The question of whether a state mortgage finance licensing obligation arises to acquire and hold mortgage loans or mortgage loan servicing rights has often generated confusion and raised questions among mortgage finance companies buying residential mortgage loans or mortgage servicing rights. Such uncertainty as to whether a state’s mortgage lender or servicer law applies to license such activities is also shared by certain state regulators.

Based on our analysis, few state mortgage finance licensing laws expressly extend the licensing obligation to purchase, acquire, or hold residential mortgage loans. More state mortgage financing licensing laws extend the licensing obligation to those who acquire, purchase, or hold mortgage loan servicing rights than those that extend the licensing obligation to those who acquire, purchase, or hold mortgage loans. From our analysis, the state regulators who apply their state’s mortgage lender or servicer licensing obligation to those who acquire and hold mortgage loan servicing rights do so based on one of four criteria, because the state law expressly provides that it applies to license those who:

1. hold servicing rights (New Hampshire is an example of such a state);
2. directly or indirectly service residential mortgage loans (Connecticut is an example of such a state);
3. have the right or responsibility to service residential mortgage loans (Arkansas is an example of such a state); or
4. are in the business of servicing residential mortgage loans (Kentucky is an example of such a state).

Now comes Maryland. The Maryland Mortgage Lender Law (the “Law”) licenses residential mortgage loan servicers, and defines the term mortgage servicer to mean “a person who: (1) engages in whole or in part in the business of servicing mortgage loans for others; or (2) collects or otherwise receives payments on mortgage loans directly from borrowers for distribution to any other person.” Md. Code Ann. Fin. Inst. § 11-501(n) (emphasis added). For a number of years, Maryland regulators have claimed that a license under the Law was needed merely to hold mortgage loan servicing rights but never took action to assert their position. Indeed, proposed regulations along those lines were published in 2016, and again in 2017, but those proposed regulations were never adopted and were eventually withdrawn. Additionally, an Advisory Opinion that took the position that certain secondary market activities, including holding mortgage loan servicing rights, was also discussed but was never issued. Then in October of 2019, Maryland added to its regulations a much broader definition of “mortgage servicer,” which “includes a person that engages in one or more of the following actions for the benefit of other persons in connection with mortgage loans:

(a) Collects or receives payments directly from borrowers for distribution to the owner of the mortgage loan or another third party, including a master servicer; (b) Evaluates borrower eligibility for loss mitigation options; (c) Communicates to the borrower regarding loss mitigation options; (d) Is responsible for supervision of third parties that take action to protect a secured party's interest in the property under the applicable security instrument, including: (i) Maintenance of hazard and mortgage insurance coverage; and (ii) Preservation of the property; or (e) Conducts or supervises the foreclosure process, except if the person is an attorney representing a mortgagee or its successors and assigns, or is acting as a substitute trustee in a foreclosure action under a deed of trust.”

MD. CODE REGs. 09.03.06.02(28) (emphasis added).

Although the definition of mortgage servicer includes one who engages in whole or in part in the business of servicing mortgage loans, the person must be in the business of servicing mortgage loans for others or conducting the activities described in the regulation, such as collecting or receiving payments directly from borrowers for distribution to the owner of the mortgage loan or other third party, for the activity to be subject to licensing under the Law. Generally, those who acquire and hold mortgage loans or mortgage servicing rights do not do so for others, but do so for themselves as an investment, and contract out the actual servicing to licensed or exempt servicers, who conduct servicing activities for others.

Late last year, the Maryland Commissioner of Financial Regulation (the “Regulator”), which is responsible for the licensing and regulation of certain persons who make, broker, and/or service consumer loans secured by residential real property, took action against a holder of mortgage loan servicing rights (the “Respondent”) and through issuance of a settlement agreement and consent order (the “Agreement”), alleged that as a holder of mortgage servicing rights, the Respondent was acting as a master servicer, which was required to be licensed pursuant to the Law.

On December 31, 2020, the Regulator entered into a settlement agreement and consent order with the Respondent. As presented in the Agreement, the Respondent was licensed as a Maryland mortgage lender for a period of time prior to and through 2015. However, in 2015, the Respondent surrendered its mortgage lender license “when it ceased its mortgage loan origination activities and transferred its servicing portfolio to a subservicer.” The Regulator alleged that the Respondent was neither exempt from licensing under the Law nor duly licensed under the Law as a Maryland mortgage lender authorized to engage in the mortgage lending business as those terms are defined in FI § 11-501(j)[1] and (k)[2] since surrendering the Maryland mortgage lender license in 2015.

Specifically, the Regulator alleged that the Respondent, as owner of the servicing rights and responsible for any and all obligations under all respective master servicing agreements, serviced a number of Maryland mortgage loans for others without benefit of a license under the Law. Further, the Agreement conveys that it was the Regulator’s position that pursuant to the Law, “a mortgage servicer, including a master servicer, is required to be licensed under the Law, whether directly handling the day-to-day servicing obligations, or relying on subservicers to do the same.” For this reason, the Regulator alleged that the Respondent, while acting as a master servicer as holder of mortgage servicing rights, engaged in unlicensed activity as a mortgage servicer in violation of the Law. The Respondent, without admitting to any of the alleged violations, agreed to certain terms and conditions to resolve the alleged violations, including but not limited to seeking a Maryland Mortgage Lender License and the payment of an administrative fee and monetary penalty.[3]

Certainly, the Agreement leaves a number of questions unanswered, but minimally, it seems that the Maryland regulators are revisiting their interpretation of the licensing obligation for persons who own mortgage servicing rights, and it is clear that they have now chosen to publicize their interpretation of the Law through this Agreement.

Like most state regulators, the Maryland regulators recognize that there are generally two types of holders of mortgage servicing rights to which they give consideration: (1) persons that purchase and hold only the mortgage servicing rights (not the underlying loan); and (2) persons that purchase residential mortgage loans along with the mortgage servicing rights. In both cases, the purchasers may retain third-party licensed servicers to perform the servicing activities. It is our understanding that the Maryland regulators’ reason that certain persons that purchase residential mortgage loans along with the mortgage servicing rights may not be subject to a licensing obligation under the Law if there is no servicing of the mortgage loan for another as required by the mortgage servicer definition. However, we note that a thorough analysis of the licensing obligations should be undertaken as other licensing obligations, such as a Maryland collection agency license for example, may be applicable under certain circumstances if any of the loans were in default when acquired.

Conversely, as it pertains to the persons who hold only the mortgage servicing rights, it is our understanding that the Regulator has reasoned that since such persons ultimately have an obligation to certain investors, the holder of the mortgage servicing rights is more akin to a master servicer. (Of note, the term “master servicer” is not defined in the Maryland statute or regulations.) Although the Agreement alleges that conclusion, it is questionable whether the Agreement clearly expresses the underlying rationale for such a conclusion. Therefore, it is our further understanding that the Regulator reasoned that: (1) the servicing activities in this scenario are being conducted on behalf of another (i.e., the investors); (2) the third-party servicer who is performing servicing activities on behalf of another is an agent of the holder of the mortgage servicing rights and is subject to a licensing obligation under the Law; and (3) since the third-party servicer is acting pursuant to the legal obligation of the holder of the mortgage servicing rights to another (i.e., the investors), the holder of the mortgage servicing rights is a master servicer to whom the licensing obligation under the Law is also extended. On inquiry, the Regulator further advised that since use of a subservicer does not discharge the obligation to the investors, the interpretation is in part based on the requisite obligation, not just the actions of the parties.

As you may note, the allegations in and conclusion from the Agreement are not explicitly expressed in the Law or the Maryland regulations, but they are indicative of the ever changing regulatory landscape related to the licensing obligations for persons who acquire and hold mortgage loans and/or mortgage servicing rights. Certainly state regulators are rigorously enforcing their statutes, and some, like Maryland, are demanding that certain holders of mortgage servicing rights become licensed in their jurisdictions. Therefore, it is imperative that state requirements related to the licensing obligations for persons who acquire and hold mortgage loans and/or mortgage servicing rights be continually monitored as failure to do so may be injurious.

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