SF 1662

as introduced - 93rd Legislature (2023 - 2024) Posted on 07/05/2023 03:48pm

A bill for an act
relating to financial institutions; regulating nonbank mortgage servicers; requiring
a report; proposing coding for new law in Minnesota Statutes, chapter 58.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MINNESOTA:

Section 1.

new text begin [58.20] DEFINITIONS.
new text end

new text begin Subdivision 1. new text end

new text begin Scope. new text end

new text begin For purposes of this section to section 58.23, the terms defined
in this section have the meanings given.
new text end

new text begin Subd. 2. new text end

new text begin Allowable assets for liquidity. new text end

new text begin "Allowable assets for liquidity" means assets
that may be used to satisfy the liquidity requirements under section 58.22, including:
new text end

new text begin (1) unrestricted cash and cash equivalents; and
new text end

new text begin (2) unencumbered investment grade assets held for sale or trade, including agency
mortgage-backed securities, obligations of government-sponsored enterprises, and United
States Treasury obligations.
new text end

new text begin Subd. 3. new text end

new text begin Board of directors. new text end

new text begin "Board of directors" means the formal body established
by a covered institution that is responsible for corporate governance and compliance with
sections 58.21 to 58.23.
new text end

new text begin Subd. 4. new text end

new text begin Corporate governance. new text end

new text begin "Corporate governance" means the structure of the
covered institution and how the covered institution is managed, including the corporate
rules, policies, processes, and practices used to oversee and manage the covered institution.
new text end

new text begin Subd. 5. new text end

new text begin Covered institution. new text end

new text begin "Covered institution" means a mortgage servicer that
services or subservices for others at least 2,000 or more residential mortgage loans in the
United States, excluding whole loans owned, and loans being interim serviced prior to sale
as of the most recent calendar year end, reported on the NMLS mortgage call report.
new text end

new text begin Subd. 6. new text end

new text begin External audit. new text end

new text begin "External audit" means the formal report, prepared by an
independent certified public accountant, expressing an opinion on whether the financial
statements are:
new text end

new text begin (1) presented fairly, in all material aspects, in accordance with the applicable financial
reporting framework; and
new text end

new text begin (2) inclusive of an evaluation of the adequacy of a company's internal control structure.
new text end

new text begin Subd. 7. new text end

new text begin Government-sponsored enterprises. new text end

new text begin "Government-sponsored enterprises"
means the Federal National Mortgage Association, and the Federal Home Loan Mortgage
Corporation.
new text end

new text begin Subd. 8. new text end

new text begin Interim serviced prior to sale. new text end

new text begin "Interim serviced prior to sale" means the
collection of a limited number of contractual mortgage payments immediately after
origination on loans held for sale but no longer than a period of ninety days prior to the
loans being sold into the secondary market.
new text end

new text begin Subd. 9. new text end

new text begin Internal audit. new text end

new text begin "Internal audit" means the internal activity of performing
independent and objective assurance and consulting to evaluate and improve the effectiveness
of company operations, risk management, internal controls, and governance processes.
new text end

new text begin Subd. 10. new text end

new text begin Mortgage-backed security. new text end

new text begin "Mortgage-backed security" means a financial
instrument, often debt securities, collateralized by residential mortgages.
new text end

new text begin Subd. 11. new text end

new text begin Mortgage call report. new text end

new text begin "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.
new text end

new text begin Subd. 12. new text end

new text begin Mortgage servicing rights. new text end

new text begin "Mortgage servicing rights" means the contractual
right to service a residential mortgage loan on behalf of the owner of the associated mortgage
in exchange for compensation specified in the servicing contract.
new text end

new text begin Subd. 13. new text end

new text begin Mortgage servicing rights investor. new text end

new text begin "Mortgage servicing rights investor" or
"master servicer" means an entity that (1) invests in and owns mortgage servicing rights;
and (2) relies on subservicers to administer the loans on the mortgage servicing rights
investor's behalf.
new text end

new text begin Subd. 14. new text end

new text begin Nationwide Multistate Licensing System. new text end

new text begin "Nationwide Multistate Licensing
System" or "NMLS" has the meaning given in section 58A.02, subdivision 8.
new text end

new text begin Subd. 15. new text end

new text begin Operating liquidity. new text end

new text begin "Operating liquidity" means the money necessary for
an entity to perform normal business operations, including payment of rent, salaries, interest
expenses, and other typical expenses associated with operating the entity.
new text end

new text begin Subd. 16. new text end

new text begin Residential mortgage loans serviced. new text end

new text begin "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.
new text end

new text begin Subd. 17. new text end

new text begin Reverse mortgage. new text end

new text begin "Reverse mortgage" has the meaning given in section
47.58, subdivision 1, paragraph (a).
new text end

new text begin Subd. 18. new text end

new text begin Risk management assessment. new text end

new text begin "Risk management assessment" means the
functional evaluations performed under the risk management program and the reports
provided to the board of directors under the relevant governance protocol.
new text end

new text begin Subd. 19. new text end

new text begin Risk management program. new text end

new text begin "Risk management program" means the policies
and procedures designed to identify, measure, monitor, and mitigate risk commensurate
with the covered institution's size and complexity.
new text end

new text begin Subd. 20. new text end

new text begin Servicer. new text end

new text begin "Servicer" has the meaning given in section 58.02, subdivision 20.
new text end

new text begin Subd. 21. new text end

new text begin Servicing liquidity. new text end

new text begin "Servicing liquidity" or "liquidity" means the financial
resources necessary to manage liquidity risk arising from servicing functions required in
acquiring and financing mortgage servicing rights; hedging costs, including margin calls,
associated with the mortgage servicing rights asset and financing facilities; and advances
or costs of advance financing for principal, interest, taxes, insurance, and any other servicing
related advances.
new text end

new text begin Subd. 22. new text end

new text begin Subservicer. new text end

new text begin "Subservicer" means the entity performing routine administration
of residential mortgage loans as the agent of a servicer or mortgage servicing rights investor
under the terms of a subservicing contract.
new text end

new text begin Subd. 23. new text end

new text begin Subservicing for others. new text end

new text begin "Subservicing for others" means the contractual
activities performed by subservicers on behalf of a servicer or mortgage servicing rights
investor.
new text end

new text begin Subd. 24. new text end

new text begin Tangible net worth. new text end

new text begin "Tangible net worth" means total equity less receivables
due from related entities, less goodwill and other intangibles, less pledged assets.
new text end

new text begin Subd. 25. new text end

new text begin Whole loans. new text end

new text begin "Whole loans" means a loan where a mortgage and the underlying
credit risk is owned and held on a balance sheet of the entity possessing all ownership rights.
new text end

Sec. 2.

new text begin [58.21] APPLICABILITY; EXCLUSIONS.
new text end

new text begin Subdivision 1. new text end

new text begin Applicability. new text end

new text begin Sections 58.20 to 58.23 apply to covered institutions. For
entities within a holding company or an affiliated group of companies, sections 58.20 to
58.23 apply at the covered institution level.
new text end

new text begin Subd. 2. new text end

new text begin Exclusions. new text end

new text begin (a) Sections 58.20 to 58.23 do not apply to persons exempt from
licensing under section 58.04 and 58.05.
new text end

new text begin (b) Section 58.22 does not apply to (1) servicers that solely own or conduct reverse
mortgage servicing; or (2) the reverse mortgage portfolio administered by a covered
institution.
new text end

Sec. 3.

new text begin [58.22] FINANCIAL CONDITION.
new text end

new text begin Subdivision 1. new text end

new text begin Compliance required. new text end

new text begin A covered institution must maintain capital and
liquidity in compliance with this section.
new text end

new text begin Subd. 2. new text end

new text begin Generally accepted new text end new text begin accounting principles. new text end

new text begin For the purposes of complying
with the capital and liquidity requirements of this section, all financial data must be
determined in accordance with generally accepted accounting principles.
new text end

new text begin Subd. 3. new text end

new text begin Federal Housing Finance Agency eligibility requirements; policies and
procedures. new text end

new text begin (a) A covered institution that meets the Federal Housing Finance Agency
eligibility requirements for enterprise single-family sellers and servicers with respect to
capital, net worth ratio, and liquidity meets the requirements of subdivisions 1 and 2,
regardless of whether the servicer is approved for government-sponsored enterprise servicing.
new text end

new text begin (b) A covered institution must maintain written policies and procedures that implement
the capital and servicing liquidity requirements of this section. The policies and procedures
implemented pursuant to this paragraph must include a sustainable written methodology to
satisfy the requirements of paragraph (a) and must be made available to the commissioner
upon request.
new text end

new text begin Subd. 4. new text end

new text begin Operating liquidity. new text end

new text begin (a) A covered institution must maintain sufficient allowable
assets for liquidity, in addition to the amounts required for servicing liquidity, to cover
normal business operations.
new text end

new text begin (b) Covered institutions must have sound cash management and business operating plans
that (1) match the complexity of the institution; and (2) ensure normal business operations.
new text end

new text begin (c) Management must develop, establish, and implement plans, policies, and procedures
to maintain operating liquidity sufficient for the ongoing needs of the covered institution.
Plans, policies, and procedures implemented pursuant to this paragraph must contain
sustainable, written methodologies to maintain sufficient operating liquidity and must be
made available to the commissioner upon request.
new text end

Sec. 4.

new text begin [58.23] CORPORATE GOVERNANCE.
new text end

new text begin Subdivision 1. new text end

new text begin Board of directors required. new text end

new text begin A covered institution must establish and
maintain a board of directors that is responsible for oversight of the covered institution.
new text end

new text begin Subd. 2. new text end

new text begin Board of directors; alternative. new text end

new text begin If a covered institution has not received
approval to service loans by a government-sponsored enterprise or the Government National
Mortgage Association, or if a government-sponsored enterprise or the Government National
Mortgage Association has granted approval for a board of directors alternative, the covered
institution may establish a similar body constituted to exercise oversight and fulfill the
responsibilities specified under subdivision 3.
new text end

new text begin Subd. 3. new text end

new text begin Board of directors; responsibilities. new text end

new text begin The board of directors must:
new text end

new text begin (1) establish a written corporate governance framework, including appropriate internal
controls designed to monitor corporate governance and assess compliance with the corporate
governance framework, and must make the corporate governance framework available to
the commissioner upon request;
new text end

new text begin (2) monitor and ensure the covered institution complies with (i) the corporate governance
framework; and (ii) sections 58.20 to this section; and
new text end

new text begin (3) perform accurate and timely regulatory reporting, including filing the mortgage call
report.
new text end

new text begin Subd. 4. new text end

new text begin Internal audit. new text end

new text begin The board of directors must establish internal audit requirements
that (1) are appropriate for the size, complexity, and risk profile of the servicer; and (2)
ensure appropriate independence to provide a reliable evaluation of the servicer's internal
control structure, risk management, and governance. The board-established internal audit
requirements and the results of internal audits must be made available to the commissioner
upon request.
new text end

new text begin Subd. 5. new text end

new text begin External audit. new text end

new text begin (a) A covered institution must receive an external audit,
including audited financial statements and audit reports, that is conducted by an independent
public accountant annually. The external audit must be made available to the commissioner
upon request.
new text end

new text begin (b) The external audit must include, at a minimum:
new text end

new text begin (1) annual financial statements, including (i) a balance sheet; (ii) a statement of operations
and income statement; and (iii) cash flows, including notes and supplemental schedules
prepared in accordance with generally accepted accounting principles;
new text end

new text begin (2) an assessment of the internal control structure;
new text end

new text begin (3) a computation of tangible net worth;
new text end

new text begin (4) validation of mortgage servicing rights valuation and reserve methodology, if
applicable;
new text end

new text begin (5) verification of adequate fidelity and errors and omissions insurance; and
new text end

new text begin (6) testing of controls related to risk management activities, including compliance and
stress testing, if applicable.
new text end

new text begin Subd. 6. new text end

new text begin Risk management. new text end

new text begin (a) Under oversight by the board of directors, a covered
institution must establish a risk management program that identifies, measures, monitors,
and controls risk commensurate with the covered institution's size and complexity. The risk
management program must have appropriate processes and models in place to measure,
monitor, and mitigate financial risks and changes to the servicer's risk profile and assets
being serviced.
new text end

new text begin (b) The size and risk management program must be scaled to the size and complexity
of the organization, including but not limited to:
new text end

new text begin (1) the potential that a borrower or counterparty fails to perform on an obligation;
new text end

new text begin (2) the potential that the servicer (i) is unable to meet the servicer's obligations as the
obligations come due as a result of an inability to liquidate assets or obtain adequate funding;
or (ii) cannot easily unwind or offset specific exposures;
new text end

new text begin (3) the risk resulting from (i) inadequate or failed internal processes, people, and systems;
or (ii) external events;
new text end

new text begin (4) the risk to the servicer's condition resulting from adverse movements in market rates
or prices;
new text end

new text begin (5) the risk of regulatory sanctions, fines, penalties, or losses resulting from the failure
to comply with laws, rules, regulations, or other supervisory requirements that apply to the
servicer;
new text end

new text begin (6) the potential that legal proceedings against the institution resulting in unenforceable
contracts, lawsuits, legal sanctions, or adverse judgments can disrupt or otherwise negatively
affect the servicer's operations or condition; and
new text end

new text begin (7) the risk to earnings and capital arising from negative publicity regarding the servicer's
business practices.
new text end

new text begin Subd. 7. new text end

new text begin Risk management assessment. new text end

new text begin A covered institution must conduct a risk
management assessment on an annual basis. The risk management assessment must conclude
with a formal report to the board of directors and must be made available to the commissioner
upon request. A covered institution must maintain evidence of risk management activities
throughout the year and must include the evidence of risk management activities as part of
the report. The risk management assessment must include issue findings and the response
or action taken to address the issue findings.
new text end