Alston & Bird Consumer Finance Blog

Licensing

New Jersey Requires License to Hold Mortgage Servicing Rights

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A&B ABstract: New Jersey is the latest state to require the licensing of an entity that passively invests in whole residential mortgage loans on a servicing-released basis or in the servicing rights in such loans. The New Jersey Department of Banking and Insurance recently released Bulletin No. 19-13 to elaborate on the state’s new licensing requirement, and to clarify that applications must be submitted by April 13, 2020.

Discussion

New Jersey enacted the Mortgage Servicers Licensing Act, N.J.S.A. 17:16F-27 to -46 (“Act”), on July 28, 2019, to create a new licensing requirement for entities “servicing” New Jersey mortgage loans. Notwithstanding the effective date of the Act, the New Jersey Department of Banking and Insurance (“DOBI”) did not provide a means by which such an entity may apply for a Mortgage Servicer License or clarification regarding the types of activities that constitute “servicing” in the state.

A New Licensing Obligation

In response to the industry’s questions regarding these points, DOBI recently released Bulletin No. 19-13. Bulletin No. 19-13 reiterates that the Act expressly provides that an entity is prohibited from acting, either directly or indirectly, as a mortgage servicer in New Jersey without obtaining a license. The term “mortgage servicer” is broadly defined as:

“[A]ny person, wherever located, who, for the person or on behalf of the holder of a residential mortgage loan, received payments of principal and interest in connection with a residential mortgage loan, records the payments on the person’s books and records and performs the other administrative functions as may be necessary to properly carry out the mortgage holder’s obligations under the mortgage agreement, including, when applicable, the receipt of funds from the mortgagor to be held in escrow for the payment of real estate taxes and insurance premiums and the distribution of the funds to the taxing authority and insurance company.”

The term also includes “a person who makes payments to borrowers pursuant to the terms of a home equity conversion mortgage or reverse mortgage.”

Significantly, Bulletin No. 19-13 states that “[t]he New Jersey Mortgage Servicer License … applies to all holders of mortgage servicing rights, including holders of master servicing rights.” Accordingly, it is now clear that DOBI considers a passive investor in New Jersey whole residential mortgage loans on a servicing-released basis or the servicing rights in such loans to be a “mortgage servicer” and requires such a person to hold a Mortgage Servicer License to conduct business.

Exemptions

Importantly, the Act provides certain exemptions from this licensing requirement, including, but not limited to:

  • Any bank, out-of-state bank, credit union chartered in New Jersey, federal credit union, or out-of-state credit union, provided that that bank or credit union is federally insured;
  • Any wholly-owned subsidiary of that bank or credit union;
  • Any operating subsidiary in situations in which each owner of the operating subsidiary is wholly-owned by the same bank or credit union; and
  • Any entity licensed as a Residential Mortgage Lender or Correspondent Residential Mortgage Lender pursuant to the New Jersey Residential Mortgage Lending Act, N.J.S.A. 17:11C-51 to -89 (“RMLA”), as long as it meets mortgage servicer registration requirements under the Act.

DOBI intends to release an application for this license on the Nationwide Multistate Licensing System & Registry this month. Further, DOBI will require all entities that are not exempt from the Act to apply for a Residential Mortgage Servicer License by April 13, 2020. Any entity claiming an exemption on the grounds that it is already licensed under the RMLA should ensure that it is appropriately registered by that date.

Other Provisions of Note

The Act also subjects licensees and other entities engaging in “mortgage servicing” to various regulatory obligations, restrictions, and prohibitions. Specifically, it creates new operational requirements for some mortgage servicers, and creates a list of prohibited activities for all mortgage servicers. Further, the Act provides DOBI with investigative, examination, and enforcement authority, including the power to impose civil monetary penalties of up to $25,000 per violation. DOBI anticipates proposing new rules under the Act to further assist mortgage servicers in meeting their obligations.

Takeaway

As Bulletin No. 19-13 provides that entities operating without a Mortgage Servicer License will be deemed to be engaging in unlicensed activities and may be subjected to an enforcement action, we encourage all persons engaging in “mortgage servicing” in the state to consider whether a license is required early on in the application cycle. This is an area of focus for DOBI, and we expect its continued attention in the months ahead.

Massachusetts Poised to Regulate Student Loan Servicers

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A&B ABstract: Amid growing concerns of a student loan crisis, proposed Massachusetts H. 3977 is worth watching. If enacted, it would provide the Division of Banks and the Attorney General additional regulatory and enforcement authority over student loan servicers. It also would establish a new Consumer Assistance Unit to help consumers address complaints in any area enforced by the Division of Banks.

Discussion

As reported in Housing Wire, student loan debt has reached $1.5 trillion, enough to buy every home in the United States twice.  In response to the foreclosure crisis, Massachusetts enacted robust laws over mortgage servicers and continues to be active in enforcing those laws.  It should come as no surprise then that the Commonwealth is turning its attention to student loan servicers and proposing additional oversight by Office of Attorney General (“Office”) and the Division of Banks (“Division”). While Massachusetts legislators have proposed multiple measures to regulate student loan servicers, H. 3977 is the one to watch in 2019.

A New Licensing Obligation

Effective in January 2021 H. 3977 would  provide that “[n]o person shall directly or indirectly act as a student loan servicer” without obtaining a license from the Division unless exempt. A “student loan servicer” is defined broadly to include

companies that collect payments on a student loan, respond to customer service inquiries, and perform other administrative tasks associated with maintaining a student loan, disburse money from the student loan track student loans while borrowers are in school, process payments, respond to borrower inquiries and information requests, accept applications and process changes in repayment plans, deferments, forbearances, or other activities to prevent default, maintain student loan records, ensure the administration of loans in compliance with federal regulations and other legal requirements.

An exemption is available for banks, credit unions and their wholly owned subsidiaries as well as operating subsidiaries where each owner of the operating subsidiary is wholly owned by the same bank or credit union. It is unclear if the Commonwealth will require passive investors to become licensed.

Other Provisions of Note

While the measure doesn’t impose substantive practice requirements, it includes other provisions of note.

First, it imposes a minimum two-year record retention requirement and requires a servicer to produce records within five business days of a request from the Commissioner of Banks (“Commissioner”) or the Student Loan Ombudsman.

Second, it gives the Commissioner broad investigation and enforcement authority. Of note, the Commissioner may revoke or refuse to renew a student loan servicer licensed if he finds two or more violations during a one-year licensing period.  Further, a violation of federal law would constitute a violation of Massachusetts law. The Commissioner also may impose an administrative penalty of up to $50,000 per incident.;

Third, the measure prohibits a student loan servicer from engaging in unfair or deceptive acts. A violation of this law is also a violation of Chapter 93A, the Commonwealth’s UDAP law that allows for treble damages.

The Student Loan Ombudsman

Following the examples set by other states (including Maine, Maryland, New Jersey and New York) and the CFPB, the measure would establish as of September 1, 2020, a “student loan ombudsman” within the Office .  The Ombudsman’s responsibilities include helping borrowers explore repayment options, apply for federal programs, avoid or remove a default, resolve billing disputes or garnishments, obtain loan account details, stop harassing collection calls and apply for discharges.  The Ombudsman also would disseminate educational materials and share information with the Division.

The Consumer Assistance Unit

As of September 1, 2020, the measure would establish a new Consumer Assistance Unit housed within the Division.  The Unit would have broad authority to help consumers address complaints in (i) any area the Commissioner has authority to regulate involving state-chartered banks and credit unions, check cashers, foreign transmittal companies, sales finance companies, mortgage lenders, brokers, originators, and student loan servicers, or (ii) other areas as the Commissioner deems appropriate.

Takeaway

Student loan servicing is on the radar of Massachusetts regulators.  Companies should be mindful of H. 3977. Additionally, with the creation of the Consumer Assistance Unit and with H. 3977 granting broad investigation and enforcement authority to the Commissioner, we expect to see increased scrutiny and enforcement actions relative to student loan servicers.

Arizona Seeks to Improve FinTech Sandbox with HB 2177

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A&B ABstract: Arizona launched a first-in-the-nation FinTech Sandbox in August 2018, which has been a successful venture by the state. Arizona seeks to improve this program with the enactment of HB 2177 and the Arizona Attorney General Office’s involvement in the CFPB’s American Consumer Financial Innovation Network.

Arizona’s FinTech Sandbox

In August 2018, Arizona was the first state to launch its “FinTech Sandbox” to ease state regulatory burdens for persons offering innovative financial technologies. (The July 2019 Alston & Bird LLP Structured Finance Spectrum provides further details).  This program allows such persons to register with the Attorney General’s Office and conduct limited tests of their technologies under its supervision without otherwise complying with more burdensome licensing and regulatory requirements. Arizona Attorney General Mark Brnovich has touted the success of this program, stating that it is “the most active and successful regulatory sandbox in North America.”

House Bill 2177

To improve this program, Arizona enacted HB 2177, which:

  • Makes businesses that provide a “substantial component of a financial product or service” eligible to participate, which will (i) allow for tests of products that affect how financial services are provided in the marketplace even if the product itself is not regulated and (ii) enable regulatory technology (“RegTech”) products to now seek entry into the program as stand-alone participants;
  • Requires applicants to demonstrate the cybersecurity measures they will undertake as part of a sandbox test to ensure consumer data remains private and protected; and
  • No longer requires that sandbox tests involving payments involve the participation of Arizona residents, as long as the transaction occurs in Arizona.

In a recent announcement regarding HB 2177, Attorney General Brnovich also announced his office’s participation in the American Consumer Financial Innovation Network (“ACFIN”).  ACFIN is a new CFPB initiative that seeks to bring together state and federal financial services regulators to collaborate on innovation-fostering programs like the FinTech Sandbox.  Given his office’s experience administering the program, Brnvich is encouraged by the federal efforts evident in ACFIN.

Takeaway

In addition to Arizona, Alabama, Georgia, Indiana, South Carolina, Tennessee and Utah are members of ACFIN. We are keeping our eyes on ACFIN, as we believe this to be an important initiative, and look forward to what is to come.

CSBS’s State Examination System Coming Soon

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A&B ABstract

The Conference of State Bank Supervisors (CSBS) revolutionized state licensing with the National Mortgage Licensing System (NMLS) by providing a more uniform approach to state licensing of non-bank financial services companies.  CSBS will bring a similar transformation to supervising such companies.

The New State Examination System

CSBS designed the State Examination System (SES) to be an end-to-end system for scheduling a single or multi-state examination to completion; the system can also be used for investigations, enforcement actions and complaints.

Within the SES, regulators will be able to access an agency library of resources, track examination time and expenses, prepare and send information requests, and engage in collaborative scheduling.  Compliance and examination support staff within companies will be able to schedule examinations, receive and respond to information requests, and receive completed examination reports.  Further, such staff also will be able to access the licensee’s company NMLS record, which should decrease regulator requests for additional information throughout the course of an examination. How the system will work outside the examination context is yet to be seen.

CSBS has announced a pilot of the SES system with 11 agencies and nine mortgage or money servicer examinations.  The pilot is scheduled to run from October 1 to December 31, 2019.  Assuming that the pilot program runs smoothly, CSBS expects to make SES available nationwide early in 2020.

Takeaways

The CSBS should be commended for taking this initiative to modernize the supervision process and make it less burdensome for non-bank financial institutions and regulators alike.  Companies should keep an eye out for training on this new system in the not-so-distant future.

New York Proposes Student Loan Servicing Rules

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A&B ABstract

Amid growing concerns over the federal government’s “hands off” approach to regulating the student loan business, New York Governor Andrew Cuomo released 3 NYCRR 409, a proposed regulation aimed at providing significant consumer protections for New York student loan borrowers, to the public for comment. The deadline for comment on the regulation is September 29.

Proposal of Part 409

Governor Andrew M. Cuomo released for public comment a new regulation (“Part 409”) aimed at providing significant consumer protections for New York student loan borrowers. The proposed rules, promulgated pursuant to Section 718 of the New York Banking Law (effective October 9, 2019), are of little surprise, given that Governor Cuomo and the Superintendent of the New York Department of Financial Services (“NYDFS”), Linda Lacewell, have been quite outspoken about their increasing concerns about the state of the student loan market in New York.

Activities within the Scope of Part 409

To further the NYDFS’ mission, Part 409 provides that, except as otherwise provided in New York laws and regulations, “every person engaged in the business of servicing student loans owed must be licensed by the [NYDFS] as a student loan servicer.”

For purposes of Part 409, “student loan servicer” means “a person engaged in the business of servicing student loans owed by one or more borrowers.” Further, Part 409 defines the term “student loan” as “any loan to a borrower to finance postsecondary education or expenses related to postsecondary education.”

An entity is deemed to be “servicing” if it is:

  • receiving any payment from a borrower pursuant to the terms of any student loan;
  • applying any payment to the borrower’s account pursuant to the terms of a student loan or the contract governing the servicing of any such loan;
  • during a period where a borrower is not required to make a payment on a student loan, maintaining account records for the student loan and communicating with the borrower regarding the student loan on behalf of the owner of the student loan promissory note; or
  • in conjunction with the activities described [above] (a) providing any notification of amounts owed on a student loan by or on account of any borrower; (b) performing other administrative services with respect to a borrower’s student loan; or (c) interacting with a borrower with respect to or regarding any attempt to avoid default on the borrower’s student loan and facilitating the [receipt or application of payments].

Notably, “servicing” excludes “collecting, or attempting to collect, on a defaulted student loan for which no payment has been received for 270 days or more.”

Other Requirements and Restrictions

Part 409 requires entities that “service” New York student loans to:

  • Provide clear and complete information concerning fees, payments due, and terms and conditions of loans;
  • Apply payments in borrowers’ best interest, rather than in ways that maximize servicer fees;
  • Inform borrowers of income-based repayment and loan forgiveness options;
  • Maintain and provide to consumers a detailed history of their account;
  • When a borrower’s loan is transferred to a new servicer, ensure that all necessary servicing information is transferred with the loan so the borrower’s repayment is not disrupted;
  • Provide accurate information to credit reporting agencies;
  • Provide timely and substantive responses to consumer complaints; and
  • Refrain from defrauding or misleading borrowers, engaging in any unfair, deceptive, abusive or predatory act or practice, or misapplying borrowers’ payments.

What’s Next?

Part 409 is open for comment until September 29, 2019. Given the messaging from Governor Cuomo and the NYDFS surrounding the regulation of the New York student loan market and the fact that the NYDFS made its New York Student Loan Servicer license application available to entities engaging in “student loan servicing” through the Nationwide Multistate Licensing System & Registry on August 1, 2019, this may only be New York’s first step into regulating student loan servicers.

UPDATE: As a complement to its regulatory efforts, the DFS is also increasing its staffing on student loan servicing issues.  Since our initial post, Superintendent Lacewell has announced: the appointment of Mr. Winston Berkman-Breen as the DFS’s first-ever Student Advocate and Director of Consumer Advocacy; and (2) the formation of the Student Debt Advisory Board. Both appointments, part of the DFS “Step Up for Students” initiative, highlight that safeguarding student loan borrowers is a priority for both Governor Cuomo and Superintendent Lacewell.