Connecticut Repeals Mortgage Servicer Licensing Exemption for Licensed Mortgage Lenders

A new approval requirement is coming for companies licensed as Mortgage Lenders in Connecticut and engaging in mortgage servicing activities. Effective October 1, 2025, Connecticut Mortgage Lender licensees will have to hold a new registration to enjoy an exemption from mortgage servicer licensing, thanks to Connecticut Senate Bill 1257. The bill, which was signed into law on July 1, repeals an exemption from mortgage servicer licensing for “any person licensed as a mortgage lender” in Connecticut that meets supplemental bond and insurance requirements. This change will affect companies that are licensed as mortgage lenders in Connecticut and that also service mortgage loans or hold mortgage servicing rights (MSRs).

The New Exempt Mortgage Servicer Registration

Consistent with several other states that maintain a separate mortgage lender and mortgage servicer licensing requirement, Connecticut previously authorized licensed mortgage lenders to engage in otherwise licensable mortgage servicing activities without obtaining a separate mortgage servicer license or obtaining a separate approval from the state regulators, as long as the licensed mortgage lender maintained a supplemental surety bond, fidelity bond, and errors and omissions insurance policy. Once Senate Bill 1257 takes effect, a licensed mortgage lender will need to apply for and obtain a new “exempt mortgage servicer registration,” in order to be able to continue to service first or subordinate lien mortgage loans secured by residential real estate in Connecticut from any location licensed as a main or branch office without obtaining a mortgage servicer license. And because a mortgage servicer is statutorily defined to include a first-party mortgage servicer—i.e., a mortgagee servicing its own mortgage loans on its own behalf—the new exempt mortgage servicer registration also will be required for licensed mortgage lenders that service their own loans.

The new registration requirement also has potential application to passive holders of MSRs. The Connecticut Department of Banking has taken the position in public guidance that passive owners of MSRs are subject to licensing under Connecticut’s mortgage servicing provisions. As such, licensed mortgage lenders that passively hold MSRs to their own loans or to loans held by another entity (for example, because the lender originated and sold loans on a servicing-retained basis) may find themselves subject to the requirement to register as an exempt mortgage servicer, if they are not otherwise exempt, and even if the licensed mortgage lender engages licensed or exempt mortgage servicers to carry out all direct consumer-facing mortgage servicing functions.

Miscellaneous Other Changes

The legislation also amends the statutory definition of a mortgage servicer, albeit in a way that is unlikely to be material for many companies engaged in mortgage servicing activity. Whereas the current definition includes any person who receives payments “of principal and interest,” the amended definition is expanded to reach any person who receives payments “including, but not limited to, payments for principal, interest or fees.”

SB 1257 also amends various Connecticut statutes regulating sales finance companies, student lenders and servicers, and commercial financing providers and brokers, and enacts new disclosure requirements for mortgage shared appreciation agreements, among other changes.

Looking Ahead

The legislation provides that the exempt mortgage servicer registration will be administered by the Connecticut Department of Banking through the Nationwide Multistate Licensing System (NMLS), although the application for this registration has not been posted on the NMLS as of August 26. A registrant must meet the supplemental mortgage servicer surety bond, fidelity bond and errors and omissions coverage requirements and pay any required fees. Registrations will expire annually on December 31 unless renewed. Connecticut Mortgage Lender licensees currently relying on the exemption from mortgage servicer licensing should monitor the NMLS and related updates to ensure that they have adequate time to submit an application for the new exempt mortgage servicer registration by October 1.