BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 2666
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          Date of Hearing:   April 23, 2012

                      ASSEMBLY COMMITTEE ON BANKING AND FINANCE
                                   Mike Eng, Chair
             AB 2666 (Banking & Finance) - As Introduced:  March 5, 2012
          
          SUBJECT  :   Mortgage loan originators.

           SUMMARY  :   Provides updates, changes and clarifications to 
          portions of the Residential Mortgage Lending Act (RMLA) and the 
          California Finance Lenders Law (CFLL).  Specifically,  this bill  : 
           

          1)Provides a definition of "expungement" for purposes of 
            considering expunged or pardoned felony convictions in 
            licensing decisions.

          2)Exempts employees of federal, state, or local government 
            agencies from the requirements to be licensed as mortgage loan 
            originators (MLO).

          3)Exempts U.S. Housing and Urban Development (HUD) certified 
            counselors that will only provide traditional counseling 
            services from the requirement to be licensed as a MLO.

          4)Clarifies exempt company registration procedures.

          5)Clarifies that an MLO acting under the CFLL is required to be 
            licensed, in order to be consistent with the CFLL.

          6)Clarifies the validity of electronic records held in the 
            National Mortgage Licensing System (NMLS).

          7)States that a CFL lender or servicer is prohibited from paying 
            a fee or commission to an unlicensed MLO.

           EXISTING LAW  

          Title V of the Federal Housing Finance Regulator Reform Act, 
          signed by President Bush on July 30, 2008 established the Secure 
          and Fair Enforcement for Mortgage Licensing (SAFE) Act requiring 
          the establishment of a national registry for mortgage loan 
          originators and required all the states to establish 
          requirements to carry out the SAFE Act licensing and 
          registration.  California's SAFE Act licensing framework was put 








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          into law by SB 36 (Calderon), Chapter 160, Statutes of 2009.  In 
          California, employees of those licensees licensed under the CFLL 
          and California RMLA that meet the definition of "mortgage loan 
          originator" must obtain licenses from DOC.  Persons licensed by 
          the Department of Real Estate under the Real Estate Law must 
          obtain a mortgage loan originator license endorsement if they 
          meet the "mortgage loan originator" definition.

           



          FISCAL EFFECT  :   Unknown
           
          COMMENTS  :   

          This bill would amend those portions of the CFLL and the RMLA 
          that implement the SAFE Act.  Generally, this bill addresses two 
          issues that have emerged since California's version of the 
          Federal SAFE Act, SB 36 (Chap.160, Stats. 2009 - Calderon), was 
          signed into law.  First, the HUD has published its much awaited 
          Final Rule (Federal Register, Vol. 76, No. 126, page 38464 
          through 38501), effective August 29, 2011, to implement the SAFE 
          Act.

          The proposed changes clarify the requirements imposed by the 
          SAFE Act and the HUD Final Rule, and provide mortgage loan 
          providers, such as loan officers and their employer lenders, 
          brokers, and servicers, with clearer guidance as to what is 
          required under the CFLL and the CRMLA.  Moreover, clarification 
          of the licensure requirements will assist the DOC when it 
          reviews MLO applications, conducts examinations of lenders, 
          brokers, servicers and MLOs, and brings enforcement actions 
          against those MLOs and their employers who are not in compliance 
          with the law.  The changes will also provide guidance to the 
          industry by clarifying the requirements necessary to supervise 
          and train their MLOs.  

          The proposed legislative language sets forth a definition of 
          "expungement."  SB 217 (Chap. 444, Stats. 2011 - Vargas), signed 
          by Governor Brown in October 2011, took effect on January 1, 
          2012.  SB 217 provides that the Commissioner may consider the 
          underlying facts and circumstances of an expunged or pardoned 
          felony conviction in licensing decisions of MLOs.  That part of 
          SB 217 was enacted in response to HUD's pronouncement in its 








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          Final Rule that "?expunged convictions do not "in themselves" 
          render an individual ineligible?" for licensure as an MLO.  
          However, the term "expungement" is not defined in either the 
          CFLL or the CRMLA.  Therefore, it is necessary to define this 
          term and make references to the Penal Code Section 1203.4, on 
          which the definition is based.
           
           The bill would exempt employees of federal, state, and local 
          government agencies when acting under the official authority of 
          and on behalf of the federal, state, or local government agency 
          employer.  The HUD Final Rule provides an exemption for federal, 
          state, and local government employees.  HUD states that the 
          employee is not engaged in the business of a MLO and does not 
          participate in any commercial gain or profit.  Based on the 
          non-commercial aspect of the government agency, HUD exempts such 
          individuals from having to become licensed in any state, 
          provided that the MLO's activities are on behalf of a government 
          agency.   AB 2666 would allow state departments such as the 
          California Department of Veterans Affairs to save the costs 
          associated with application, prelicensure education, continuing 
          education, testing, and renewal costs. 
           
           The bill exempts employees of bona fide nonprofit organizations 
          from MLO licensing requirements, provided the nonprofit 
          organization complies with various criteria specified by HUD.  
          This exemption is necessary to allow bona fide nonprofit 
          organizations, such as Habitat for Humanity, to continue to 
          provide valuable housing services to their constituents.

          The HUD Final Rule provides that employees of a bona fide 
          nonprofit organization under specified conditions may be exempt 
          from licensure if the state "?periodically examineİs] the books 
          and activities of the bona fide nonprofit organization and 
          revokeİs] its status?if it does not continue to meet the 
          criteria?" provided in the Final Rule.

          
           The bill allows HUD-certified Housing Counselors who only 
          provide "traditional housing counseling services" to be exempt 
          from licensure.  The language is added to the nonprofit 
          organization exemption, explained in paragraph 3 above.  This 
          bill would provide HUD-certified Housing Counselors the ability 
          to continue to assist troubled homeowners during this difficult 
          housing market without the added costs of licensure.









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          The bill clarifies that a subsidiary of a depository institution 
          that is owned and controlled by a depository institution and 
          regulated by a federal banking agency is exempt from state 
          licensing requirements. 
           
           The bill clarifies that the exempt company procedure provided by 
          SB 217 (Chap. 444, Stats. 2011 - Vargas) is applicable to all 
          exempt companies, not just licensed insurance producers.  SB 217 
          inadvertently applies the exempt company procedure to only 
          licensed insurance producers such as State Farm Bank, the 
          sponsor of the bill.  Since DOC does not have jurisdiction over 
          exempt companies, some companies may need a procedure by which 
          their employees could be sponsored in order for their employees 
          to be licensed as MLOs.  Although DOC made exempt company 
          procedures available through the NMLS, with the passage of SB 
          217, because the exempt company procedure became only applicable 
          to State Farm Bank, the legislative proposal would clarify that 
          such procedures are available to exempt companies as long as 
          certain conditions (as provided by rule or order by the 
          Commissioner), are complied with.  This provision will allow 
          exempt companies to insure that their employee MLOs are in 
          compliance with the SAFE Act.
           
           Under the RMLA, the licensing requirement of MLOs is explicitly 
          stated.  However, under the CFLL, such language is missing.  
          Therefore, the bill would include language to require that an 
          individual who is engaged in the business of a MLO is required 
          to be licensed.  This provision is necessary for enforcement 
          purposes, and to ensure consistency.
           
           Under current Corporate Securities Law (CSL) administered by the 
          DOC, there is a provision which states that any document held by 
          a central depository, such as the Central Registration 
          Depository (CRD) is deemed to be a valid original document upon 
          reproduction to paper.  The bill would tailor the language from 
          the CSL into provisions in the CFLL and the CRMLA.  This 
          provision will assist the DOC's enforcement efforts, especially 
          if a defendant questions the validity of records held by the 
          NMLS, an electronic document depository system similar to the 
          CRD, in an evidentiary proceeding.  According to the DOC, 
          records have not been questioned with regard to their validity 
          at this time.

          Under current CRMLA, a lender or servicer is prohibited from 
          paying a fee or commission to an unlicensed MLO.  The bill makes 








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          the CFLL consistent with the CRMLA by adding similar language to 
          the CFLL.  This provision would provide that unlicensed MLOs 
          would be prohibited from profiting when not in compliance with 
          the law.
           
           The bill also offers other technical, clean-up language, such as 
          including "mortgage loan originator" in the CFLL section which 
          provides that the Commissioner may issue a desist and refrain 
          order if there is any violation of the CFLL.  This provision 
          would make the CFLL more consistent with the CRMLA.  
          Furthermore, this provision would aid in the DOC's enforcement 
          efforts.

           REGISTERED SUPPORT / OPPOSITION  :   

           Support 
           
          None on file.

           Opposition 
           
          None on file.
           
          Analysis Prepared by  :    Mark Farouk / B. & F. / (916) 319-3081