What law regulates the servicing of mortgage loans?

The California Residential Mortgage Lending Act (CRMLA) is contained in Division 20 of the California Financial Code, commencing with Section 50000. The regulations are contained in Subchapter 11.5 of Chapter 3 of Title 10 of the California Code of Regulations, commencing with Section 1950.003 (10 C.C.R. §1950.003, et seq.).

The CRMLA was enacted in 1994 and became operative in 1996. The CRMLA was enacted as an alternative to the existing laws licensing lenders under the Real Estate Law and the California Finance Lenders Law, in order to provide mortgage bankers with a licensing law specifically intended to regulate their primary functions of originating and servicing residential mortgage loans. Unlike the Real Estate Law and the California Finance Lenders Law, the CRMLA is specifically designed to authorize and regulate mortgage banking activities. An applicant under the CRMLA may obtain a license as a lender, a servicer, or both.

The CRMLA authorizes licensees to make federally related mortgage loans, to make loans to finance the construction of a home, to sell the loans to institutional investors, and to service such loans. Licensees are authorized to purchase and sell federally related mortgage loans and to provide contract underwriting services for institutional lenders. Licensees are authorized to service any federally related mortgage loan regardless of whether they make the loan or purchase a servicing portfolio.

A licensed CRMLA lender is also authorized to provide brokerage services to a borrower, by attempting to obtain a mortgage loan on behalf of the borrower from an institutional lender.  Employees who engage in brokering activities on behalf of the CRMLA licensee must be licensed mortgage loan originators employed by the licensee.

This  4 minute video offers highlights from the description of mortgage servicing below.

How does mortgage servicing work and who is involved? Broadly speaking, mortgage servicers work with four types of loans. The most common loans are backed by the government-sponsored enterprises, namely Fannie Mae and Freddie Mac, and are called GSE loans. Government loans are backed by the government, portfolio loans are kept by private lenders on their balance sheets, and private-label securities, or PLS loans, are purchased by private investors.

Since the housing crisis, PLS loans have become a tiny portion of the market, and because portfolio loans resemble GSE loans in many aspects, we focus on government and GSE loans, as they constitute the bulk of today’s mortgage loans.

In addition to the servicer and the homeowner, the mortgage servicing industry consists of five key actors. Each of these five parties makes critical decisions that determine how a loan is serviced.

First, there is the lender. After the loan is closed, the lender decides who services the mortgage. Generally, there are two ways for the lender to set up mortgage servicing:

1. The lender decides to service the loan itself, in which case the lender is also the servicer. When this happens, the homeowner makes monthly payments to the lender.
2. The lender can sell the right to service the mortgage to another entity, in which case the homeowner makes monthly payments to that entity, which becomes the servicer of record.

Homeowners do not get to select who services their mortgage after they close the loan. Nor do they have a say if the loan is transferred and the loan servicer changes. Confusion and delays in recording and posting borrower payments can arise when the servicer sells or transfers its servicing rights to another servicer.

Next, there are the insurers and guarantors. Often, the most important players are the insurers and the guarantors. Insurers and guarantors differ slightly, but their general role is the same. They offer protection that the owners of the loans will be paid the principal and interest, even if a homeowner does not make the monthly mortgage payment.

Guarantors and insurers create guidelines that servicers must follow, including guidelines for assisting homeowners who fall behind on mortgage payments. These guidelines often, but not always, give the servicer limited discretion in dealing with the borrower and are usually considered the industry standard.

So who are these insurers and guarantors?

Two federal agencies—the Federal Housing Administration (FHA) and the US Department of Veterans Affairs (VA)—insure nearly one-fourth of new mortgages used to buy homes in the US.

The GSEs—Fannie Mae and Freddie Mac—guarantee nearly half of new mortgages. A third federal agency, the US Department of Agriculture (USDA), also insures a small portion of loans.

And six private mortgage insurers provide additional insurance to some loans guaranteed by Fannie Mae and Freddie Mac.

Then, there is the investor. The investor is the person or entity that owns the loan. Sometimes the investor is the original lender who keeps the loan on its balance sheet, in which case it establishes the rules for servicing the loan. The majority of the time, the investor owns a mortgage-backed security that is insured or guaranteed by a GSE, the FHA, or the VA. In such instances, the insurer or the guarantor sets the servicing guidelines. For a small section of the market, the investor owns a PLS. The servicing guidelines for PLS vary widely depending on the terms of the security’s governing documents.

Finally, there are the regulators. State and federal regulators oversee different aspects of the mortgage finance system. This oversight ensures that servicers comply with consumer protection laws and regulations and that market players are financially stable.

Several federal regulators play oversight roles. One federal regulator, the Consumer Financial Protection Bureau, watches out for consumers’ interests. Others monitor the health of the overall mortgage market, and others oversee specific financial institutions, insurers, or guarantors. Some lenders and servicers are regulated by state entities as well.

State legislatures and sometimes state courts set the rules for foreclosures. In some states and cities, these rules include mediation requirements, which are put in place to avoid foreclosure if possible.

The investors, insurers, guarantors, and regulators make the rules for how servicers work with homeowners. The servicers are then responsible for understanding and following all of these rules and for helping homeowners when they run into trouble paying their mortgages.

In practice, this means servicers are legally accountable to multiple stakeholders: investors, insurers, guarantors, and regulators. Servicers must also comply with consumer protection requirements.

For additional information on mortgage servicing, visit these pages:

1. What is mortgage servicing?
2. What is default servicing?
3. How does securitization affect mortgage servicing?

Who regulates the UK mortgage industry?

Who has the power to regulate mortgages in US?

What is Regulation Z?

What is meant by mortgage servicing rights?