BILL ANALYSIS
SB 36
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Date of Hearing: June 29, 2009
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Pedro Nava, Chair
SB 36 (Calderon) - As Amended: June 23, 2009
SENATE VOTE : 36-1
SUBJECT : Real estate, finance lender, and residential mortgage
lender licenses: mortgage loan originators.
SUMMARY : Requires licensing of all mortgage loan originators,
as well as, registration with the Nationwide Mortgage Licensing
System and Registry (NMLSR). Specifically, this bill :
1)Brings California in compliance with the provisions of the
Safe and Fair Enforcement of Mortgage Licensing Act (SAFE) ,
pursuant to Title V of the provisions of the Housing and
Economic Recovery Act of 2008 (HR 3221; Public Law 110-289).
2)Establishes standards, requirements, prohibitions for mortgage
loan originators operating under the real estate law, the
California finance lenders law (CFLL) and the Residential
Mortgage Lending Act (RMLA) in order to comply with the SAFE
Act (Public Law 110-289).
3)Prohibits any individual from engaging in the business as a
mortgage loan originator without first obtaining and
maintaining a loan originator's license or license endorsement
and registering with the NMLSR.
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).
EXISTING STATE LAW:
1)Regulates RMLs under the RMLA and the DOC. [Financial Code,
Section 50000 et seq.]
2)Regulates CFLs under the CFLL and the DOC. [Financial Code,
Section 22000 et seq.]
3)Regulates real estate brokers, who make or service residential
mortgage loans under the Real Estate law administered by DRE.
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FISCAL EFFECT :
The Senate Appropriations Committee analysis provides the
following:
The Department of Real Estate currently licenses 9,770 real
estate brokers and corporations that will need to seek a loan
originator license/endorsement. In addition, these 9,770
brokers and corporations employ 34,016 real estate salespeople
who will also need to licensed and endorsed as mortgage loan
originators. SB 36 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 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. SB 36 provides that the provisions under DRE will not
be effective until the DRE issues a finding that the NMLSR is
capable of two-way electronic communication with the enterprise
information system maintained by the DRE.
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
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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, all DRE 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
SB 36 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. The DOC in a preliminary
fiscal analysis estimates startup costs of at least $2 million,
and an additional $1 million annually, with an unknown amount
of fee revenue at this time.
COMMENTS :
On July 30, 2008 President Bush signed into law HR 3221, the
Housing and Economic Recovery Act of 2008. This legislation
provides reforms for Fannie Mae and Freddie Mac, as well as, new
programs designed to assist homeowners facing foreclosure.
Among its many provisions, HR 3221 contained a section known as
the SAFE Act ( Title V of P.L. 110-289 ), a wholesale regulatory
change of the licensing and regulation of mortgage originators.
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The SAFE Act is designed to require every state, through
consultation and coordination with the Conference of State Bank
Supervisors and the American Association of Residential Mortgage
Regulators to establish a NMLSR that will accomplish the
following:
1)Provides uniform license applications and reporting
requirements for State-licensed loan originators.
2)Provides a comprehensive licensing and supervisory database.
3)Aggregates and improves the flow of information to and between
regulators.
4)Provides increased accountability and tracking of loan
originators.
5)Streamlines the licensing process and reduces the regulatory
burden.
6)Enhances consumer protections and supports anti-fraud
measures.
7)Provides consumers with easily accessible information, offered
at no charge, utilizing electronic media, including the
Internet, regarding the employment history of, and publicly
adjudicated disciplinary and enforcement actions against, loan
originators.
8)Establishes a means by which residential mortgage loan
originators would to the extent possible, be required to act
in the best interest of the consumer.
9)Facilitates responsible behavior in the subprime mortgage
market place and provides comprehensive training and
examination requirements related to subprime mortgage lending.
10)Facilitates the collection and disbursement of consumer
complaints on behalf of State and Federal mortgage regulators.
The SAFE Act requires California and other states to have a
framework in place by August 1, 2009, or face direct oversight
and implementation from the Federal Department of Housing and
Urban Development (HUD). States may receive an extension if
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they are making a good faith effort to implement the
requirements. Since the creation of California's multi-layered
framework, the system has been somewhat of an arbitrage where
lenders could pick and choose licenses based on their business
models or market needs. Some lenders have acquired licenses
across all licensing laws.
On November 12, 2008 the Assembly Banking & Finance Committee
conducted an informational hearing to hear from a panel of
experts and stakeholders regarding the implementation of the
SAFE Act. As a result of the information collected at the
hearing AB 34 (Nava) and SB 36 (Calderon) were introduced to
ensure that California is in compliance with the requirements of
SAFE.
Under the requirements of this bill all mortgage loan
originators must meet the following requirements:
1)Register with the NMLSR and obtain a unique identifier. This
registration process will ensure that those persons who have
committed violations in other states are not allowed to become
licensed in California. Additionally, this registration
system will assist regulators with tracking and, if necessary,
instituting disciplinary action against originators of
mortgage loans.
2)Pass background and criminal history checks.
3)Disclosure on all advertising materials their unique
identifier that is obtained from the NMLSR.
4)Meet minimum and continuing educational requirements that
include education in federal law and regulations, as well as,
issues relating to the non-traditional mortgage market place.
5)Meet and maintain net worth and/or bonding requirements.
Does this bill apply to state chartered banks and credit unions?
Mortgage loan originators who are employed by depository
institutions or their subsidiaries must register with the NMLSR,
but need not be licensed. Institutions will be required to
register their employees as loan originators by July 1, 2009.
Under California law, mortgage loans can be made and originated
under several different structures and licensing regimes.
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Mortgage brokers operate under a real estate license from the
DRE. This license requires several hours of educational
training and ongoing direct oversight by the department.
Additionally, common law has determined that real estate brokers
owe their customers a fiduciary duty.
Under the CFLL or the RMLA, originators offer loans under the
umbrella license of the company under which they are employed.
Under this structure, the loan originator is not individually
licensed nor statutorily mandated to maintain certain levels of
educational experience. This is the similar to a loan officer
who works at a bank or credit union. The logic with this model
is that the wrongdoing of an individual places the whole license
in jeopardy so institutions are more likely to self regulate.
Some distinctions have been made in recent years regarding
individual employees. For example, several legislative
proposals have come forward in recent years that have put some
requirements on individuals in these cases such as expanded
background checks.
SB 36 reflects the challenges and difficulties imposed when
attempting to craft, what is for the most part, a entirely new
regulatory system for mortgage loan originators. Imposing
these new requirements is somewhat easier for DRE licensed
brokers as they already are licensed individually and meet
several of the mandatory requirements imposed by the SAFE Act.
Background of NMLSR.
The NMLSR is a web-based system that allows state licensed
mortgage lenders, mortgage brokers, and loan officers to apply
for, amend, update or renew a license online for all
participating state agencies using a single set of uniform
applications. NMLSR brings greater uniformity and transparency
to the mortgage industry while maintaining and strengthening the
ability of state regulators to monitor the industry and protect
their citizens. NMLSR began operation on January 2, 2008.
The NMLSR is owned and operated by State Regulatory Registry
LLC. The Conference of State Bank Supervisors (CSBS) in
cooperation with the American Association of Residential
Mortgage Regulators (AARMR) established the State Regulatory
Registry LLC (SRR) on September 21, 2006. A limited-liability
company, SRR is to develop and operate nationwide systems for
state regulators in the financial services industry. Such
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systems are intended to enhance state's ability to protect
consumers; improve supervision and enforcement of licensed
entities; and streamline licensing and other processes for state
agencies and the industry through the use of modern technology
and centralizing redundant state agency operations.
The State Regulatory Registry provides the following on their
website regarding NMLSR:
1)State agencies and the District of Columbia are working
together to create the CSBS/AARMR Nationwide Mortgage
Licensing System ("The System") for the following reasons:
a) The System will improve state regulators' ability to
supervise mortgage lending and brokering in their states
and enhance the ability to take enforcement actions against
bad actors;
b) States will share the same licensing information about
companies and professionals. Enforcement actions taken by
one state against a licensee will be tied to the licensee's
record in the national system accessible by all regulators;
c) The System will increase accountability in the mortgage
industry by ensuring that entities that are licensed at the
state level are tracked across states and over time;
d) Licensees will have a single record that will be used in
all states and tracked over time. Bad actors will not be
able to escape their record by migrating from one state or
company to another;
e) The System will save states significant resources by
automating and streamlining agency processing of mortgage
licensing applications and renewals;
f) Automating license processing will save states
significant resources that can be used for other purposes,
such as enforcement. The costs for each state to build its
own similar system would be $1.5 - $2 million per state.
The CSBS/AARMR System is being built for $10 million.
States working together in this manner is a responsible use
of public funds;
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g) The System will improve licensees' ability to apply for
and maintain state mortgage licensure by providing direct
access through a secured website to manage a single record
that will be shared by all participating states;
h) The System will allow licensees to complete a single
application electronically and then submit to numerous
states with the click of a button. The System will reduce
response times, and allow licensees to update information
instantly and check the status of requests online;
i) The System will provide consumers a single website to
check on the license status of any state licensed mortgage
lender or broker with whom they wish to do business; and,
j) A public website will contain searchable information
about every state licensed lender, broker, branch, and
professional. The information will include the status of
the entity's license in each state and any final
enforcement actions tied to that licensee.
How does this bill interact with AB 34 (Nava) which also
implements the SAFE Act?
Both AB 34 and SB 36 go about creating state compliance through
licensing of mortgage loan originators in very similar ways. At
this point, any differences between the bills are either purely
technical in nature, or issues that will require further
reconciliation. Both authors have agreed that they will
reconcile the major differences in these bills as they move
forward.
Related Legislation .
AB 34 (Nava), also implements changes to the RMLA, CFL and real
estate law in order to comply with the SAFE Act. This bill is
currently pending Senate Business and Professions Committee.
SB 491 (Maldonado)Would begin the process of amending
California's mortgage lending and brokering laws in compliance
with the SAFE Act. Failed passage in the Senate Banking, Finance
& Insurance Committee.
REGISTERED SUPPORT / OPPOSITION :
SB 36
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Support
California Association of Mortgage Brokers
Opposition
None on file.
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081