Texas Formally Requires Passive Holders of Mortgage Servicing Rights to Register with the State

Texas now formally requires passive holders of mortgage servicing rights (MSRs) to register with the state as mortgage servicers, effective immediately. The change comes pursuant to new rules adopted with little fanfare on November 3, 2024, which took effect November 23. With the new rules, Texas joins the growing number of states expressly requiring holders of MSRs to obtain a license or registration, regardless of whether they engage in direct consumer-facing servicing activities.

Registration of Mortgage Servicers in Texas

Texas has required servicers of consumer-purpose mortgage loans to obtain a registration under the Residential Mortgage Loan Servicer Registration Act (the “Servicer Act”) since 2011. The Servicer Act requires a mortgage servicer registration to “act as a residential mortgage loan servicer, directly or indirectly, for a residential mortgage loan secured by a lien on residential real estate” in Texas. Under the Servicer Act, a mortgage servicer is a person who:

(A) receives scheduled payments from a borrower under the terms of a residential mortgage loan, including amounts for escrow accounts; and
(B) makes the payments of principal and interest to the owner of the loan or other third party and makes any other payments with respect to the amounts received from the borrower as may be required under the terms of the servicing loan document or servicing contract.

Accordingly, persons who “directly or indirectly” act as a residential mortgage loan servicer under this definition and do not qualify for an exemption must apply for and obtain a registration through the Nationwide Multistate Licensing System (NMLS).

It may be noted that although the Servicer Act’s definition of a mortgage servicer encompasses typical mortgage servicing activities, it does not explicitly extend to a “passive” MSR holder that merely holds the contractual right to service a mortgage loan without engaging in direct, consumer-facing servicing activities. In practice, many passive MSR holders contract with third-party servicers to engage in direct servicing activities on the MSR holder’s behalf, and the “directly or indirectly” language appears in many state servicing licensing laws that are not applied to passive MSR holders. However, the new rules enacted in November unambiguously require a passive MSR holder to register as a mortgage servicer in Texas.

New Formal Registration Obligation for MSR Holders

Specifically, the new rules provide:

With respect to a residential mortgage loan for which the mortgage servicing rights are held by a person who is not the owner of the note (a/k/a “master servicer”), the holder of the mortgage servicing rights must be registered under [the Servicer Act] even if that person does not actually receive any payments from the borrower but, instead, contracts with another person to service the loan (a/k/a “subservicer”).

The new rules define “mortgage servicing rights” to mean “the contractual obligation to service a mortgage loan and the right to receive compensation for such services in accordance with the contract.” The registration obligation also extends to the holders of MSRs to “wrap loans,” who must comply also with the Texas wrap mortgage loan financing statute, which took effect in 2022. In addition to the new language, the rulemaking reorganized the existing mortgage loan servicing rules by relocating them from Title 7, Chapter 79 of the Texas Administrative Code to Chapter 58, which had previously been vacant.

As worded, the registration requirement applies only to MSR holders that do not own the mortgage loans associated with such MSRs. A person that acquires whole loans on a servicing-released basis—and thus holds a mortgage loan and the MSRs to that loan—would not, for that reason, be required to register.

Although the passive MSR holder registration language is new, it reflects the SML’s recent views as expressed in informal guidance and correspondence between the SML and the industry over the past few years. The SML’s informally held view that passive MSR holders (of MSRs for loans held by others) must be registered as mortgage servicers seems to have developed sometime in 2022, when the corresponding NMLS checklist was updated to include “master servicing” as an activity “authorized” by the registration. On December 5, the NMLS mortgage servicer checklist was quietly updated again to include language stating that “[a] master servicer is required to have this registration.” An SML press release addressing the rule change elides specifics, noting only that the “new rules govern[] residential mortgage loan companies, mortgage bankers, individual residential mortgage loan originators, mortgage servicers, and wrap mortgage loans.” Ideally, the new rules would have come before the informal guidance, but the rules did, eventually, arrive. It's also debatable whether the new formal registration obligation would have been more appropriate as legislation than as a rulemaking. The Servicer Act authorizes the SML to “adopt and enforce rules necessary for the purposes of or to ensure compliance with [the statute],” which would allow for the clarification of ambiguous statutory terms by rule to the extent the rules do not expand upon the scope of the statute in a manner that calls for legislation.

Next Steps

Persons holding the MSRs to Texas mortgage loans that are owned by another party—and that do not qualify for a statutory exemption—will need to apply for and obtain a Texas Residential Mortgage Loan Servicer Registration through the NMLS. Given recent trends, other states are likely to follow by requiring MSR holders to obtain a license or registration under their own laws.