[kjgreen]

We are a small community bank with well under $5,000 mortgage loans. We do, however, take payments for a scholarship loan program funded by a local attorney–some of which are secured by the borrower’s primary residence. We do not fund the loans, take action on the loans, report to the IRS or act as the creditor in any way aside from taking their payments. Does this knock us out of the Small Servicer Exemption? Thoughts?

[rcooper]

Commentary 12 CFR 1026.41(e)(4)(ii) Small servicer defined.
Small servicers that do not qualify for the exemption. A servicer that services any mortgage loans for which a servicer or an affiliate is not the creditor or assignee is not a small servicer. For example, a servicer that owns mortgage servicing rights for mortgage loans that are not owned by the servicer or an affiliate, or for which the servicer or an affiliate was not the entity to whom the obligation was initially payable, is not a small servicer.
Reg Z 1026.41 defines a mortgage loan as any closed end consumer credit transaction secured by a dwelling. From my understanding of your situation, I would say you do not meet the small servicer exemption requirements since you are servicing another creditors mortgage loans. However, if you don’t own the servicing rights you may qualify under the subservicer provision. If you and the master servicer both meet the small servicer requirements that may be an option. See commentary 12 CFR 1025.41(e)(4)(ii)(2).

[kjgreen]

Thanks rcooper. The scholarship loan program has less than 5,000 mortgage loans, as well, so this would allow us to qualify, correct? That is the way I’m reading the commentary.

[jholzknecht]

I agree with rcooper’s answer, but relief may be on the way. The CFPB recently proposed changes to the serving rules. The proposed revision clarifies the exemption for institutions with small servicing operations. The proposal clarifies that loans serviced on a charitable basis will not be included. To be eligible you cannot impose fees for servicing the loans.

For more information see my blog article on this topic at https://jholzknecht.wordpress.com/2013/04/22/cfpb-proposes-more-changes-to-the-qm-and-servicing-changes/

[kjgreen]

I read through the proposed rule. Apparently the attorney compensates us very minimally once a year–none in connection with any of the loans. If we forego this “handling fee” and it becomes true charitable servicing, under the condition that the proposed rule becomes final, would we then still qualify as a small servicer? I don’t see any reason why we would not, as the rule does not appear to look historically.

[kjgreen]

One more question about this subject, and hopefully I’m done! I think we may have run across a loophole. The scholarship fund that we service for is monies left to an estate. The executor is a local attorney. These funds are not federally insured, nor is the “lender” federally regulated–which appears to mean that they are not federally regulated mortgage loans. Am I on the right track here?

[rcooper]

IMO, that may work for the requirements in Reg X, but probably wouldn’t for Reg Z. Reg Z doesn’t use the same definition of mortgage loan in 1026.41 as is used in Reg X. And if you’re wanting to use the small servicer exemption under 1026.41(e)(4) then I think you would have to use the definition of mortgage loan as defined in that section.

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