A&B Abstract:
Effective October 1, 2019, the Maryland Commissioner of Financial Regulation will impose new net worth requirements on licensees. Importantly, Maryland servicing licensees without GSE approvals may not use a line of credit to satisfy the net worth requirements. However, mortgage servicers may include mortgage servicing rights in the calculation of tangible net worth. The minimum net worth requirements for mortgage lender and broker licensees remain unchanged, but must be met with tangible net worth (excluding intangible assets such as copyright, trademark or goodwill).
Background
Since the financial crisis, the rapid growth of nonbank mortgage servicers has led regulators to call for enhanced oversight of such entities. The Financial Stability Oversight Council (charged under the Dodd-Frank Act with identifying risks to the stability of the U.S. market) recommended in its 2014 annual report that state regulators work collaboratively to develop prudential and corporate governance standards.
In 2015, state regulators through CSBS and AARMR, proposed baseline and enhanced prudential regulatory standards (including capital and net worth requirements) for nonbank mortgage servicers. Although those standards were not finalized, several states – including Oregon and Washington – have imposed new net worth requirements on nonbank servicers. Maryland is the latest state to update its law.
Maryland House Bill 61 and Advisory Notice
Maryland House Bill 61 takes effect October 1, 2019, and, among other changes adds net worth requirements for licensed mortgage servicers. This means that current licensees must meet the revised requirements during the 2020 renewal cycle of November 1 to December 31, 2019. Licensed servicers that meet the capital requirements of and are approved by a government sponsored entity (such as Fannie Mae or Freddie Mac) satisfy Maryland’s net worth requirements.
Maryland licensees without GSE approval must maintain a minimum tangible net worth that varies according to portfolio volume. Specifically, the minimum net worth requirements are:
- $100,000 if the unpaid principal balance of the entire servicing portfolio is less than or equal to $50,000,000;
- $250,000 if the unpaid principal of the entire servicing portfolio is greater than $50,000,000 but less than or equal to $100,000,000
- $500,000 if the unpaid principal balance of the entire servicing portfolio is greater than $100,000,000 but less than or equal to $250,000,000, or
- $1,000,000 if the unpaid principal balance of the entire servicing portfolio is great than $250,000,000.
Limitations on Net Worth
Importantly, a servicer may not use a line of credit to satisfy the net worth requirements of a licensed mortgage servicer. This is an important distinction from the requirements for mortgage lenders and broker net worth requirements, where a working line of credit (but not a warehouse line of credit) can be used to satisfy a portion of the net worth requirements. It is also important to recognize that the new law requires tangible net worth for licensees. The calculation of tangible net worth excludes intangible assets, such as copyrights, trademarks or goodwill.
Takeaway
The regulators have clarifies that mortgage servicing rights may be included in the calculation of tangible net worth. With the continued focus on nonbank mortgage servicers, capital and net worth requirements are worthy of attention.