BILL ANALYSIS                                                                                                                                                                                                    

                   Senate Appropriations Committee Fiscal Summary
                           Senator Tom Torlakson, Chairman

                                           385 (Machado)
          Hearing Date:  5/31/07          Amended: 4/23/07
          Consultant:  Maureen Ortiz      Policy Vote: B. F. & I.  10-0
          BILL SUMMARY:   SB 385 extends federal guidance on  
          nontraditional mortgage product risks to state-regulated  
          mortgage lenders and brokers.
                            Fiscal Impact (in thousands)

           Major Provisions         2007-08      2008-09       2009-10     Fund
          Dept of Real Estate                     -----------minor,  
          absorbable------------          Real Estate

          Dept Fin. Institutions                   $120                  
          $240             $240             Fin. Inst,.

          Dept Corporations                       $63                   
          $125              $125            Corporations


          Costs will result from the development of emergency and final  
          regulations, as well as enforcement and oversight.  The  
          Department of Financial Institutions anticipates the need for 2  
          PYs with costs totaling $240,000 annually, and the Department of  
          Corporations will incur examination and enforcement costs of  
          approximately $125,000.
          Existing state law authorizes residential mortgage lending and  
          brokering under the Banking Law, Credit Union Law, Finance  
          Lenders Law, Residential Mortgage Lending Act, and the Real  
          Estate Law, all of which regulate entities that engage in  
          mortgage lending and borrowing through the Department of  
          Financial Institutions (DFI), the Department of Corporations  
          (DOC), and the Department of Real Estate (DRE).


          SB 385 does the following:  1) directs the DFI to apply the  
          nontraditional mortgage product risk guidance issued by the  
          federal government to state-regulated financial institutions, 2)  
          directs the DOC to apply the risk guidance issued by the  
          Conference of State Bank Supervisors and the American  
          Association of Residential Mortgage Regulators (CSBS/AARMR) to  
          licensed finance lenders and residential mortgage lenders, 3)  
          directs the DRE to apply the risk guidance of CSBS/AARMR to real  
          estate brokers, 4) authorizes all three commissioners to adopt  
          emergency regulations and final regulations to clarify the  
          application of the applicable guidance documents to their  
          licensees as soon as possible, 5) directs all affected licensees  
          to develop policies and procedures to achieve the objectives set  
          forth in the guidance, and 6) requires the Secretary of BT&H to  
          ensure that all three commissioners coordinate their  
          policymaking and rulemaking efforts.  Additionally, amendments  
          were added in the Senate Banking,


          Page 2
          SB 385 (Machado)

          Finance and Insurance Committee to expand the definition of real  
          estate brokers to include a person who engages as a principal in  
          the business of making loans, and
          makes 8 or more specified loans to the public from the person's  
          own funds.  The bill also now provides the Commissioner of DRE  
          with clearer statutory authority to compel brokers to provide  
          more information on their renewal forms relating to the types of  
          licensed activities they had engaged in since their last  

          The intent of this bill is to ensure that all mortgage lenders  
          and brokers, regardless of their regulator, are subject to the  
          federal guidance on nontraditional mortgage product risks.

          Nontraditional loans are those that allow borrowers to defer  
          repayment of principal, and in some cases, interest.  Borrowers  
          are given the opportunity to make relatively low payments during  
          an initial low interest rate period in exchange for agreeing to  
          make much higher payments during a later amortization period.

          Major components of the federal guidance include the following:


             1)   Financial institutions' analyses of borrowers' repayment  
               capacity should include an evaluation of the consumer's  
               ability to pay the fully indexed rate, not just the initial  
               low introductory rate;
             2)   Institutions should avoid underwriting practices that  
               will heighten the need for a borrower to rely on the sale  
               or refinancing of the property once amortization begins;
             3)   Higher pricing of loans should not replace the need for  
               sound underwriting;
             4)   Second mortgages with minimal or no owner equity should  
               not have a payment structure that allows for delayed or  
               negative amortization unless the risk is mitigated;
             5)   Institutions with high concentrations of nontraditional  
               products should have good risk management practices and  
               capital levels commensurate with risk; and,
             6)   Institutions that offer nontraditional mortgage products  
               should inform the consumer of all possible risks in a  
               clear, balanced and timely manner.

          In issuing the guidance in November 2006, the federal regulators  
          urged states to work quickly to apply similar guidance to  
          state-regulated entities engaged in mortgage lending and