BILL ANALYSIS Senate Appropriations Committee Fiscal Summary Senator Christine Kehoe, Chair 34 (Nava) Hearing Date: 8/27/2009 Amended: 7/23/2009 Consultant: Maureen Ortiz Policy Vote: B. F. & I. 10-0 B. P. & E. D. 8-1 _________________________________________________________________ ____ BILL SUMMARY: AB 34, an urgency measure, will bring California's 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 (known as the SAFE Act) by requiring the licensure of mortgage loan originators beginning August 1, 2010. _________________________________________________________________ ____ Fiscal Impact (in thousands) Major Provisions 2009-10 2010-11 2011-12 Fund DRE costs $12,730 $10,731 $10,731 Special* ---- potentially offset by fee revenue---- Licensing/registry $1,000 $2,000 $2,000 ------unknown fee revenue--------- Special** *Real Estate Fund **Corporations Fund _________________________________________________________________ ____ STAFF COMMENTS: SUSPENSE FILE. Department of Real Estate AB 34 requires a specific endorsement under the Department of Real Estate (DRE) for licensees to engage in the business of a mortgage loan originator. The bill provides for penalties for those who fail to obtain the endorsement and authorizes the commissioner to suspend or revoke that individual's real estate license. The Department of Real Estate currently licenses 9,770 real estate brokers and corporations that will need to comply with obtaining a loan originator license/endorsement. In addition, these brokers and corporations employ 34,016 real estate salespeople who will also need to licensed and endorsed as mortgage loan originators. AB 34 places numerous criteria for licensees including educational requirements, and annual reports on business activities. The commissioner will be authorized to examine the affairs of real estate brokers that obtain license endorsement as a mortgage loan originator, and be required to report violations to the Nationwide Mortgage Licensing System and Registry (NMLSR). Additionally, the SAFE Act requires the licensee to directly register with the NMLSR, and then requires the DRE to verify the data provided by the licensee. The SAFE Act Page 2 AB 34 (Nava) does not currently allow for an electronic upload of the licensing data to be transmitted, but will instead require DRE to manually input the verification information. Therefore, the department will not only be responsible for licensing over 43,000 licensees annually, but staff must also handle an estimated 10,000 to 15,000 changes (address, name, affiliation, etc.) to these license records through out the year. Under the SAFE Act, all licenses must be renewed as of December 31st of each year. Therefore, the DRE's current system of rolling renewals will not be allowed and California will be unable to spread out the workload associated with license renewals across a twelve month period. In a preliminary fiscal estimate, the DRE anticipates the need for 129 PYs resulting in annual costs of approximately $10.3 million. Most costs will be offset by license fee revenue estimated at this time to be between $250 and $300 per licensee. The breakdown of staffing requirements is as follows: 14 PYs - Mortgage Lending Unit 17 PYs - Auditing Division 38 PYs - Enforcement Program 28 PYs - Legal Section 24 PYs - Licensing Program 2 PYs - Information Technology Unit 6 PYs - Administrative Support Other costs identified by the DRE include the following: Information Technology Modification: One-time: $1,315,540 and annual ongoing $263,671 Office Network and Equipment Costs: First year costs of $911,722 and second year $114,929 In addition, according to the Department of Real Estate, all existing office facilities are at maximum occupancy and cannot house the additional staff nor the document storage equipment required to support the requirements of the SAFE Act. Anticipated one-time facility costs are $201,606, with ongoing rent at $50,430 for the additional space. Department of Corporations AB 34 requires persons licensed as finance lenders and brokers and residential mortgage lenders by the Department of Corporations (DOC) to obtain an additional license in order to engage as a mortgage loan originator. This provision, required by Page 3 AB 34 (Nava) the SAFE Act, also requires the licensing of employees who are not currently required to obtain a license. The bill requires finance lenders and brokers and residential mortgage lenders that employ a mortgage loan originator to maintain a minimum net worth of $250,000. The DOC in a preliminary fiscal analysis estimates startup costs of approximately $2 million annually, with an unknown amount of fee revenue at this time. AB 34 provides that no person will be required to obtain a license as a mortgage loan originator under the California Finance Lenders Law, or the California Residential Mortgage Lending Law before July 31, 2010. No person will be required to obtain a mortgage loan originator license endorsement under the Real Estate Law before December 31, 2010. The SAFE Act requires all states to individually license mortgage loan originators, and then requires the mortgage loan originators to register through a nationwide organization called the Nationwide Mortgage Licensing System and Registry (NMLSR). The SAFE Act provides that 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 the Secretary of the U. S. Department of Housing and Urban Development (HUD). However, states that are deemed as making a good faith effort to establish a state licensing law may be granted one additional year in which to comply. "Mortgage loan originator" is generally defined as 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. Under the SAFE Act, mortgage loan originators who are not employed by a depository institution must be both licensed by their state and registered on the national registry. License applicants must undergo background checks, submit to credit checks, complete and successfully pass pre-licensing education courses approved by the registry, complete continuing education requirements and meet other specified criteria. Mortgage loan originators who are employed by depository institutions or their subsidiaries must register with the NMLSR, but need not be licensed. This bill is substantially similar to SB 36 (Calderon) which is currently pending in the Assembly Appropriations Committee.