Kentucky is giving entities that merely hold the rights to service residential mortgage loans just over two months to obtain a license, unless they can provide exemption documentation.

On December 22, 2016, the Kentucky Department of Financial Institutions issued a Memorandum stating that it will require "master servicers," as well as "subservicers," to be licensed as mortgage companies under the Kentucky Mortgage Licensing and Regulation Act.

The Act requires a person to obtain a mortgage company license if (among other activities) it "directly or indirectly . . . services mortgage loans, or holds oneself out as being able to do so." According to the Department's recent Memorandum, a "master servicer" is any entity or individual that owns the right to perform servicing of a mortgage loan. The Department notes that a master servicer typically reserves the legal right to either perform the servicing itself or to do so through a subservicer. Since the Department concludes that a master servicer both holds itself out as being able to service loans and indirectly services them though a subservicer, a master servicer falls within the scope of the licensing requirement, unless an exemption applies.

The Department's position is not unique. Regulators in other states with mortgage finance licensing statutes that either (i) apply to persons that service loans directly or indirectly, or (ii) define a servicer to be a person that has the right or responsibility to service loans, have applied their laws to those that merely acquire or hold the servicing rights. Any person that actually services mortgage loans for others in Kentucky, or that purchases such loans, should already be licensed under the Kentucky Act (unless exempt), so the impact of the Department's new interpretation will hit entities acquiring and holding mortgage loan servicing rights the hardest.

In addition, one aspect of the Memorandum will come as a surprise for certain exempt entities. The Memorandum states that a master servicer (or subservicer), as described above, that is not already licensed as a mortgage company under the Act must obtain a license by March 1, 2017, unless the entity can document to the Department, in writing, that it is specifically exempt under the Act.  Section 286.8-020(6) of the Act, however, expressly relieves a number of exempt entities (e.g., banks, or bank subsidiaries under certain conditions) from needing to make any filing with the Department. As the Memorandum is inconsistent with the Act in that regard, Mayer Brown's Consumer Financial Services group has sought confirmation from the Department that the Memorandum is not intended to impose a new filing obligation on those exempt entities.

Moreover, the Memorandum asserts that the Department may pursue appropriate administrative action against master servicers or subservicers that engage, either directly or indirectly, in servicing activities after March 1, 2017 without a mortgage company license from the Department. As the Memorandum is the Department's first formal guidance on the licensing obligation for master servicers (or subservicers), we have sought confirmation that the Department will not impose penalties on nonexempt entities that have been merely holding servicing rights without a license prior to March 1. We will post an update if and when the Department responds, which we do not expect until after the first of the year.

Originally published December 28, 2016

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