Financial Responsibility Standards for Covered Mortgage Servicers

Financial Responsibility Standards for Covered Mortgage Servicers This rule shall be applicable to covered institutions as defined in Rule 1.13.1, below. For entities with a holding company or affiliated group of companies, applicability shall be at the covered institution level. Not-for-profit mortgage servicers and housing finance agencies are not subject to the requirements of this rule. 1. Definitions. For purposes of this section, the following terms are defined as follows: a. “Agency” means Fannie Mae, Freddie Mac and Ginnie Mae. b. “Allowable assets for liquidity” means those assets that may be used to satisfy the liquidity requirements herein, including unrestricted cash and cash equivalents and unencumbered investment grade assets held for sale or trade (Agency MBS, obligations of GSEs, U.S. Treasury obligations). c. “Board of directors” means the formal body established by a covered institution that is responsible for corporate governance and compliance with this rule. d. “Covered institution” means a nonbank mortgage servicer required to be licensed under the Mississippi S.A.F.E. Mortgage Act, Section 81-18-1, et seq., Mississippi Code Annotated, with servicing portfolios of 2,000 or more 1 – 4-unit residential mortgage loans serviced or subserviced for others, excluding whole loans owned, and loans being “interim” serviced prior to sale as of the most recent calendar year end, reported in the NMLS Mortgage Call Report, and that operates in two (2) or more states, districts or territories of the United States either currently or as of the prior calendar year end. e. “Corporate governance” means the structure of the institution and how it is managed, including the corporate rules, policies, processes, and practices used to oversee and manage the institution. f. “External audit” means the formal report prepared by an independent certified public accountant expressing an opinion on whether the financial statements are presented fairly, in all material aspects, in accordance with the applicable financial reporting framework, and is inclusive of an evaluation of the adequacy of a company’s internal control structure. g. “FHFA” means the Federal Housing Finance Agency. h. “GSE” means government-sponsored enterprises, or Federal National Mortgage Association (“Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac). i. “Ginnie Mae” means Governmental National Mortgage Association. j. “Internal audit” means the internal activity of performing independent, objective assurance and consulting to evaluate and improve the effectiveness of company operations, risk management, internal controls and governance processes. k. “Interim serviced prior to sale” means the activity of collecting a limited number of contractual mortgage payments immediately after origination on loans held for sale but prior to the loans being sold into the secondary market. l. “Mortgage Call Report” means the quarterly or annual report of residential real estate loan origination, servicing and financial information completed by companies licensed in NMLS. m. “MSR Investor” means entities that invest in and own mortgage servicing rights and rely on subservicers to administer the loans on their behalf. MSR Investors are often referred to as “master servicers.” n. “Mortgage-backed security” or “MBS” means a financial instrument, often a debt security, collateralized by residential mortgages. o. “Mortgage servicing rights” or “MSRs” refers to the contractual right to service residential mortgage loans on behalf of the owner of the associated mortgage in exchange for specified compensation in accordance with the servicing contract. p. “Operating liquidity” means the funds necessary to perform normal business operations, such as payment of rent, salaries, interest expense and other typical expenses associated with operating the entity. q. “Residential mortgage loans serviced” means the specific portfolio or portfolios of residential mortgage loans for which a licensee is contractually responsible to the owner or owners of the mortgage loans for the defined servicing activities. r. “Reverse mortgage” means a loan collateralized by real estate, typically made to borrowers over 55 years of age, that does not require contractual monthly payments and is typically repaid upon the death of the borrower through the sale of the home or refinanced by the heirs. s. “Risk management assessment” means the functional evaluations performed under the Risk Management Program and reports provided to the board of directors under the relevant governance protocol. t. “Risk management program” means the policies and procedures designed to identify, measure, monitor and mitigate risk sufficient for the level of sophistication of the servicer. u. “Servicer” means the entity performing those activities listed in the definition of “service a mortgage loan” under Mississippi Administrative Code Section 81-18-3(ll) when those activities are performed on behalf of the owner or owner of the related mortgages under the terms of a servicing contract. v. “Servicing liquidity” or “liquidity” means the financial resources necessary to manage liquidity risk arising from servicing functions required in acquiring and financing MSRs, hedging costs (including margin calls) associated with the MSR asset and financing facilities, and advances or costs of advance financing for principal, interest, taxes, insurance and any other servicing related advances. w. “Subservicer” means the entity performing the routine administration of residential mortgage loans as agent of a servicer or MSR investor under the terms of a subservicing contract. x. “Subservicing for others” means the contractual activities performed by subservicers on behalf of a servicer or MSR investor. y. “Tangible net worth” means total equity less receivables due from related entities less goodwill and other intangibles less pledged assets. z. “Whole loans” means those loans where a mortgage and the underlying credit risk is owned and held on the balance sheet of the entity with all ownership rights. 2. Financial Condition. A covered institution must maintain capital and liquidity in compliance with this rule, as follows: a. For the purpose of complying with the capital and liquidity requirements of this rule, all financial data must be determined in accordance with Generally Accepted Accounting Principles (GAAP). b. A covered institution that meets the FHFA Eligibility Requirements for Enterprise Single-Family Seller/Servicers for capital, net worth ratio, and liquidity, regardless of whether the servicer is approved for GSE servicing, meets the capital and liquidity requirements of this rule. Covered institutions shall maintain written policies and procedures implementing the capital and servicing liquidity requirements of this section. Such policies and procedures must include a sustainable written methodology for satisfying these requirements and be available to the Commissioner upon request. c. Covered institutions shall maintain sufficient allowable assets for liquidity in addition to the amounts required for servicing liquidity, to cover normal business operations. Covered institutions shall have in place sound cash management and business operating plans that match the size and sophistication of the institution to ensure normal business operations. Management must develop, establish, and implement plans, policies, and procedures for maintaining operating liquidity sufficient for the ongoing needs of the institution. Such plans, policies, and procedures must contain sustainable, written methodologies for maintaining sufficient operating liquidity and be available to the Commissioner upon request. 3. Corporate Governance. a. Board of Directors Required. Covered institutions shall establish and maintain a board of directors responsible for oversight of the covered institution. b. Alternative to board of directors. For covered institutions that are not approved to service loans by a GSE or Ginnie Mae, or where these federal agencies have granted approval for a board alternative, an institution may establish a similar body constituted to exercise oversight and fulfill the board of directors’ responsibilities. c. Board of directors’ responsibilities. The board of directors shall be responsible for: i. Establishing a written corporate governance framework, including appropriate internal controls designed to monitor corporate governance and assess compliance with the corporate governance framework, available to the Commissioner upon request. ii. Monitoring and ensuring institution compliance with the corporate governance framework and this rule. iii. Accurate and timely regulatory reporting, including the requirements for filing the Mortgage Call Report. d. Internal Audit. The board of directors shall establish internal audit requirements that are appropriate for the size, complexity and risk profile of the servicer, with appropriate independence to provide a reliable evaluation of the servicer’s internal control structure, risk management and governance. Board established internal audit requirements, and the results of the internal audits shall be made available to the Commissioner upon request. e. External Audit. Covered financial institutions shall receive an external audit, including audited financial statements and audit reports conducted by an independent public accountant annually. The external audit shall be available to the Commissioner upon request and include at a minimum: i. Annual financial statements including a balance sheet, statement of operations [income statement] and cash flows, including notes and supplemental schedules prepared in accordance with GAAP. ii. Assessment of the internal control structure. iii. Computation of tangible net worth. iv. Validation of MSR valuation and reserve methodology, if applicable. v. Verification of adequate fidelity and errors and omissions (E&O) insurance. vi. Testing of controls related to risk management activities, including compliance and stress testing, where applicable. f. Risk Management. Covered institutions shall establish a risk management program under the oversight of the board of directors and available to the Commissioner upon request that identifies, measures, monitors, and controls risk sufficient for the level of sophistication of the servicer. The risk management program must have appropriate processes and models in place to measure, monitor and mitigate financial risks and changes tot eh risk profile of the servicer and assets being serviced. The Risk Management Program must be scaled to the complexity of the organization, but be sufficiently robust to manage risks in several areas, including, but not limited to: i. Credit risk: The potential that a borrower or counterparty will fail to perform on an obligation. ii. Liquidity risk: The potential that the servicer will be unable to meet its obligations as they come due because of an inability to liquidate assets or obtain adequate funding or that it cannot easily unwind or offset specific exposures. iii. Operational risk: The risk resulting from inadequate or failed internal processes, people, and systems or from external events. iv. Market risk: The risk to the servicer’s condition resulting from adverse movements in market rates or prices. v. Compliance risk: The risk of regulatory sanctions, fines, penalties or losses resulting from failure to comply with laws, rules, regulations or other supervisory requirements applicable to the servicer. vi. Legal risk: The potential that actions against the institution that result in unenforceable contracts, lawsuits, legal sanctions or adverse judgments can disrupt or otherwise negatively affect the operations or condition of the servicer. vii. Reputation risk: The risk to earnings and capital arising from negative publicity regarding the servicer’s business practices. g. Risk Management Assessment. Covered institutions shall conduct a risk management assessment on an annual basis concluding with a formal report to the board of directors available to the Commissioner upon request. Evidence of risk management activities throughout the year must be maintained and made part of the report, including findings of issues and the response to address those findings. 4. Commissioner’s Authority to Address Risk. The Commissioner may: a. Where risk is determined by a formal review of a specific covered institution to be extremely high, order or direct the institution to satisfy additional conditions necessary to ensure that the institution will continue to operate in a safe and sound manner and be able to continue to service loans in compliance with state and federal law and/or regulation. b. Where risk is determined by a formal review of a particular covered institution or institutions to be extremely low, provide notice that all or part of this rule is not applicable to those covered institutions. c. Where economic, environmental, or societal events are determined to be of such severity to warrant a temporary suspension of all or certain sections of this rule, provide public notice of temporary suspension.