The Small Servicer Exemption and Charitable Servicing

Issue/Inquiry

The Bank wants to service mortgage loans made by a nonprofit lender. Will this affect its status as a small servicer? Can it receive any fees or compensation for servicing such loans?

Response Summary

A creditor qualifies for the small servicer exemption from the Mortgage Servicing Rules if it services 5,000 or fewer mortgage loans of which it is either the owner or assignee. If it services loans which it does not own and did not originate, then it cannot qualify as a small servicer, even though it may service fewer than 5,000 loans. However, mortgage loans voluntarily serviced for which a servicer does not receive fees or compensation are not considered in determining whether it is a small servicer.

Response Detail

The Mortgage Servicing Rules of RESPA (Regulation X) and the TILA (Regulation Z) generally apply to consumer mortgage loans. Regulation X requires servicers to establish reasonable policies and procedures for servicing loans, early intervention with delinquent mortgage loan borrowers, providing loss mitigation options, and maintaining contact with borrowers. It also requires servicers to correct errors asserted by borrowers, provide them with requested information, and provide certain protections with respect to force-placed hazard insurance.

Regulation Z has requirements pertaining to providing adjustment notices for adjustable-rate mortgages, periodic statements for residential mortgage loans, prompt crediting of mortgage payments, and responding to requests for payoff amounts.

Small servicers are exempt from some of the Mortgage Servicing Rules. To qualify as a “small servicer,” the creditor, servicer, or assignee must service 5,000 or fewer mortgage loans, for which it is either the creditor or assignee. 12 CFR §1026.4(e)(4)(ii).

There are two elements in satisfying the small servicer test:

• The servicer must service 5,000 or fewer mortgage loans; and
• The servicer must service only mortgage loans it either currently owns or was the entity to which the mortgage loan obligation was initially payable to. Official Interpretations, 1026.4(e)(4)(ii) – 2.

This means that, even if the servicer is servicing fewer than 5,000 loans that it owns or originated, but is also servicing loans that it does not own and did not originate, it will not be considered a small servicer.

The official commentary provides an example of a bank that serviced 3,000 mortgage loans of which it was the creditor or assignee, and 100 loans that it did not own or originate, but for which it had the loan servicing rights. Such a bank was not considered to be a small servicer, since it was servicing 100 loans of which it was not the creditor or assignee, even though it serviced fewer than 5,000 mortgage loans.  Official Interpretations, 1026.4(e)(4)(ii) – 2.

In this case, the Bank would be servicing mortgage loans that it does not own and did not originate. Would this disqualify it from being a small servicer? Regulation Z provides that the mortgage loans considered in determining status as a small servicer are closed-end consumer transactions secured by a dwelling, subject to certain exclusions:

• Mortgage loans voluntarily serviced by the servicer for a non-affiliate of the servicer and for which the servicer does not receive any compensation or fees
• Reverse mortgage transactions
• Mortgage loans secured by consumers’ interests in timeshare plans
• Seller financing provided by a natural person, estate, or trust. 12 CFR §1026.4(e)(4)(iii).

When the CFPB first proposed the Mortgage Servicing Rules, it received much feedback that if banks were disqualified from being small servicers because they were servicing loans for non-profit entities, notwithstanding that they were doing so for charitable purposes, without fees or compensation, they would likely refrain from such servicing. Consequently, it revised the proposed rules to exclude charitably serviced loans from consideration in determining whether a servicer qualifies as a small servicer; that is, mortgage loans voluntarily serviced for a non-affiliate creditor or assignee and for which the servicer does not receive any compensation or fees. In response to one comment when the final rules were published, the CFPB said that the exclusion with respect to volunteer servicing is not limited to the servicing of mortgage loans owned or originated by nonprofit organizations, although it suspected that most charitable servicing is done on behalf of such organizations. 78 Federal Register 44685 (July 24, 2013), 44696.

The exclusion of mortgage loans serviced by the servicer for which it does not receive any compensation or fees is reflected in the official commentary. It states that mortgage loans that are not considered for purposes of determining whether a servicer is a small servicer are not considered either for determining whether a servicer services 5,000 or fewer mortgage loans or whether it is servicing only mortgage loans that it owns or originated. For example, if a servicer services 5,400 mortgage loans, of which it owns or originated 4,800, voluntarily services 300 for a nonprofit organization that it does not own and did not originate, and services 300 reverse mortgage loans that it does not own and did not originate, then it qualifies as a small servicer, since the only loans counted towards the 5,000 mortgage loan threshold are the 4,800 mortgage loans that it owns or originated. Official Interpretations, 1026.4(e)(4)(iii) – 3.

This means that if the Bank will be servicing the mortgage loans in question without compensation or fees, then the loans will not be considered in determining whether the Bank qualifies as a small servicer.

This entry was posted on Monday, November 13th, 2017 at 6:00 am.