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Iowa Adopts Mortgage Servicer Prudential Standards

BY: Morey Barnes Yost, Consumer Finance Team
Single family house on pile of money.

What Happened?

Effective July 1, Iowa House File 2392 (the “Iowa Law”) enacts mortgage servicer prudential standards (codified in Chapter 535B of the Iowa Code) that largely follow those promoted by the Conference of State Bank Supervisors (“CSBS”).

As we have previously reported, the CSBS adopted model “State Regulatory Prudential Standards for Nonbank Mortgage Servicers” (the “CSBS Standards”) in 2021.  The CSBS Standards address financial condition and corporate governance requirements for certain mortgage servicers.

Why Is It Important?

Following the CSBS Standards, the Iowa Law’s requirements apply to a “covered institution.”  A “covered institution” services or subservices at least 2,000 residential mortgage loans (excluding whole loans owned and loans being interim serviced prior to sale) as of the most recent calendar year end as reported on the NMLS mortgage call report.  For entities within a holding company or an affiliated group of companies, the Iowa Law’s requirements apply at the covered institution level.

Financial Condition:

The Iowa Law requires a covered institution to meet specified financial condition standards. First, a covered institution must maintain capital and liquidity as set forth in new Section 535B.24.  Second, a covered institution must maintain written policies and procedures necessary to implement that section’s capital, operating liquidity, servicing liquidity requirements.

Third, a covered institution must maintain sufficient allowable assets for operating liquidity, in addition to amounts required for servicing liquidity.  Fourth, a covered institution must develop, establish, and implement written plans, policies and procedures, utilizing sustainable documented methodologies to maintain operating liquidity.  Finally, a covered institution must have a sound written cash management plan and a sound written business operating plan (commensurate with the entity’s complexity) that ensures normal business operations.

The financial condition standards do not apply to servicers that solely own or conduct servicing on reverse annuity mortgage loans, or to a covered institution’s  reverse annuity mortgage loan portfolio.

Corporate Governance:

The Iowa Law also requires a covered institution to comply with enumerated corporate governance requirements. First, a covered institution must establish and maintain a board of directors (or equivalent body).  The board’s responsibilities include: (a) establishing a written corporate governance framework that includes appropriate internal controls to monitor and assessing compliance with the corporate governance framework; (b)  monitoring and ensuring that the covered institution complies with the corporate governance framework and with the Iowa Law’s requirements; and (c) ensuring that the covered institution establishes and maintains a risk management program that identifies, measures, monitors, and controls risk commensurate with the covered institution’s size and complexity.

Second, new Section 535B.25 enumerates criteria for a covered institution’s risk management program (to include addressing the potential that a borrower or counterparty fails to perform on an obligation). Third, the Iowa Law requires a covered institution to undergo an annual external audit (including an evaluation of the entity’s internal control structure, a review of the entity’s annual financial statements of the company, and a computation of the entity’s tangible net worth).

Fourth, the Iowa law requires a covered institution to conduct an annual risk management assessment that concludes with a formal report to the board of directors. The risk management assessment must include findings and action taken to address each issue. Additionally, a covered institution must maintain ongoing documentation of risk management activities and include the documentation in its risk management assessment.

What Do I Need to Do?

Mortgage servicers subject to the Iowa Law should review the new standards and ensure that their business practices are compliant.  We will continue to monitor other states for adoption of their own versions of the CSBS Standards.

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