Year round, tourists flock to the emerald islands in the middle of the Pacific Ocean—the Islands of Hawaii—to enjoy the social and cultural diversity. Tourism is not the only industry, and many people choose to make their home in the islands, bringing their paycheck or retirement dollars with them. Real estate investment is robust even in the current recession, and out-of-state mortgage lenders doing business in Hawaii have enjoyed special privileges as “foreign lenders” under an unusual provision of Hawaii statutes. Of course, Hawaii has licensed and regulated local mortgage brokers and mortgage solicitors for many years. In May, Hawaii’s legislature passed Hawaii House Bill 1071, which will license and regulate mortgage servicers, and sent the bill to Governor Linda Lingle for her signature. The law will impose important new substantive and licensing requirements effective July 1, 2010, for servicers responsible for managing loans secured by Hawaii real estate.
HB 1071 will require mortgage servicers to obtain and maintain a servicer license unless exempt. Under the new law, a “mortgage servicer” means a person responsible for receiving any scheduled periodic payments from a borrower pursuant to the terms of any residential mortgage loan, including amounts for escrow accounts, and for making the payments to the owner of the loan or other third parties of principal and interest and such other payments as required under the terms of the mortgage servicing loan documents. In the case of a home equity conversion mortgage, or a reverse mortgage, making payments includes payments made to the borrower. A “residential mortgage loan” means a mortgage loan, home equity loan, or reverse mortgage loan, secured by a lien on residential real property located in Hawaii, including a refinancing of any secured loan on residential real property located in Hawaii, upon which: (1) a structure or structures designed principally for occupancy by one to four families, including individual units of condominiums and cooperatives, sits or will sit; or (1) a manufactured home (although manufactured homes are rare in Hawaii).
The new law will exempt the federal GSEs, FDIC-insured depository institutions and their operating subsidiaries, and trust companies, credit unions, insurance companies and financial services loan companies licensed by the State of Hawaii. Conspicuously absent from the exempt entities are “foreign lenders.” A foreign lender means a lender that (1) does not maintain a place of business in Hawaii, (2) conducts its principal activities outside of Hawaii, and (3) qualifies under the definition of “foreign lender.” A “foreign lender” includes, among other entities, depository institutions, real estate investment trusts, and lenders approved by the Secretary of the U.S. Department of Housing and Urban Development for participation in any mortgage insurance program under the National Housing Act.
Under the provisions already on the books applicable to foreign lenders, a foreign lender does not, by engaging in Hawaii in any or all of certain specified activities, violate the laws of Hawaii relating to doing business or doing a banking, trust or insurance business, or become subject to licensing and lending provisions applicable to financial services loan companies. The activities specified include:
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Acquiring by assignment or otherwise partial or entire interests in loans or in security for loans;
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Servicing (but servicing only by or through individuals who are residents of, or corporations doing business, in Hawaii);
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Collecting, enforcing, or otherwise realizing upon loans or upon security for loans or upon interests in such loans or security;
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Taking, holding, and disposing of any property acquired (whether by purchase at any sale pursuant to foreclosure by suit or foreclosure under power of sale, or by foreclosure by entry, or by conveyance in lieu of foreclosure) in enforcement of the rights of the foreign lender in the event of default by any borrower; and
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Empowering agents and servants or in connection with, and entering into and performing contracts, and doing other acts and things necessary or appropriate for or preliminary or incident to, any of the foregoing activities, but not maintaining any office in Hawaii for the conduct of any such activities.
Notwithstanding the exemption from lending licensure for foreign lenders under the existing laws, HB 1071 seems to require an out-of-state servicer (whether or not a “foreign lender”) to obtain a license in order to engage in servicing activity in connection with loans secured by real property located in Hawaii, unless it qualifies for exemption. Although not yet clear, it appears that a servicer may retain local Hawaiian businesses or firms licensed as servicers to engage in the servicing activities.
In addition to the requirement to obtain a license, the new law will impose new substantive requirements on licensed mortgage servicers. Licensees must, among other things, safeguard and account for money handled for the borrower, disclose to the Hawaii Commissioner of Financial Institutions its fees and charges, and file a report annually with the Commissioner. The servicer will also send the borrower any notice required by RESPA, its schedule of ranges and categories of its costs and fees, and a notice that the Commissioner of Financial Institutions licenses the servicer and that the consumer can file complaints with the Commissioner. If the borrower defaults, the servicer has additional disclosure duties. The new law also contains prohibited practices, provides an administrative fine of $5,000 per violation, and preserves a private right of action. For servicers of Hawaiian real estate, HB 1071 imposes a new level of regulation in paradise.
Elizabeth A. Huber is a partner in the Los Angeles office of Hudson Cook, LLP. Basis Points readers can reach Liz at 310.686.5050 or ehuber@hudco.com.