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 still lack apparent licensing authority of some kind for nonbank mortgage servicers: 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," he 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 Millon, 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 license 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 nonbank servicers, which tend to have thinner capital buffers and less traditional regulation than banks.
The structural differences of nonbanks can make them more susceptible to volatile swings in MSR market values. With origination volumes and margins thinner, there also is increased concern that nonbank servicers that also operate as lenders will be under strain.
Servicing mortgages is often used as a natural hedge to the cyclical originations business; when interest rates rise and loan volume falls, the value of servicing rights tends to go up. But atypical market swings do happen, exposing mortgage companies to potential losses during a transition.
The one type of investor that may be exempt from licensing requirements is an excess MSR holder. Investors holding the rights to fees that exceed the basic fee paid to servicers are "not required to be licensed" unless specified through agreement, according to regulatory filing by MSR investor New Residential Investment Corp.