August 11, 2014
by Robert Wichowski and David Borrino
Bendett & McHugh, P.C.
USFN Member (Connecticut, Maine, Vermont)
Connecticut Public Act 14-89 (formerly House Bill 5353) (the Act) has been signed into law. The Act will significantly affect the business of mortgage servicing in Connecticut. The Connecticut Department of Banking was the impetus for legislative adoption of the Act, which is formally entitled, “An Act Concerning Mortgage Servicers, Connecticut Financial Institutions, Consumer Credit Licenses, The Foreclosure Mediation Program, Minor Revisions to the Banking Statutes, The Modernization of Corporation Law and Reverse Mortgage Transactions.”
The Act creates licensing, reporting, bonding, a code of conduct, and other requirements for mortgage servicers. It also extends the sunset date for the state’s mediation program into 2016 and creates a task force to examine reverse mortgages (home equity conversion mortgages). A copy of the full text of the Act can be found here: http://www.cga.ct.gov/2014/act/pa/pdf/2014PA-00089-R00HB-05353-PA.pdf.
Mortgage Servicing Licensing and Regulation
Section 4 of the Act requires, as of January 1, 2015, any entity that services mortgages in Connecticut that is not a federally-insured bank, out-of-state bank, credit union or federal credit union (or any wholly owned subsidiary), or that is not licensed as a mortgage lender or mortgage correspondent lender in Connecticut to obtain a license to continue to service mortgages in Connecticut.
Section 5 sets forth licensing prerequisites. To obtain a license, an entity needs to have a “qualified person” at its main office and each branch office. A qualified person is required to have supervisory authority at the office location and to have had at least three years’ experience in the mortgage servicing business within the five years immediately preceding the application. Experience in the mortgage servicing business is defined as paid experience in the: (1) servicing of mortgage loans; (2) accounting, receipt, and processing of payments on behalf of mortgagees or creditors; (3) supervision of such activities or (4) any other experience as determined by the Connecticut Commissioner of Banking (Commissioner). No person with any supervisory authority at the office for which the license is sought can have been convicted of, or pled guilty or no contest to, in a domestic, foreign or military court: (1) a felony within the seven years prior to the application; or (2) a felony involving fraud, dishonesty, breach of trust, or money laundering at any time. An applicant shall demonstrate the financial responsibility, character, and general fitness of any person who shall have supervisory authority at the office for which the license is sought. The applicant will need to provide a statement specifying the duties and responsibilities of the person’s employment including dates of employment and contact information of a supervisor, and an employer or business reference (if self-employed). The Act also allows the Commissioner to conduct criminal and background checks and requires fingerprints be submitted. There is an application fee of $1,000, which is required to be submitted with the application. (All fees required by the Act are non-refundable.) The Act also provides for automatic license suspension after notice from the Commissioner.
Section 6 contains filing requirements. The Act institutes an annual filing requirement for mortgage loan servicers. At least annually, the servicer shall file with the Commissioner a schedule of the ranges of costs and fees it charges mortgagors for its servicing-related activities and a report detailing a mortgage servicer’s activities in the state including the following: (1) the number of residential loans serviced; (2) the type and characteristics of the loans; (3) the number of serviced loans in default with a breakdown of 30-, 60-, and 90-day delinquencies; (4) information on loss mitigation activities, with details on workout arraignments undertaken; and (5) information on foreclosures commenced in the state.
Additionally, the servicer must notify the Commissioner at least 30 days prior to the servicer changing its name and provide an endorsement, amendment, or rider to the bond, and evidence of errors & omissions insurance. Also, the servicer must notify the Commissioner within five business days of any of the following: (1) Files for bankruptcy or consummates a corporate restructuring; (2) Is criminally indicted, or receives notice that any of its officers, directors, members, partners, or shareholders owning 10 percent or more of its outstanding stock is indicted for, or convicted of, a felony; (3) Receives notice of the institution against it of license denial, cease and desist, suspension or revocation procedures, or other formal or informal regulatory action by any governmental agency and the reasons for the action; (4) Receives notice that the attorney general of this or any other state has initiated an action, presumably against the licensee, and the reasons for it; (5) Knows that its status as an approved seller or servicer has been suspended or terminated by the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation or Government National Mortgage Association; (6) Receives notice that certain of its servicing rights will be rescinded or cancelled, and the reasons why; (7) Receives notice that any of its officers, directors, members, partners, or shareholders owning 10 percent or more of its outstanding stock has filed for bankruptcy; or (8) Receives notice of a consumer class action lawsuit against it that is related to the operation of the licensed business.
Section 7 contains license terms and fees and provides that each license will expire on December 31 of the year that it is issued, unless renewed. If the license is approved on or after November 1, the license will expire December 31 of the following year. The Act specifies that an application for license renewal must be filed between November 1 and December 31 of the year in which the license expires.
Section 8, effective October 1, 2014, requires every mortgage servicer applicant or licensee and specified mortgage lending licensee to file with the Commissioner, a surety bond, a fidelity bond and evidence of errors and omissions coverage. The surety bond must be in the amount of $100,000 per office location and run concurrently with the term of the mortgage servicing license. The surety bond must be conditioned on the applicant faithfully performing any and all written agreements with or for the benefit of mortgagors and mortgagees; faithfully accounting for all funds received in connection with mortgage servicing operations and complying with the law.
The fidelity bond and errors and omissions coverage must include the Commissioner as an additional loss payee. The amount of the bond and coverage is based on the servicer’s volume of servicing as reported to the Commissioner.
Section 9, effective October 1, 2014, requires every mortgage servicer licensee and specified mortgage lending licensee maintain adequate records of each loan, or make such records available at the request of the Commissioner and requires that such records be maintained for at least two years after the loan has been service released or paid off. The records can be presented to the Commissioner at his office, or mailed registered or certified or sent via any express delivery carrier that provides a dated delivery receipt, within five days of such request by the Commissioner. The records shall include: (1) an itemized loan history; (2) the original or an exact copy of the note, mortgage, or other evidence of the debt; (3) the name and address of the mortgage lender, mortgage correspondent lender, and mortgage broker, if any; (4) copies of any state- or federally-required disclosures or notifications; (5) a copy of any approved bankruptcy plan, (6) a communications log, and (7) a copy of any notices sent to the mortgagor related to any foreclosure proceeding.
Section 10, effective January 1, 2015, provides that, upon assignment of servicing rights of a residential mortgage loan, the mortgage servicer must disclose to the mortgagor any required RESPA or TILA notice, together with a schedule of the ranges and categories of its costs and fees for its servicing-related activities.
Section 11, also effective January 1, 2015, obligates mortgage servicers to comply with all applicable federal laws and regulations relating to mortgage loan servicing, in addition to any other remedies; failure to do so may be grounds for the Commissioner to take enforcement action under Section 15 of the Act (see below).
Section 12 institutes a requirement that a mortgage servicer shall maintain a schedule of fees and costs that it charges mortgagors for servicing-related activities. In instances where there is no set fee, the schedule shall contain a range of fees. Section 12 also imposes a restriction on mortgage servicers from imposing a late fee or delinquency charge when the only delinquency is attributable to a late fee or delinquency charge on an earlier payment when such payment would have been a full payment but for such charges. Section 12 is effective on January 1, 2015.
Section 13, effective January 1, 2015, establishes a code of conduct for mortgage servicers. (See the discussion of section 17 below and the statutory ambiguity as to which entities are exempted from provisions of section 13.) Section 13 sets forth a list of 19 categories of prohibited conduct by mortgage servicers, including:
Misleading mortgagors directly or indirectly or defrauding any person;
- Engaging in unfair or deceptive practices either through action, omission, or misrepresentation;
- Obtaining property by fraud or misrepresentation;
- Knowingly or recklessly misapplying payments to the outstanding balance;
- Knowingly or recklessly misapplying payments to an escrow account;
- Placing insurance on the mortgaged property when the servicer knows or has reason to know the mortgagor has an effective policy for such insurance;
- Failing to timely comply with a request for payoff or reinstatement;
- Knowingly or recklessly misreporting to a credit bureau;
- Failing to report payment history to a credit bureau at least annually;
- Collecting PMI beyond the date that PMI is required;
- Failing to properly or timely release a mortgage;
- Failing to notify a mortgagor of force-placed insurance;
- Placing force-placed insurance in an amount that exceeds the replacement cost of the improvements;
- Failing to provide to the mortgagor a refund of force-placed insurance if the mortgagor provides reasonable proof that the force-placed policy is not required;
- Requiring remittance of funds in a method more costly than a bank or certified check;
- Refusing to communicate with a mortgagor’s authorized representative;
- If required to hold a mortgage servicing license, conducting any business as a mortgage servicer without a license;
- Negligently or wilfully making a false statement to a government agency; and
- Attempting to charge or collect a fee that is prohibited.
Sections 14, 15, and16, effective October 1, 2014, grant to the Commissioner the authority and power to conduct broad investigations and examinations, including the ability to view and inspect records and documents and compel the presentation of records and attendance of individuals whose testimony may be required about residential loans. The Commissioner may suspend, revoke, or refuse to renew any mortgage servicer license after investigation and a finding that the mortgage servicer: (1) made a material misstatement on the application; (2) committed any fraud, misrepresentation, or misappropriation of funds; (3) violated any provision of the banking laws; or (4) failed to perform any agreement with a mortgagee or mortgagor.
Section 17 clearly provides, from its effective date of October 1, 2014, an exemption from sections 5 through 13 of the Act for: (1) mortgage and correspondent lenders servicing their own loans; (2) any entity servicing five or fewer loans in any 12 consecutive months; and (3) any agency of the federal, state, or municipal government. There is, however, complete ambiguity as to whether an exemption is also granted to any entity exempted from licensure under Section 4(b)(1), (2), and(3) of the Act, which includes federally insured banks, out-of-state banks, state and federal credit unions, and wholly-owned subsidiaries of such banks or credit unions. Section 17 of the Act states that such entities are exempted from sections 5 to 13, inclusive, of the Act; however, Section 4(c) expressly provides that sections 10 through 13, inclusive, applies to any entity acting as a mortgage servicer in Connecticut on or after January 1, 2015, even those exempted from licensure under section 4(b).
Mediation and Reverse Mortgages
Sections 38 and 46 extend the Connecticut Court-Annexed mediation program until 2016. Under the current statute, the program was set to expire in 2014. Also, effective as of October 1, 2014, the Act, section 37, institutes a “premediation review protocol” where the judicial foreclosure mediator can re-request any documents that are incomplete or otherwise likely to be rejected by a foreclosing plaintiff, which potentially may increase the number of productive first or second mediation sessions. Section 51 creates a task force for the purpose of examining the reverse mortgage industry in Connecticut.
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Summer 2014 USFN Report