October 12, 2010Re: Banking Law Sections 590(1)(i) and 590(2)(b-1)
Dear Mr. [---]:
Thank you for your email letter regarding the interpretation of the definition of "servicing mortgage loans" in Banking Law ("BL") Section 590(1)(i), as used in BL Section 590(2)(b-1). As you know, these provisions were added by the legislature in chapter 472 of the Laws of 2008. We are aware that there has been some confusion as to the meaning of these provisions, and we are pleased to provide you with our interpretation.
As your letter points out, BL Section 590(2)(b-1) provides that an exempt organization, such as a bank, is not required to register as a "mortgage loan servicer," but it must (i) notify the Superintendent that it is acting as a "mortgage loan servicer" and (ii) comply with any regulation applicable to mortgage loan servicers promulgated by the Banking Board or prescribed by the Superintendent with respect to mortgage loan servicers. Effective October 1, 2010, the Superintendent adopted Part 419 of the Rules of the Superintendent, entitled Servicing Mortgage Loans: Business Conduct Rules, which contains specific requirements with respect to the servicing of residential mortgage loans by mortgage loan servicers.
Your letter points out that Section 590(1)(h) defines a "mortgage loan servicer" as a person who engages in the business of "servicing mortgage loans" for property located in New York and Section 590(1)(i) defines "servicing mortgage loans" as "receiving any scheduled periodic payments from a borrower..., including amounts for escrow accounts ..., and making the payments to the owner of the loan or other third parties ... pursuant to the terms of the mortgage service loan documents or servicing contract." (emphasis added) You note that a number of your community bank clients take believe they are not "servicing mortgage loans" if (i) they receive mortgage payments only with respect to mortgage loans that they themselves have made, own and have never transferred to another party, and (ii) they do not receive any tax or insurance payments to be escrowed and later paid to taxing authorities or insurance companies. You argue that the language used in the definition of "servicing mortgage loans" contemplates that the owner of the mortgage loan must be a third party, and not the lender itself.
The Banking Department does not concur in this position.The definition of "servicing mortgage loans" in BL Section 590(1) comes, almost in haec verba, from the regulation adopted under the Real Estate Settlement Procedures Act ("RESPA"), 24 CFR Part 3500.2. That regulation defines "servicing" as follows:
Servicing means receiving any scheduled periodic payments from a borrower pursuant to the terms of any mortgage loan, including amounts for escrow accounts under section 10 of RESPA (12 U.S.C. 2609), and making the payments to the owner of the loan or other third parties of principal and interest and such other payments with respect to the amounts received from the borrower as may be required pursuant to the terms of the mortgage servicing loan documents or servicing contract. In the case of a home equity conversion mortgage or reverse mortgage as referenced in this section, servicing includes making payments to the borrower.
The RESPA regulation makes clear that the term servicer includes not only those who collect mortgage payments and pay them to third parties, but also those who collect payments on their own behalf:
Servicer means the person responsible for the servicing of a mortgage loan (including the person who makes or holds a mortgage loan if such person also services the mortgage loan).
Given the history and wide application of RESPA, we do not believe that banks servicing their own mortgage loans should be surprised that the servicing rules apply to them.
We also think it is clear that the drafters of chapter 472 intended the new provisions with respect to mortgage loan servicers apply as broadly as the RESPA standards. Not only did they use the RESPA definition, but the stated purpose of the bill that became chapter 472 included "registering and regulating mortgage loan servicers to enhance loan servicing standards in the state." See Sponsor's Memo to S8143-A. There is no indication that they wanted to enhance standards only with respect to mortgages serviced on behalf of third party owners.
Consequently, the Banking Department interprets "servicing mortgage loans" as including a banking organization when it collects principal and interest payments for its own account, irrespective of whether it also collects taxes and insurance premiums and pays them to a third party.
One community bank has mentioned to us that they thought the reporting and recordkeeping requirements of the conduct of business rules seemed targeted at servicers who service mortgage loans for others. The Department does not believe that was the intent of the drafters of Part 472 and it was certainly not the Department's intent in drafting the conduct of business rules. We have received numerous complaints from borrowers about the servicing of their mortgage loans, both when the servicer was the lender/owner, and when the servicer was a secondary market purchaser or its agent. It is true that a small number of the recordkeeping requirements apply only to mortgages serviced by others (e.g. the log of communications between the servicer and a previous loan servicer, the lender or owner, or the mortgage holder or a person acting on the holder's behalf). However, the bulk of the required information also applies to loans serviced by the lender on its own behalf, and that information must be available for review by the Department's examination staff.
Although the Superintendent adopted Part 419 on an emergency basis, we will continue to accept comments on the Rule while the Rule goes through the approval process under the State Administrative Procedure Act. If your clients have comments on the conduct of business standards, or their application to depository institutions that only service mortgage loans they hold in their own portfolios, we would be happy to hear them. For example, the quarterly reporting requirements under Part 419.12 apply only when required by the Superintendent. If there are factors you or your clients believe should exempt an entity from being required to submit quarterly reports, such as having few delinquent loans, we would be interested in your views.I trust the foregoing is responsive to your inquiry.
Marjorie E. Gross
Deputy Superintendent & General Counsel