortgage companies will have a structure in place," Orrick attorneys wrote in a recent report.

Jurisdictions that don't have formal laws for nonbank servicers are likely to have similar standards incorporated in examinations due to the Multistate Mortgage Committee, according to Orrick. The committee coordinates joint examinations spanning multiple states.

However, the spread of formal laws reinforces bank-like standards adjusted for nondepository mortgage servicers with portfolio sizes above certain thresholds.

While the CSBS's 2021 standards are largely similar to those of government-related agencies nonbanks work with, such as Fannie Mae or Freddie Mac, they put more stress on operating liquidity or cash sufficient to meet daily business needs.

The 15 other states with similar servicing standards are: Arkansas, Connecticut, Colorado, Georgia, Iowa, Maryland, Minnesota, Montana, Nevada, New York, North Carolina, North Dakota, Oregon, Washington and Wisconsin, according to CSBS.

Five states joined the group just last year: Arkansas, Georgia, Nevada, North Carolina and Wisconsin, according to the Orrick report.

"This led to optimism among some regulators that more states will not only adopt prudential standards, but that these standards may expand beyond servicers to other nonbank participants in the mortgage market," the attorneys wrote.

Maryland and Georgia have applied equivalents of the CSBS's corporate governance standards more broadly to nonbank mortgage companies, according to Orrick. Maryland also has extended such requirements to companies involved in money transmission.

However, some states also have established limits to mortgage licensing.

Maryland's Supreme Court ruled this week that passive trusts that hold mortgages and aren't involved in servicing, funding or originating mortgages are exempt from state licensing for all periods, resolving questions about changes to this over time.

"The Maryland Supreme Court has ruled unanimously in our client's favor on the certified question – received from the United States Bankruptcy Court for the District of Maryland – of whether a passive trust is exempt," said Hinshaw & Culbertson Partner Brian McGrath.