Industry Letter

Obligation of Organizations Exempt from Licensing as Mortgage Loan Servicers to Comply with Mortgage Servicer Notice and Conduct of Business Rules

October 20, 2010

Obligation of Organizations Exempt from Licensing as Mortgage Loan Servicers to Comply with Mortgage Servicer Notice and Conduct of Business Rules

To Institutions Addressed

Section 590(2)(b-1) of the Banking Law (“BL”) provides that an exempt organization, such as a bank, savings bank or credit union, 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. This provision was added to the Banking Law by Chapter 472 of the Laws of 2008. 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.

The Banking Department has received a number of inquiries about whether an exempt organization that makes mortgage loans, keeps them in portfolio and services only its own mortgage loans must make the notification required by Section 590(2)(b-1) and comply with the servicer conduct of business rules, and whether the answer depends upon whether the banking organization escrows payments for taxes and insurance and pays them to taxing authorities or insurers.

The purpose of this letter is to confirm that an exempt organization is considered a mortgage loan servicer when it collects principal and interest payments on loans it holds in portfolio, as well as when it services loans for third parties.

Section 590(1) defines a "mortgage loan servicer" as a person who engages in the business of "servicing mortgage loans" for property located in New York and 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."

This definition is almost word-for-word the same as the definition of “servicing mortgage loans” in the regulations adopted under the Real Estate Settlement Procedures Act (“RESPA”), 24 CFR Part 3500.2. The RESPA regulations make 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).

We believe it is clear that the drafters of Chapter 472 intended the new provisions with respect to mortgage loan servicers to 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, we consider all banking organizations that collect principal and interest payments with respect to mortgages they hold in portfolio to be servicing mortgage loans, and thus required to notify the Banking Department of that fact under BL Section 590(2)(b-1) and to comply with the Conduct of Business Rules for Mortgage Loan Servicers.

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. Banking organizations that have comments on the conduct of business standards, or their application to banking organizations that service only mortgage loans they hold in their own portfolios, should feel free to provide them to the Banking Department.

If you have questions related to this Industry Letter, please contact Jane Azia, Director of Non-Depository Institutions and Consumer Protection at (212) 709-3503 or [email protected].