Transactions involving the purchase and sale of residential mortgage loans and mortgage servicing rights (“MSRs”) frequently raise the question of whether they require submitting premerger notification filings to the Federal Trade Commission (“FTC”) and the Department of Justice (“DOJ”) under the Hart-Scott-Rodino Act (“HSR Act”). This Legal Update provides an overview of how residential mortgage loans, MSRs and related assets are treated for HSR purposes in the context of asset or servicing platform sales and equity transactions pertaining to entities that hold mortgage loans or MSRs, including residential mortgage servicers.
The acquisition of mortgage loan portfolios as well as entities that hold mortgage loans and related assets, but few other assets, are categorically exempt from HSR filing requirements. MSR acquisitions are exempt if either the MSRs are acquired together with the related mortgage loans or sold independently in the ordinary course of business by sellers that will continue in the servicing business. A sale of all or substantially all of the MSRs held by a seller, however, would not qualify for the ordinary course exemption and generally will be reportable if the applicable transaction meets the HSR Act’s dollar thresholds discussed below.
Under the HSR Act, parties to transactions that meet certain dollar thresholds must submit premerger notification filings to the FTC and DOJ and observe a waiting period—usually 30 days—before the transaction may close. Transactions are reportable if the transaction meets both the “Size-of-Persons” and “Size-of-Transaction” thresholds, unless an exemption applies.
- The “Size-of-Persons” threshold is met if one of the counterparties to the transaction is a “person” with $222.7 million or more in total assets or annual net sales and another counterparty to the transaction is a “person” with $22.3 million or more in total assets or annual net sales. A “person” for the purpose of this analysis is the ultimate parent of each counterparty to the transaction. Total assets and sales are determined based on the ultimate parent’s fully consolidated financial statements.
- The “Size-of-Transaction” threshold is satisfied if the value of the mortgage loans, MSRs or equity acquired exceeds $111.4 million.1
Transactions valued in excess of $445.5 million are reportable regardless of the size of the persons.
MSRs Sold With The Applicable Loans
HSR Act Section 7A(c)(2) exempts all acquisitions of mortgage loans. The FTC Premerger Office, which is responsible for interpreting the HSR Act and the regulations promulgated under the Act (the “Rules”), has taken the position that MSRs that are sold in tandem with the related mortgage loans are also covered by the Section 7A(c)(2) exemption.2 In addition, HSR Rule 802.4 exempts equity transactions involving entities that hold mortgage loans and exempt MSRs and that do not hold non-exempt assets with a current fair market value of more than $111.4 million.
MSRs Sold Independently
MSRs sold independently from the mortgage loans to which they relate are not exempt under Section 7A(c)(2).3 This scenario arises most frequently with respect to mortgage servicers that hold MSRs and service mortgage loans held by third-party investors. Acquisitions of these MSRs may be exempt from filing, however, as a sale in the ordinary course of business under HSR Act Section 7A(c)(1) if the ultimate parent of the servicer continues to hold MSRs (directly or indirectly through controlled subsidiaries4) after the related transaction closes. In addition, to qualify for the exemption, a transaction may not be a phase or installment sale in connection with a series of related transactions leading to the total divestiture of all the MSRs by the servicer.
Sale of All or Substantially All of MSRs Held by Seller
On the other hand, if the MSRs being sold constitute all or substantially all of the MSRs held by the ultimate parent and the applicable servicer or the transaction is part of a series of transactions intended to result in the ultimate parent’s exit from the servicing business, the ordinary course exemption is not available, and the sale will be reportable if it meets the Size-of-Persons and Size-of-Transaction thresholds and no other exemption applies. For most of these transactions, other exemptions are unlikely to be available.
When a filing is required, each party must submit an HSR Form that includes the following information:
- Copies of the most recent financial statements
- Revenues from US operations for the most recent fiscal year broken out by North American Industry Classification System (“NAICS”) codes
- Documents that analyze the transaction with respect to markets, competition or synergies
- Information relating to subsidiaries, minority equity holders and minority investments in certain third-party entities
The buyer is required to pay a filing fee that ranges from $30,000 (for transactions valued in excess of $111.4 million up to $161.4 million) to $2.25 million (for transactions valued at $5 billion or more).5
Remedies for Failure to File
A failure to make a required HSR filing may result in an investigation, fines of up to $50,120 per party for every day in which the parties are in non-compliance, and other remedies up to and including rescission of the transaction.
While many transactions involving mortgage loans and MSRs are exempt from HSR filing requirements, parties to these transactions should confer with HSR counsel to confirm that an HSR filing would not be required. Mayer Brown’s antitrust practice has extensive experience advising clients with respect to these transactions.
1 In an asset acquisition, such as an acquisition of MSRs, the value is the higher of the purchase price or the fair market value as determined by the buyer. In an equity acquisition, the value is the purchase price, or if there is no agreed-upon price, the fair market value as determined by the buyer. 16 C.F.R. § 801.10 (“HSR Rule 801.10”). Note that cash and unreimbursed advances or servicing advances are not counted towards the Size-of-Transaction threshold. See Informal Interpretation 1302001 (Feb. 5, 2013).
4 Under the HSR Rules, control for a corporation is defined as holding 50% or more of the corporation’s voting securities or having the right to appoint 50% or more of the corporation’s board of directors, while control of a non-corporate entity, such as a limited liability company or partnership, is defined as having the right to 50% or more of the entity’s profits or 50% or more the entity’s assets upon dissolution. HSR Rule 801.1(b).
5 Under new HSR filing requirements proposed by the FTC in June 2023, the information required on the HSR form would be expanded significantly, including more details about the parties’ corporate relationships, the products and services involved, projected revenue streams, previous acquisitions, and labor market impacts. The FTC estimates this will increase the time required to prepare a filing by four-fold. See FTC Notice of Proposed Rule Making, June 29, 2023 at 16 CFR Parts 801 and 803: Premerger Notification; Reporting and Waiting Period Requirements | Federal Trade Commission (ftc.gov).