Pub. 5 2014 Issue 2

www.wvbankers.org 12 West Virginia Banker T his year ushered in new mortgage servicing rules promulgated by the Consumer Financial Protection Bureau (“Bureau”). The rules implement certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), which was passed in 2010 to protect consumers from perceived abuses in the financial services industry. By now, most bankers are familiar with the rules, but questions are still raised about the exemptions. Specifically, which of the mortgage servicing rules apply to my bank? This article focuses on the exemp- tions, and in particular, the small servicer exemption. The mortgage servicing rules are found in either Regulation Z - Truth in Lending Act or Regulation X - Real Estate Settlement Procedures Act. Exemptions can occur in a variety of ways, e.g., by definition or by an affirmative statement that certain loans are exempt. The new mortgage servicing rules created a new exemption category, called the “Small Servicer” exemption. Creating the Small Servicer Exemption Dodd-Frank tasked the Bureau with con- sidering potential costs and benefits of the proposed regulations, and in particular, the impact on smaller financial institu- tions. Dodd-Frank also gave the Bureau authorization to create exemptions where appropriate. The Bureau’s analysis of the proposed mortgage servicing rules considered the business model that has evolved for servicing high volumes of mortgage loans, which the Bureau distinguished from ser- vicers that rely on local reputation and are therefore motivated to provide what the Bureau considered higher quality servic- The Small Servicer Exemption to the Consumer Financial Protection Bureau’s Mortgage Servicing Rules ing. Generally, the latter are community banks and credit unions that service only loans they originate, build relationships with their customers and depend upon re- peat business. Beginning with this prem- ise, and with input from its Small Business Review Panel, the Bureau concluded that an exemption to the mortgage servicing rules was appropriate for servicers that (i) service a relatively small number of loans and (ii) originate the loans and retain either ownership or servicing rights. Defining the Small Servicer (12 C.F.R. 1026.41(e)(4)) The final regulations define a Small Servicer as one that, (i) together with affiliates, services 5,000 or fewer mortgage loans, (ii) for which the servicer or affiliate is the creditor or assignee. Both prongs must be met to qualify as a Small Servicer. A servicer (or affiliate) is a creditor or assignee if it currently owns or originated the loan. Only closed-end consumer credit transac- tions secured by a dwelling are considered, both for counting the number of loans and for qualifying status as creditor or assign- ee. Open-end lines of credit are excluded. Also excluded are reverse mortgages and loans secured by a timeshare plan. For example, if the servicer (with affiliate) services 5,200 mortgage loans, but 300 of them are reverse mortgages, the servicer may qualify as a Small Servicer because the 300 reverse mortgages are not included in the loan count. If the servicer is not the creditor or assign- ee for one or more of the mortgage loans it services, the servicer cannot qualify as a Small Servicer regardless of how many loans it services. For example, if a servicer services 4,500 loans, but neither the servicer nor an affiliate is a creditor or assignee for 100 of those loans, the servicer cannot qualify as a Small Servicer, even if the servicer has mortgage servicing rights for those 100 loans. If the servicer services 4,000 loans and its affiliate services 2,000 loans, the servicer cannot qualify as a Small Servicer because the total exceeds 5,000. Mortgage loans acquired by a servicer or affiliate as part of a merger or acquisition are considered loans for which the servicer or affiliate is the creditor. Small Servicer status is not lost by retaining a subservicer, but a subservicer By Debra Hovatter, Spilman, Thomas & Battle, PLLC