Key Proposed Mortgage Servicing Amendments to the MLA

Here is a summary of the key MLA Amendments drafted and advocated by the Department, and some questions that the MLA Amendments raise:

• What is a “Mortgage Servicer”? The MLA Amendments cover those that “directly or indirectly” service a mortgage loan. Does this mean that both servicers and subservicers are covered by the requirements below? How does one service “indirectly”?? Also, since a “mortgage loan” under the MLA includes both first and second lien loans, all that service second lien mortgage loans are covered by the MLA Amendments.
• New Mortgage Servicing Licensing Requirement; Exemptions. The MLA Amendments require most mortgage servicers to apply for and obtain a mortgage servicer license from the Department. MLA-licensed mortgage lenders that only service loans they have originated or own would NOT need an additional mortgage servicer license – so all others that service loans for third parties would need the additional license.
• The MLA currently exempts from existing MLA licensing requirements certain entities (e.g., banking institutions, credit unions, attorneys), and that exemption continues for servicers. The MLA also partially exempts affiliates of banks from licensing, but subjects them to various substantive MLA requirements. The MLA Amendments extend the bank affiliate exemption from licensing to mortgage servicers, but require such partially exempt mortgage servicers to comply with several of the MLA’s other requirements.
• Building on the current MLA exemption for persons who originate fewer than four mortgage loans in a calendar year, the MLA Amendments also exempt persons who service less than four mortgage loans per year.
• What about Mortgage servicing centers located in Pennsylvania that do not have Pennsylvania customers? The MLA currently excepts from MLA licensing mortgage originators licensed elsewhere that operate Pennsylvania facilities but that do not engage in Pennsylvania transactions. No such licensing exemption seems to cover servicers that operate facilities here, but do not deal with Pennsylvania customers.
• Servicer License Qualifications. The MLA Amendments state that to be eligible for a servicer license, an applicant must:
  • Be approved by or meet the current eligibility criteria for approval as a residential mortgage loan servicer by a GSE, government corporation or federal agency
  • Have a minimum net worth of $250,000
  • Be approved for fidelity bond average in accordance with Fannie/Freddie guidelines
  • Obtain a surety bond in the amount of $500,000
  • Designate the individual who will serve on the Nationwide Multistate Licensing System & Registry as its “qualifying individual” (i.e., a person who is or meets the licensing qualifications of a mortgage originator or a management-level officer) for the principal place of business
• Servicer License Fees. The MLA Amendments would establish servicer license fees as follows:
  • Initial Licenses - $2,500 (principal office)/$1,250 (each branch office)
  • Renewals - $1,000 (principal office)/$500 (each branch office)
• Servicer Duties Following Payoff. The MLA already expressly requires licensees to comply with Pennsylvania's existing Mortgage Satisfaction Act. Nevertheless, the Department inserted a new section establishing servicer duties following payoff. The MLA Amendments require servicers, following pay-off of a closed-end loan or termination of the lender’s obligation to make future advances on an open-end loan that has no outstanding balance, to request that the loan holder take the following actions (or to take such actions itself if it has been delegated by the loan holder with the responsibility to record the satisfaction of mortgage):
  • Release the lien and cancel it of record and, when returning the note or loan agreement to the borrower, deliver any document needed to evidence the lien release
  • Cancel any insurance provided in connection with the loan, and refund any unearned premium paid by the borrower for such insurance
• Servicer Prohibitions; “Single Point of Contact”: The MLA Amendments subject servicers to all of the existing prohibitions in the MLA that apply to licensed mortgage lenders, brokers and originators. For example, a licensed servicer may not undertake unrelated business without giving at least 30 days’ advance notice to the Department. Any new servicer licensee should review these requirements.

In addition, the MLA Amendments wade into the existing RESPA mortgage servicing regulations, and impose a Pennsylvania law “single point of contact” requirement. Servicers must not fail by no later than the 36th day after a borrower becomes delinquent “to establish or attempt to establish a single point of contact with whom a borrower can communicate about foreclosure matters or loss mitigation options …, unless contact is inconsistent with applicable bankruptcy law or court order.”

The Drafting Problem: In attempting to copy the RESPA Mortgage Servicing Regulations, the Department got the timing wrong. Those RESPA regulations establish a 36-day period for “early intervention,” which requires a good-faith effort to establish live contact. They allow 45 days for servicers to implement the single point of contact. The MLA Amendments allow 36 days. Cherry-picking federal mortgage servicing provisions and placing them into the MLA with different time limitations creates confusion, and could subject licensees to needless penalties. Perhaps the regulations will address this.

• RESPA Regulation X Mortgage Servicing Regulations: Copied Into Pennsylvania Law? The MLA Amendments require the Department to adopt regulations incorporating the servicing requirements found in Subpart C of Regulation X (12 C.F.R. 1024.31 through .41, without regard to the limitations in 12 C.F.R. 1024.30 as to scope), and thereafter to amend those regulations to reflect any subsequent changes to Subpart C. Thus, a servicer that violates federal mortgage servicing law could also trigger Department enforcement that seeks to impose MLA penalties, and such violation could potentially threaten a licensee’s future renewals.. Also, even though the federal mortgage servicing provisions do NOT apply to open-end mortgages, the MLA Amendments seem to expand the scope of federal law to all loans subject to the MLA.

The MLA Amendments also provide that if Regulation X Subpart C should be altered in such a way as to result in a complete lack of federal regulations in this area, the Department’s regulation would remain in effect for two years, during which time the Department would be required to adopt “replacement regulations.” Perhaps the Department fears that changes in leadership at the Consumer Financial Protection Bureau and in Congress could result in regulatory relief, and the MLA Amendments would guard against that for mortgage servicers.

The danger of such a provision is that even if the federal government determined that the RESPA mortgage servicing regulations were counterproductive and in the end harmful to the public and the Department agreed, the Department would be unable to change its mortgage servicing regulations for two years, unless and until the Legislature amended this provision. Also, nonbank mortgage servicers in Pennsylvania would find themselves at a competitive disadvantage because a bank servicing in Pennsylvania would be free from repealed federal mortgage servicing regulation, while a non-bank-licensed Pennsylvania mortgage servicer would still find itself struggling to comply for at least two years.

• Effective Date. The MLA Amendments would not take effect until the effective date of regulations (the requirement that the Department adopt regulations becomes effective immediately). The regulatory process is not very quick in Pennsylvania. Thus, the industry should have the opportunity through the administrative notice and comment period to seek interpretations that assist with compliance and reduce confusion.
• Penalties and Enforcement Against Servicers. Existing MLA penalties of a $10,000 fine for each offense assessed by the Department would apply to servicers that are covered by the MLA Amendments. The Department could also suspend, revoke or refuse to license a servicer.

Reed Smith was just engaged by a regional trade association, the Mortgage Bankers Association of Greater Philadelphia (“MBAGP”), as its Legislative Counsel, and it is likely that the MBAGP will be involved in the rulemaking process. You can join the MBAGP by contacting us directly to assure your input is provided in this process.

Client Alert 2017-307