BILL ANALYSIS                                                                                                                                                                                                    







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        |Hearing Date:July 13, 2009         |Bill No:AB                         |
        |                                   |34                                 |
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                      SENATE COMMITTEE ON BUSINESS, PROFESSIONS 
                               AND ECONOMIC DEVELOPMENT
                         Senator Gloria Negrete McLeod, Chair

                           Bill No:        AB 34 Author:Nava
                        As Amended:June 1, 2009  Fiscal:    Yes

        
        SUBJECT:  Real estate, finance lender, and residential mortgage lender  
        licenses: mortgage loan originators.

        SUMMARY:  This bill would bring California Real Estate Law, Finance  
        Lenders Law, and Residential Mortgage Lending Act into compliance with  
        the federal Secure and Fair Enforcement for Mortgage Licensing Act of  
        2008 (the SAFE Act) by requiring those engaging in mortgage loan  
        origination activities to obtain a license from Department of  
        Corporations after meeting specified requirements, or, if a real  
        estate licensee, obtain a license endorsement from the Department of  
        Real Estate after meeting specified requirements.

         NOTE  :  This measure was heard in Senate Banking, Finance and Insurance  
        Committee on July 9, 2009, and passed on a 10 to 0 vote.  

        Existing federal law:

   1)Requires pursuant to the SAFE Act all states to license and register  
          their mortgage loan originators through a nationwide  
          organization called the Nationwide Mortgage Licensing System and  
          Registry (NMLSR), and for any state that does not implement a  
          mortgage loan originator licensing system in compliance with the  
          SAFE Act by July 30, 2009, for the U.S. Department of Housing  
          and Urban Development (HUD) to establish a licensing system  
          within that state.

   2)Provides that 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.






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   3)The SAFE Act defines the term "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.

        


        Existing law (The Real Estate Law):

          1)   Establishes in the Business and Transportation Agency  
          (BT&H) the Department of Real Estate (DRE), the chief officer of  
          which is the Real Estate Commissioner, and specifies that the  
          Commissioner, through the Department, is responsible for the  
          regulation of real estate transactions and licensure of real  
          estate agents, brokers and salespersons.

          2)   Specifies that a licensed real estate broker is a person  
          who may solicit borrowers or lenders for or negotiate loans or  
          collect payments or perform services for borrowers or lenders or  
          note owners in connection with loans secured directly or  
          collaterally by liens on real property or on a business  
          opportunity.

          3)   Specifies other requirements for real estate brokers who  
          solicit borrowers or lenders or negotiate loans or collect  
          payments or perform services for borrowers or lenders relative  
          to loans secured by real property, including a limited  
          notification provision for brokers who advance their own funds  
          as defined.

          4)   Provides that the following conditions must be met for  
          issuance of a real estate broker's license:  (a) the applicant  
          has successfully passed the real estate broker's license  
          examination; (b) the applicant must have held a real estate  
          salesman's license for at least 2 years and be eligible for  
          renewal of that license within 5 years of the application for a  
          broker's license, and must be actively engaged in the business  
          of real estate salesperson during that time; (c) furnish a full  
          set of fingerprints for purposes of conducting a criminal  





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          history record check.  The Commission may waive certain  
          requirements based on whether the person is a licensed attorney  
          or has obtained additional education.

          5)   Requires that all real estate licensees must comply with  
          continuing education requirements as specified by the  
          Commissioner pursuant to regulations.

        Existing law (California Finance Lenders Law (CFL Law), and  
        California Residential Mortgage Lending Act (CRML Act):

        1)Establishes in the Business and Transportation Agency (BT&H) the  
          Department of Corporations (DOC), the chief officer of which is  
          the Commissioner of Corporations and specifies that the  
          Commissioner, through the Department, is responsible for the  
          licensure and regulation of finance lenders and brokers and  
          residential mortgage lenders and servicers.

        2)Defines a "finance lender" as any person who is engaged in the  
          business of making consumer loans or making commercial loans.   
          The business of making consumer loans or commercial loans may  
          include lending money and taking, in the name of the lender or  
          in any other name, in whole or in part, as security for a loan,  
          any contract or obligation involving the forfeiture of rights in  
          or to personal property, the use and possession of which  
          property is retained by other than the mortgagee or lender, or  
          any lien on, assignment of, or power of attorney relative to  
          wages, salary, earnings, income, or commission.  Finance lender  
          also includes a personal property broker as referenced in  
          Section 1 or Article XV of the California Constitution.

        3)Provides that the following conditions must be met for issuance  
          of a financial lender's license:  (a) submit information on an  
          application as required by the Commissioner; (b) furnish a full  
          set of fingerprints and related information for purposes of  
          conducting a criminal history record check; (c) file with the  
          application financial statements prepared in accordance with  
          generally accepted accounting principles that indicated a net  
          worth of at least twenty-five thousand dollars ($25,000); (d)  
          evidence of a surety bond issued in the amount of twenty-five  
          thousand dollars ($25,000).

        4)Defines a "lender" as a person that (a) is an approved lender  
          for the Federal Housing Administration, Veterans Administration,  
          Farmers Home Administration, Government National Mortgage  
          Association, Federal National Mortgage Association, or Federal  





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          Home Loan Mortgage Corporation, (b) directly makes residential  
          mortgage loans, and (c) makes the credit decision in the loan  
          transactions.

        5)Defines "mortgage servicer" or "residential mortgage loan  
          servicer," similar to that of a "lender," that they directly  
          service or offer to service mortgage loans.

        6)Provides that the following conditions must be met for issuance  
          of a finance lender, broker, residential mortgage and servicers  
          license:  (a) submit information on an application as required  
          by the Commissioner; (b) furnish a full set of fingerprints and  
          related information for purposes of conducting a criminal  
          history record check at the discretion of the Commissioner; (c)  
          file with the application a statement of financial solvency  
          prepared by an independent certified public accountant and  
          access to supporting credit information as required; (d)  
          evidence of a surety bond issued in the amount of fifty thousand  
          dollars ($50,000).

        This bill:

        1)Would amend California's Real Estate Law, CFL Law and CRML Act  
          in compliance with the SAFE Act.  Specifically, this measure  
          would require mortgage loan originators, as defined, who are  
          licensed real estate brokers to apply for and obtain a license  
          endorsement from the DRE, or if they are a mortgage loan  
          originator employee of a California licensed finance lender or  
          residential mortgage lender to obtain a mortgage loan originator  
          license from the DOC, as applicable, and obtain a unique  
          identifier, as defined, before engaging in mortgage loan  
          origination activities in connection with a residential mortgage  
          loan in California.

        2)Would require applicants for a DRE license endorsement or DOC  
          license 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 DRE license endorsements and DOC licenses  annually  ,  
          by completing at least 8 hours of continuing education, as  
          specified, and continuing to meet the minimum standards for  





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          license endorsement/ approval.

        4)Would make other related, conforming changes.


        FISCAL EFFECT:  According to the Assembly Appropriations Committee  
        analysis, dated May 13, 2009, major increase in regulatory costs.   
        Likely in the millions of dollars to DRE and the DOC to comply  
        with the SAFE Act, offset by new SAFE fees charged to industry  
        applicants.

        According to DRE, 9,770 real estate brokers and corporations will  
        need to seek a loan originator license/endorsement.  The 9,770  
        real estate brokers and corporations employ 34,016 real estate  
        salespeople who will also need to seek a loan originator  
        license/endorsement.  An anticipated fee ranging from $250 to $300  
        per licensee for a one year license endorsement period would be  
        required to offset the cost to implement this legislation.  DRE  
        further indicates that it is reasonable to expect that at least  
        half of the total initial start up costs, or $7,003,824  
        ($14,007,648 divided by 2) will be spent in the last half of FY  
        2009/10, with the remaining half expected during the first six  
        months of FY 2010/10.  By the end of December 2010, all of the  
        DRE's 43,786 mortgage loan originator licensees and any new  
        licensees wishing to perform licensed mortgage loan origination  
        activity in California must have had their endorsement issued to  
        them by DRE.

        
        COMMENTS:
        
        1.Purpose.  The Author is the sponsor of this measure.  According  
          to the Author, this measure will 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.

        The Author indicates that this measure reflects the challenges and  
          difficulties imposed when attempting to craft, what is for the  
          most part, an entirely new regulatory system for mortgage loan  
          originators.  Imposing these new requirements for DRE licensed  
          brokers is somewhat easier as they already are licensed  
          individually and meet several of the mandatory requirements  
          imposed by the SAFE Act.  A change to the requirements of the  
          SAFE Act will require a wholesale restructure of those licensing  





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          frameworks.

        2.Background.

           a.   SAFE Act Compliance Necessary.  On July 30, 2008,  
             President Bush signed the Housing and Economic Recovery Act  
             of 2008, whose provisions included the SAFE Act.  As  
             indicated, 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 (NMLS Registry).  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 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 NMLS Registry.  The system was officially launched in  
             January 2008.

           Prior to enactment of the SAFE Act, participation by states in  
             the NMLS Registry 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 NMLS Registry.  Under the  
             SAFE Act, participation in the NMLS Registry 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  





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             it through non-participation.  To date, 23 states have signed  
             on to NMLS Registry, and most others are expected to sign on  
             by July 31, 2010.

           In promotional material regarding the NMLS Registry, CSBS and  
             AARMR describe the system, as follows:  "Through NMLS  
             Registry, 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  
             Registry 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 Registry 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."

           b.   What the Safe Act Specifically Requires.  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 NMLS Registry.  License applicants must undergo  
             background checks, submit to credit checks, complete and  
             successfully pass pre-licensing education courses approved by  
             NMLS Registry, meet specific personal character requirements  
             specified in the SAFE Act, and, once licensed, must complete  
             annual continuing education courses approved by NMLS Registry  
             and submit as-yet-unspecified call reports to NMLS Registry  
             annually.

           Mortgage loan originators employed by depository institutions  
             or their subsidiaries must register on NMLS Registry, 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.

           c.   How this Measure Implements the Requirements of the SAFE  
             Act.






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              i.     Changes to the Real Estate Law  .  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 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 NMLS Registry 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.

              ii.    Changes to the CFL Law and the CRML Act  .  The SAFE Act  
               will impact CFL Law and CRML Act licensees very differently  
               than it will impact Real Estate Law licensees.  Under  
               existing law, DOC licenses financial lenders and  





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               residential mortgage lender corporations under the CFL Law  
               and CRML Act 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 CFL Law and CRML Act employee who  
               performs activities that meet the SAFE Act definition of a  
               mortgage loan originator must be both licensed by  
               California and registered on NMLS Registry.  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 significant change for CFL Law and  
               CRML Act licensees who have not previously had to ensure  
               that their mortgage loan originator employees were  
               licensed.

             This measure does not contain any amendments to the Banking  
               Law or Credit Union Law, because the Department of  
               Financial Institutions (DFI) does not believe any changes  
               to these statutes are required.  Instead, the DFI  
               anticipates directing its licensees to follow the  
               regulations that will be issued by FFIEC, using regulatory  
               authority the Department already has.

        3.Similar or Related Legislation this Session.   SB 36  (Calderon)  
          is substantially similar to this measure.  It passed out of this  
          Committee by a vote of 7 to 1, and is pending in the Assembly  
          Banking and Finance Committee.

         SB 94  (Calderon) would prohibit persons from charging advance fees  
          to borrowers in connection with the modification of the terms of  
          the borrower's loan, require those who wish to charge a fee for  
          loan modification services (after performing them) to provide a  
          specified notice to borrowers, and close a loophole in the  
          California Finance Lenders Law.  This measure is pending in the  
          Assembly Banking and Finance Committee.






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         AB 33  (Nava) would abolish the DOC, the DFI, the DRE and the  
          Office of Real Estate Appraisers and transfer all powers,  
          duties, purposes, jurisdiction, responsibilities and functions  
          of these agencies to a newly created Department of Financial  
          Services (DFS) and designate the chief officer of the DFS as the  
          Commissioner of Financial Services.  This measure is awaiting a  
          hearing in Senate Banking, Finance and Insurance Committee.
         
         AB 260  (Lieu, Bass, and Nava) enacts duties, requirements and  
          prohibitions relating to higher priced mortgage loans including  
          the suspension or revocation of a license granted by DRE, DOC,  
                                                                                     or DFI for violating any federal laws related to mortgage loans.  
           This measure is awaiting a hearing in Senate Banking, Finance  
          and Insurance Committee.

        4.Prior Related or Similar Legislation.  SB 1053  (Machado, 2008)  
          would have required real estate brokers that make, arrange, or  
          service residential mortgages on property containing one to four  
          residential units to notify the DRE within 30 days of entering  
          the mortgage field and upon exiting that field, and would  
          require these brokers to file specified reports with DRE on an  
          annual basis, documenting their level of compliance with  
          applicable law and regulation.  This measure was held in the  
          Assembly Banking and Finance Committee.


         SB 1240  (Machado, 2008) would have required real estate licensees  
          engaged in mortgage brokering, lending, and/or servicing  
          activities to notify DRE about those activities, submit an  
          annual business activities report, and contract for a compliance  
          review by an independent public accountant on an annual or  
          biennial basis, depending on loan volume.  This measure was  
          originally SB 1053 which was passed out of the Senate and then  
          held in Assembly Banking and Finance.  This measure was a gut  
          and amend in the Assembly.  However, it was vetoed by the  
          Governor, with a veto message requesting the Legislature to send  
          him a SAFE Act implementation bill to sign.

        5.Arguments in Support.  The  California Association of Realtors   
          (CAR) is in support and believes that this measure takes the  
          appropriate approach toward SAFE Act implementation by using an  
          additional endorsement on the real estate license and applying  
          similar licensing requirements to other types of loan  
          originators regulated outside of DRE.  CAR believes that this  
          approach will result in the least disruption of existing  
          licensing requirements and minimize compliance costs to both the  





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          state and individual licensees.  CAR also speaks to the  
          electronic exchange issue discussed immediately above by  
          stating, "We hope that in your role as Chair (Author) that you  
          can intervene with the federal entities involved to ensure that  
          state costs are minimized by allowing electronic exchanges of  
          databases and discipline records."

        The  American Association of Retired Persons  (AARP) is in support  
          of this measure and indicates that this measure provides  
          protections for a group of homeowners that are frequently  
          overlooked; those 50 and older.  AARP supports this bill because  
          its own research has shown that 28% of all foreclosures or  
          delinquencies involved home owners age 50 and older, and among  
          those individuals who had taken out sub-prime loans, older  
          Americans were 17 times more likely to be in this situation.   
          AARP believes this measure will create uniform licensing and  
          professional educational standards for mortgage loan originators  
          in lieu of the patchwork system currently in place, and will  
          also require that licensees be included in a nationwide database  
          that will allow consumers to readily access information on the  
          professional and criminal backgrounds of loan originators.
        

        SUPPORT AND OPPOSITION:
        
         Support:  

        California Association of Realtors
        American Association of Retired Persons (AARP)

         Opposition:  

        None received as of July 8, 2009.



        Consultant:Bill Gage