Can a Bank Lose its Small Servicer Exemption if it Originates Mortgage Loans That It Sells But Still Services?

By Leslie Callaway, CRCM, CAFP; Mark Kruhm, CRCM, CAFP; and Rhonda Castaneda, CRCM

Q Under the mortgage servicing rules, would a bank lose its small servicer exemption if it originates mortgage loans that it sells to an investor but still services?

A If your bank originated the loan, the bank still qualifies as a small servicer if all other conditions are met.

Comment 2 to §1026.41(e)(4)(ii) of Regulation Z explains that to qualify as a small servicer, the servicer must service only mortgage loans for which the servicer (or an affiliate) is the creditor or assignee. “To be the creditor or assignee of a mortgage loan, the servicer (or an affiliate) must either currently own the mortgage loan or must have been the entity to which the mortgage loan obligation was initially payable (that is, the originator of the mortgage loan).”

In your case, the mortgage loan was initially payable to the bank. Of course, the bank must meet the other condition that, together with any affiliates, it services 5,000 or fewer mortgage loans for which the servicer (or affiliate) is the creditor or assignee. (Response provided June 2020.)

Q If, due to forbearance or similar promotion, a home equity line of credit customer is not required to make a payment for a period of time (for example, three months), is a periodic statement still required under Regulation Z?

A Yes. Under, §1026.5(b)(2)(i) and the related commentary, periodic statements are required in any billing cycle on which a finance charge has been imposed or on which an account has a debit or credit balance of $1 or more. Simply removing or not imposing interest does not, by itself, eliminate the requirement to provide a statement. Exceptions to this statement requirement are limited to situations where an account is deemed “uncollectible”; delinquency collection actions have started; the account has been charged off and no additional fees or interest will be charged; or where furnishing the statement would violate federal law. Moreover, other provisions of the regulation may be affected by the date the periodic statements are mailed or delivered, such as §1026.13 which relating to billing error resolutions. (Response provided June 2020.)

Q An individual borrower on a consumer unsecured line of credit has requested that the bank add an additional borrower to the account. Does Regulation Z require the bank to provide the new borrower account-opening disclosures?

A No. Section 1026.5(d) explains, “If there is more than one consumer, the disclosures may be made to any consumer who is primarily liable on the account.” (Different rules apply in transactions subject to the right of rescission.) However, there may be legal or similar provisions (for example, state or contract law) that would warrant providing a copy of the agreement and other information to the new borrower. Please check with legal counsel for guidance. (Response provided June 2020.)

Q Is there any fair lending risk associated with consideration of foster care payments as income, assuming the applicant provided it voluntarily?

A No, assuming the same consideration is made for all similarly situated applicants. Note that there is generally no prohibition in considering income from any source. However, there are restrictions on what information lenders may request. For example, §1002.5(d) in Regulation B indicates a creditor may not inquire whether income stated in an application is derived from alimony, child support or separate maintenance payments. However, that prohibition does not extend to foster care payments, which appear not to qualify as such. (Response provided June 2020.)

Answers are provided by Leslie Callaway, CRCM, CAFP, director of compliance outreach and development; Mark Kruhm, CRCM, CAFP, senior compliance analyst; and Rhonda Castaneda, CRCM, senior compliance analyst, ABA Regulatory Policy and Compliance. Answers do not provide, nor are they intended to substitute for, professional legal advice. Answers were current as of the response date shown at the end of each item.