North Dakota currently licenses and regulates all types of lending in North Dakota (other than payday lending)—including mortgage lending, non-mortgage consumer lending, commercial lending, and finance leasing—under the North Dakota Money Brokers Act. North Dakota is also one of the only states that does not currently require a license to service residential mortgage loans. That is set to change as of August 1, 2023, now that Governor Doug Burgum has signed Senate Bill 2090 (“SB2090”) and House Bill 1068 (“HB1068”).
Senate Bill 2090 and the New Residential Mortgage Lending License Requirement
SB2090 establishes a new licensing requirement to engage in “residential mortgage lending,” defined as “the act of arranging or providing residential mortgage loans as a form of financing, or advertising or soliciting either in print, by letter, in person, or otherwise, the right to find lenders or provide residential mortgage loans for a person.” A “residential mortgage loan” is defined consistently with the federal SAFE Act as a loan primarily for personal, family, or household purposes that is secured by a dwelling, or residential real estate upon which a dwelling will be constructed. SB2090 also amends the Money Brokers Act to create an exemption for “residential mortgage lenders” who are licensed under the new law. As a result, companies engaged in lending and brokering activity for consumer-purpose mortgage loans will be required to obtain only a residential mortgage lender license, while companies making or brokering all other types of loans—including commercial-purpose loans secured by dwellings in North Dakota—will continue to be subject to the licensing obligation under the Money Brokers Act.
Under the new statute, applicants for a residential mortgage lending license must maintain a surety bond of at least $50,000 and a minimum net worth of $25,000. Banks, credit unions, savings and loan associations, insurance companies, and certain other persons and individuals are exempt from the new residential mortgage lender licensing requirement.
In addition to enacting a new licensing requirement, SB2090 also incorporates a number of substantive compliance requirements for licensed residential mortgage lenders. These include:
- A prohibition on receiving certain advance fees. A licensee may accept an advance fee only if the fee (i) does not exceed the licensee’s good-faith estimate of the actual costs of any appraisal or credit report, or (ii) represents a rate lock fee. Any advance fee permitted under the first exception must be refunded or credited to the borrower at closing if the fee exceeds the actual cost of any appraisal or credit report.
- A maximum 36% APR limit, inclusive of all origination fees and charges (other than costs to file, record, or release a lien and permissible insurance premium charges).
- A limitation on late fees. A licensee will be prohibited from charging or receiving late fees that exceed 5% of the payment. If the residential mortgage loan is in an original principal amount of $50,000 or less, late charges may not exceed $20.
- Brokerage or loan agreements must contain a specific regulatory disclosure regarding the licensee’s licensing status and directions for borrowers to submit complaints.
The legislation provides that existing money broker license holders will not be required to obtain a residential mortgage lender license until December 31, 2023. All other provisions of the new law will take effect on August 1, 2023. Although we expect that North Dakota regulators will need to create a procedure to receive and process applications for the new residential mortgage lending license, mortgage brokers and lenders holding a money broker license in North Dakota should prepare to transition their license to the new residential mortgage lending license at the end of 2023 by watching for regulatory announcements regarding that transition process.
House Bill 1068—North Dakota will Now License Mortgage Servicers
As noted above, North Dakota is one of the only states in the country that does not require companies servicing mortgage loans to obtain a license. Even companies servicing delinquent or defaulted mortgage loans do not require a license, since the North Dakota Collection Agencies Act exempts “mortgage servicing compan[ies]” from its coverage. That will no longer be the case as of August 1, 2023, now that North Dakota has enacted HB1068.
HB1068 creates a new licensing requirement for any person engaging in “residential mortgage loan servicing,” whether as a primary servicer, subservicer, or holder of mortgage servicing rights. “Residential mortgage loan servicing” is defined to include receiving any scheduled periodic payments from a borrower pursuant to the terms of any federally related mortgage loan (including amounts for escrow) and making the payments of principal, interest, and escrow amounts to the owner of the loan or other third parties, pursuant to the terms of the loan documents or servicing contract. For reverse mortgages, “residential mortgage loan servicing” also includes making payments to the borrower. The law also requires a license from any “mortgage servicing rights investor,” defined as an entity that invests in and owns mortgage servicing rights and relies on subservicers to administer the loans on their behalf. Institutions exempt from the new law include banks, credit unions, savings and loan associations, federal or state housing finance agencies, Farm Credit Administration-chartered institutions, and nonprofit mortgage servicers.
In addition to creating a new mortgage servicer licensing requirement, HB1068 also implements the Conference of State Bank Supervisors (“CSBS”) prudential standards for nonbank mortgage servicer licensees. Under the new statute, mortgage servicer licensees must meet certain net worth and financial condition requirements; the particular requirements depend on whether the servicer is a “large” servicer, meaning one (i) that operates in two or more states, districts, or territories of the United States either currently or as of the end of the prior calendar year and (ii) whose servicing portfolio, as reported in its NMLS Mortgage Call Report, consists of 2,000 or more 1-to-4 unit residential mortgage loans serviced or subserviced for others, exclusive of whole loans owned and loans serviced on an interim basis prior to sale. A large servicer that meets FHFA eligibility requirements for capital, net worth ratio, and liquidity—regardless of whether the servicer is actually approved to service loans owned by the GSEs—will be in compliance with the requirement to maintain capital and liquidity. All required financial information must be determined in accordance with Generally Accepted Accounting Principles. Large servicers must also maintain written policies and procedures implementing the capital and liquidity requirements and for the company to maintain sufficient operating liquidity, and these policies and procedures must include a sustainable written methodology for satisfying the capital and liquidity requirements. HB1068 also subjects “large” servicers to corporate governance requirements. These include a requirement to establish a formal risk management program, and to obtain an annual external opinion audit, audited financial statements, and a report from an independent public accountant that includes assessment of the servicer’s internal control structure, computation of tangible net worth, validation of MSR valuation and reserve methodology, and risk management, compliance, and stress testing.
A non-“large” servicer that is approved by one or more of the GSEs must maintain liquidity, operating reserves, and a tangible net worth that meets the highest standard of the GSEs for which the servicer is approved. If the non-“large” servicer is not approved by any of the GSEs, it must maintain liquidity to include operating reserves of .00035% of the unpaid principal balance of its servicing portfolio and either maintain a $1 million surety bond, or meet a minimum tangible net worth requirement that is tiered based on the number of loans in the servicer’s nationwide portfolio, ranging from $100,000 up to $1 million.
HB1068 takes effect on August 1, 2023. Companies that service, or own servicing rights to, residential mortgage loans in North Dakota should begin their preparations to submit a license application so that they are ready for when North Dakota regulators begin to accept applications for mortgage servicer licenses.