BILL ANALYSIS
SENATE COMMITTEE ON BANKING, FINANCE,
AND INSURANCE
Senator Ronald Calderon, Chair
AB 34 (Nava) Hearing Date: July 1, 2009
As Amended: June 1, 2009
Fiscal: Yes
Urgency: No
SUMMARY Would amend California's Real Estate Law, Finance
Lenders Law, and Residential Mortgage Lending Act, to ensure
compliance with the federal Secure and Fair Enforcement for
Mortgage Licensing Act of 2008 (the SAFE Act).
DIGEST
Existing federal law provides for the SAFE Act, pursuant to
Title V of the provisions of the Housing and Economic Recovery
Act of 2008 (HR 3221; Public Law 110-289). The provisions of
the SAFE Act are discussed in more detail below in the
Background section of this analysis.
Existing law
1. Authorizes residential mortgage lending, brokering, and
servicing under five different laws, including the Banking Law,
Credit Union Law, California Finance Lenders Law (CFLL),
California Residential Mortgage Lending Act (CRMLA), and Real
Estate Law, and the regulations that interpret those laws;
2. Generally regulates the entities that engage in mortgage
lending, brokering, and servicing under three different
departments, including the Department of Financial Institutions
(DFI), Department of Corporations (DOC), and the Department of
Real Estate (DRE).
This bill
1. Would amend California's Real Estate Law, CFLL, and CRMLA,
in compliance with the SAFE Act. Specifically, the bill
would require mortgage loan originators, as defined, to
apply for and obtain a license or license endorsement, from
DOC or DRE, as applicable, and obtain a unique identifier,
AB 34 (Nava), Page 2
as defined, before engaging in mortgage loan origination
activities in connection with a residential mortgage loan in
California;
2. Would require applicants for a license or license
endorsement to complete at least 20 hours of pre-licensing
education and successfully pass an examination on that
material, submit to a criminal history background check and
a credit check, and meet several requirements related to
their personal character, as a condition of being approved
to act as a mortgage loan originator;
3. Would further require licensed mortgage loan originators to
renew their licenses or license endorsements annually, by
completing at least 8 hours of continuing education, as
specified, and continuing to meet the minimum standards for
license/license endorsement approval;
4. Would make other related changes, described below.
COMMENTS
1. Purpose of the bill To ensure that California is in
compliance with the SAFE Act, and, in doing so, avoid
triggering action by the Secretary of the U.S. Department of
Housing and Urban Development (HUD) to take over regulation
of California's mortgage loan originators.
1. Background On July 30, 2008, President Bush signed the
Housing and Economic Recovery Act of 2008, whose provisions
included the SAFE Act. The SAFE Act requires all states to
license and register their mortgage loan originators through
a nationwide organization called the Nationwide Mortgage
Licensing System and Registry (NMLSR). Any state that does
not implement a mortgage loan originator licensing system,
in compliance with the SAFE Act, by July 30, 2009, risks
direct intervention by HUD.
Under the SAFE Act, HUD is authorized to establish and maintain
a mortgage loan originator system in any state that fails to
voluntarily comply with SAFE by July 30, 2009. States
deemed by the Secretary of HUD to be making a good faith
effort to establish a state licensing law which complies
with the SAFE Act may be granted one additional year in
which to comply, before risking HUD intervention. Avoiding
HUD intervention will be critical, if California wishes to
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retain its existing authority to regulate the
mortgage-related activities of its state licensees.
The provisions of the SAFE Act were sponsored by the Conference
of State Bank Supervisors (CSBS) and American Association of
Residential Mortgage Regulators (AARMR), two organizations
which represent state banking and mortgage lending
regulators nationwide. In 2003, CSBS and AARMR developed
the idea for the NMLSR. The system was officially launched
in January 2008.
Prior to enactment of the SAFE Act, participation by states in
the NMLSR was voluntary. Several of the country's smaller
states signed on, but lack of participation among the
country's larger states, including California, hampered the
registry's ability to function as a truly national registry.
In sponsoring the SAFE Act, CSBS and AARMR were seeking to drive
more states to sign on to its NMLSR. Under the SAFE Act,
participation in NMLSR remains voluntary, but states that
fail to participate will lose regulatory authority over
their mortgage loan originators, a threat so great that no
large states appear willing to risk it through
non-participation. To date, 23 states have signed on to
NMLSR, and most others are expected to sign on by July 31,
2010.
In promotional material regarding the NMLSR, CSBS and AARMR
describe the system, as follows: "Through NMLS, licensed
mortgage lenders, bankers, broker companies and loan
officers in participating states are able to complete a
single uniform form electronically, regardless of the number
of states in which they are licensed. This information is
housed in a secure centralized repository available to
mortgage regulators. Licensees are able to access their own
record 7 days a week through the NMLS website to update,
amend and renew their licenses, or apply for new licenses?As
mortgage companies and/or individuals create a record for
themselves and submit [it] to their regulators, NMLS will
permanently assign a unique identifying number to each
record. The unique identifying number allows regulators to
definitively track companies and professionals across states
and over time."
What Does the SAFE Act Require? The SAFE Act defines the term
AB 34 (Nava), Page 4
"mortgage loan originator" as (generally speaking) one who
takes a residential mortgage loan application or offers or
negotiates terms of a residential mortgage loan for
compensation or gain. Administrative and/or clerical
employees are not included within the definition, nor are
real estate brokers who don't broker mortgages. SAFE
creates a distinction between mortgage loan originators who
are employed by depository institutions or subsidiaries of
depository institutions, and all other mortgage loan
originators.
Under the SAFE Act, mortgage loan originators who are not
employed by a depository institution or a subsidiary of a
depository institution must be both licensed by their state
and registered on NMLSR. License applicants must undergo
background checks, submit to credit checks, complete and
successfully pass pre-licensing education courses approved
by NMLSR, meet specific personal character requirements
specified in the SAFE Act, and, once licensed, must complete
annual continuing education courses approved by NMLSR and
submit as-yet-unspecified call reports to NMLSR annually.
Mortgage loan originators employed by depository institutions or
their subsidiaries must register on NMLSR, using rules to be
established by the Federal Financial Institutions
Examination Council (FFIEC), but need not be licensed.
Registrants will have to undergo background checks, but are
not required to submit to credit checks, nor comply with the
education requirements that apply to mortgage loan
originators who are required to be licensed under the Act.
How Does AB 34 Work? Under the provisions of the bill, real
estate licensees who wish to act as mortgage loan
originators must obtain a license endorsement. The license
endorsement will only be available to real estate licensees
that comply with the background check and education
requirements of the SAFE Act, and that meet the SAFE Act's
personal character requirements. Thus, under the Real
Estate Law, step 1 will be obtaining a real estate license.
Only with that real estate license may an individual obtain
a license endorsement to act as a mortgage loan originator.
The CFLL and CRMLA laws will work quite differently. Under
these laws, every mortgage loan originator employee of a
California licensed finance lender or finance broker, or a
California licensed residential mortgage lender or servicer,
AB 34 (Nava), Page 5
will be required to obtain a mortgage loan originator
license. That license will only be available to loan
originator employees who comply with the background check
and education requirements of the SAFE Act, and who meet the
SAFE Act's personal character requirements. The mortgage
loan originator license will be separate and apart from a
CFL or RML license. Every licensed CFL or RML will have to
ensure that their mortgage loan originator licensees are
licensed as such.
Consistent with the SAFE Act, AB 34 requires mortgage loan
originators to renew their licenses or license endorsements
annually. CSBS and AARMR have determined that all licenses
and license endorsements will expire on December 31st of
each year, and must be renewed, effective January 1st of
each year.
AB 34 does not contain any amendments to the Banking Law or
Credit Union Law, because DFI does not believe any changes
to these statutes are required. Instead, DFI anticipates
directing its licensees to follow the regulations that will
be issued by FFIEC, using regulatory authority the
Department already has.
How Will the SAFE Act Change The Status Quo in California? The
SAFE Act will require different types of changes under the
Real Estate Law than it will under the CFLL and CRMLA.
Real Estate Law changes: Under existing California law,
licensed real estate salespersons and licensed real estate
brokers may engage in activities that are defined in the
SAFE Act as mortgage loan origination. Real estate licenses
may be issued to individuals or to corporations. The SAFE
Act will require these already-licensed individuals and
corporations to obtain special mortgage loan originator
license endorsements in order to continue engaging in
activities for which no special license endorsement is
currently required.
The SAFE Act requirements are similar to, but somewhat different
from, the requirements for licensure under the Real Estate
Law. For example, real estate licensees must complete both
pre-licensing education and continuing education classes,
and must undergo background checks, all of which are
required under the SAFE Act. However, the personal
character requirements under California's Real Estate Law
AB 34 (Nava), Page 6
are different than those under the SAFE Act (more stringent
in certain places, less stringent in others), and
California's real estate license cycle is four years long,
rather than annual (thus, under existing California law,
continuing education requirements must be satisfied over a
four year period, rather than once annually).
Under the SAFE Act, licensed real estate salespersons and
brokers who wish to continue engaging in mortgage loan
origination activities must undergo brand new background
checks and take different education classes in order to
satisfy the SAFE Act mortgage loan originator licensing
requirements. They will also have to continue to meet the
SAFE Act's personal character requirements on an annual
basis, in order to remain eligible to retain their license
endorsements. Corporations engaged in mortgage loan
origination will have to register with NMLSR and obtain a
license endorsement for their company. Corporations
licensed under the Real Estate Law will also have to ensure
that each of their mortgage loan originator employees
obtains an individual mortgage loan originator license
endorsement.
CFLL and CRMLA changes: The SAFE Act will impact CFLL and CRMLA
licensees very differently than it will impact Real Estate
Law licensees. Under existing law, DOC licenses
corporations under the CFLL and CRMLA and requires
background checks on the persons controlling these
corporations. Individual employees of these corporations
are not licensed, nor are they subject to background checks
(unless they are controlling persons in the organization).
Pre-licensing education and continuing education are not
required.
Under the SAFE Act, every CFLL and CRMLA employee who performs
activities that meet the SAFE Act definition of a mortgage
loan originator must be both licensed by California and
registered on NMLSR. Thus, employees who were previously
untracked by the state will now be required to undergo a
background check, submit to a credit check, complete
pre-licensing education classes, and satisfy the SAFE Act's
personal character requirements to obtain their licenses.
They will also have to comply with annual continuing
education requirements and continue to meet the SAFE Act's
personal character requirements in order to remain eligible
to retain their licenses. These requirements represent a
AB 34 (Nava), Page 7
significant change for CFLL and CRMLA licensees, who have
not previously had to ensure that their mortgage loan
originator employees were licensed.
2. Support . The California Association of Realtors (CAR)
believes that AB 34 takes the right approach in using
license endorsements for real estate licensees. This
approach will allow California to comply with the SAFE Act
with the least disruption of existing regulatory structures
and the lowest cost imposed on licensees. CAR also believes
that the license endorsement mechanism in the bill will
facilitate a smooth transition to a unified regulator at a
later time, if AB 33 (Nava) or a similar consolidation bill
takes effect.
3. Opposition None received.
4. Suggested Amendments . Although this bill will require
technical refinements before it moves to the Governor, no
amendments are suggested at the present time.
Assemblymember Nava and his staff will continue working with
DRE and DOC on technical amendments desired by these
departments.
5. Related Legislation
a. SB 36 (Calderon): Substantially similar in
intent to AB 34. Pending in the Assembly Banking &
Finance Committee.
AB 34 (Nava), Page 8
POSITIONS
Support
California Association of Realtors
Oppose
None received
Consultant: Eileen Newhall (916) 651-4102