BILL ANALYSIS
SB 36
Page 1
SENATE THIRD READING
SB 36 (Ron Calderon)
As Amended August 31, 2009
2/3 vote. Urgency
SENATE VOTE :36-1
BANKING & FINANCE 10-1 BUSINESS & PROFESSIONS
11-0
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|Ayes:|Nava, Gaines, Evans, |Ayes:|Hayashi, Emmerson, |
| |Fong, Fuentes, Mendoza, | |Conway, |
| |Ruskin, Swanson, Torres, | |Eng, Hernandez, Nava, |
| |Tran | |Niello, |
| | | |John A. Perez, Ruskin, |
| | | |Smyth, Monning |
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|Nays:|Anderson |
| | |
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APPROPRIATIONS 15-0
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|Ayes:|De Leon, Conway, Ammiano, |
| |Charles Calderon, Coto, |
| |Davis, Fuentes, Hall, |
| |Nielsen, John A. Perez, |
| |Skinner, Solorio, Audra |
| |Strickland, Torlakson, |
| |Hill |
| | |
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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 (SAFE) Act, 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
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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.
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.
4)Provides that loan originators regulated by the Department of Real
Estate (DRE) will not need a loan originators' license until
December 31, 2010.
5)Specifies that a loan originator licensed by the Department of
Corporations (DOC) will not need a loan originators license until
July 1, 2010.
6)Contains an urgency clause, allowing this bill to take effect
immediately upon enactment.
EXISTING FEDERAL LAW provides for the SAFE Act, pursuant to Title V
of the provisions of the Housing and Economic Recovery Act of 2008.
EXISTING STATE LAW regulates:
1)RMLs under the RMLA and the DOC. [Financial Code, Section 50000
et seq.]
2)CFLs under the CFLL and the DOC. [Financial Code, Section 22000
et seq.]
3)Real estate brokers who make or service residential mortgage loans
under the Real Estate law administered by DRE.
FISCAL EFFECT : According to the Assembly Appropriations Committee:
1)Increase in regulatory, licensing, and registry costs totaling
about $10 million annually to DRE and about $2 million to DOC
(special funds) to comply with SAFE (federal law), offset by new
SAFE fees charged to industry applicants.
2)Additional one-time costs, potentially up to several millions to
DRE for start-up expenses, not fully reimbursed by fees.
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COMMENTS : DRE 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 of DRE 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 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, DRE 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 throughout 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
12-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 personnel years (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:
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Information Technology Modification : One-time cost of $1,315,540
and annual ongoing cost of $263,671.
Office Network and Equipment Costs : First year cost of $911,722 and
second year cost of $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.
DOC : SB 36 requires persons licensed as finance lenders and brokers
and residential mortgage lenders by the DOC to obtain an additional
license in order to engage as a mortgage loan originator. 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.
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.
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)Provide uniform license applications and reporting requirements
for state-licensed loan originators.
2)Provide a comprehensive licensing and supervisory database.
3)Aggregate and improve the flow of information to and between
regulators.
4)Provide increased accountability and tracking of loan originators.
5)Streamline the licensing process and reduces the regulatory
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burden.
6)Enhance consumer protections and supports anti-fraud measures.
7)Provide 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)Establish 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)Facilitate responsible behavior in the subprime mortgage market
place and provide comprehensive training and examination
requirements related to subprime mortgage lending.
10)Facilitate 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 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 (Ron 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
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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. Mortgage
brokers operate under a real estate license from the DRE. This
license requires several hours of educational training and ongoing
direct oversight by DRE. 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, an entirely new
regulatory system for mortgage loan originators. Imposing these new
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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 systems are intended to enhance the 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.
SRR provides the following on their Web site regarding NMLSR:
1)State agencies and the District of Columbia are working together
to create the CSBS/AARMR Nationwide Mortgage Licensing System
(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;
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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;
g) The System will improve licensees' ability to apply for and
maintain state mortgage licensure by providing direct access
through a secured Web site 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 Web site 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 Web site 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.
Related legislation . AB 34 (Nava) of 2009, also implements changes
to the RMLA, CFL, and real estate law in order to comply with the
SAFE Act. This bill is currently pending in the Senate.
SB 491 (Maldonado) of 2009 would begin the process of amending
California's mortgage lending and brokering laws in compliance with
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the SAFE Act. It failed passage in the Senate Banking, Finance and
Insurance Committee.
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081
FN: 0002704