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
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BILL SUMMARY: SB 385 extends federal guidance on
nontraditional mortgage product risks to state-regulated
mortgage lenders and brokers.
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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
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STAFF COMMENTS: SUSPENSE FILE.
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,
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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
renewal.
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
brokering.