BILL ANALYSIS                                                                                                                                                                                                    

                                    AND INSURANCE
                           Senator Ronald Calderon, Chair

          AB 34 (Nava)                  Hearing Date:  July 9, 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).
          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  

           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.


           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  


                                                   AB 34 (Nava), Page 3

              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,  

          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  

          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  

          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  

          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  
          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

          California Association of Realtors
          None received

          Consultant:  Eileen Newhall (916) 651-4102