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