In a development that industry observers may have overlooked amid more pressing concerns caused by the COVID-19 pandemic, the Idaho legislature enacted a measure that will require mortgage servicers to be licensed by July 1, 2020, unless the date is extended. With last month’s enactment, Idaho joins the majority of states that license mortgage servicing and provides a useful reminder that, when things eventually return to some degree of normalcy, non-pandemic-related compliance obligations will remain. This blog post discusses Idaho’s new mortgage servicer licensing obligation and other pertinent provisions of the legislation.
The New Mortgage Servicer Licensing Obligation
Idaho House Bill 401 (“H401” or the “Bill”) amends the Idaho Residential Mortgage Practices Act (Idaho Code §§ 26-31-101 et seq.) (the “RMPA” or the “Act”) to include mortgage servicing among the activities that trigger licensing under the Act. The pre-amended RMPA requires a license to make, broker, or originate a mortgage loan. The Bill adds servicing to those activities.
Rather than enact a new standalone statute to regulate mortgage servicers, H401 amends the RMPA’s definition of licensable “mortgage lending activities” to include, in addition to traditional mortgage lending activities, “directly or indirectly . . . servicing a residential mortgage loan on behalf of any person.” H401 defines “servicing” to mean “collecting payments of principal, interest, or any other payment obligations required pursuant to the terms of a residential mortgage loan.” As worded, H401 imposes a licensing obligation both on entities servicing loans on behalf of another and on entities servicing their own loans in portfolio, unless exempt.
Licensing of Holders of Mortgage Servicing Rights?
Based on the definition of servicing above, it is reasonable to conclude that the term would not reach one who passively holds mortgage loan servicing rights (“MSRs”) and contracts out the consumer-facing servicing activities to licensed or exempt mortgage loan servicers. It is not clear, however, whether regulators with the Idaho Department of Finance (the “Department”), which administers the RMPA, will interpret the Bill in this manner, or will require licensing of an entity that passively holds MSRs, as licensing extends to one who “directly or indirectly” services a residential mortgage loan. The Department has not yet indicated how it will apply the servicing licensing obligation. Regulators in other states interpret similar “directly or indirectly” servicing language to reach passive MSR holders. Therefore, we reached out to senior regulators with the Department, emphasizing that the definition of servicing should govern the manner in which the servicer licensing obligation should be applied. Once we receive a reply, we will issue an update to this blog post.
H401 leaves intact the RMPA’s existing exemptions for federal and state-chartered banks and subsidiaries thereof, real property owners who are seller-financers, certain regulated lenders licensed under the Idaho Credit Code, and passive loan funders, among others. The RMPA does not license the mere purchasing of closed loans. The Bill also does not license the mere purchase of loans, provided the purchaser does not actually service the loans purchased and, until we know otherwise, does not purchase the loans with the MSRs.
Implementation of the Servicer Licensing Obligation
Idaho currently offers a single Mortgage Broker/Lender License for entities subject to licensing under the RMPA. The Department’s practice of folding lending and brokering activities into a single license makes it likely that H401 will not result in the Department offering a new standalone license for mortgage servicers, as the Bill construes servicing activities as a subset of “mortgage lending activities.” More likely, mortgage servicers that are not licensed under the RMPA will need to apply for a Mortgage Broker/Lender License and will be subject to all of the corresponding practice requirements for a Mortgage Broker/Lender licensee. If so, any entity that already holds a Mortgage Broker/Lender License would not need to take any action in response to the Bill’s enactment. We are also seeking confirmation from the Department on this point.
Certain “Fix and Flip Loans” are Excluded from the RMPA
Unlike most other state mortgage licensing statutes, the RMPA is not restricted in scope to mortgage loans made for personal, family or household purposes. As such, commercial or business-purpose loans secured by Idaho residential real estate have been subject to the RMPA’s licensing and other requirements. H401 changes this requirement for loans made to certain borrowers. Specifically, by amending the definition of “borrower” and adding a definition of “organization” that excludes a natural person, the amended RMPA will not apply to loans made to “an organization that, as part of a regular business of constructing or rehabilitating dwellings, makes application for a residential mortgage loan to finance the construction or rehabilitation of a dwelling.” Based on this language, this exemption would appear to extend to brokers, lenders, servicers and originators of “fix and flip” loans to entities that are not natural persons. We have sought confirmation from Department regulators that this exemption will be so applied.
The Bill also makes the following changes:
- Eliminates the requirement for a RMPA licensee to employ a Qualified Person in Charge, defined as an Idaho-licensed mortgage loan originator with at least three years of experience who oversees operations at Idaho-licensed office locations.
- Repeals the Idaho Mortgage Company Act (Idaho Code Ann. §§ 26-2801 et seq.), a non-licensing statute that imposes a few practice requirements on lenders, servicers, buyers and sellers of consumer-purpose residential mortgage loans. However, the Bill also imports these practice requirements into the RMPA in substantially identical form to apply to mortgage lenders.
- Amends the RMPA’s de minimis exemption to apply to a person making not more than five residential mortgage loans generally, instead of not more than five consumer-purpose mortgage loans specifically.
- Provides temporary loan origination authority for certain federally registered mortgage loan originators upon becoming employed by a RMPA licensee.
H401 and the new mortgage servicer licensing requirement take effect July 1, 2020, barring any pandemic-related or other extensions provided by the Department. Unlicensed companies engaging in licensable mortgage servicing activity in Idaho should prepare and submit a license application well in advance of that date to avoid interruption of operations. We stand ready to assist with any step of this process.