BILL ANALYSIS Ó SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE Senator Juan Vargas, Chair AB 2666 (Committee on Banking & Finance)Hearing Date: June 20, 2012 As Amended: June 12, 2012 Fiscal: Yes Urgency: No SUMMARY Would make technical and clarifying changes to provisions of the California Finance Lenders Law (CFLL) and California Residential Mortgage Lending Act (CRMLA) that implement the federal Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) of 2008. DESCRIPTION 1. Would add California's Penal Code definition of "expungement" to the CFLL and CRMLA. 2. Would amend the CFLL and CRMLA to exempt the following individuals from the definition of a mortgage loan originator: a. Employees of federal, state, or local government agencies or housing finance agencies, who act as mortgage loan originators only in their official duties as employees of those agencies. b. Employees of bona fide nonprofit organizations, who exclusively originate residential mortgage loans for those bona fide nonprofit organizations, and who act as mortgage loan originators only with respect to residential mortgage loans with terms that are favorable to the borrower, as defined. To qualify for the exemption, a bona fide nonprofit organization must register with the Department of Corporations (DOC); provide specified documentation to DOC regarding its activities on an annual basis; periodically provide reports regarding its activities, as requested by the Commissioner of Corporations (Commissioner); and subject itself to periodic examinations of its books and records by the Commissioner, as specified. The Commissioner is AB 2666 (Comm. on B. & F.), Page 2 given the authority to revoke a nonprofit organization's status as a registered bona fide nonprofit organization (and thus revoke the exemption provided to its employees), if the organization fails to provide required documentation to DOC or does not continue to meet specified criteria. 3. Would amend the CFLL to authorize companies that are "not subject to" the CFLL and amend the CRMLA to authorize companies that are "exempt from" the CRMLA to apply to the Commissioner for exempt company registrations. 4. Would amend the CFLL and CRMLA to clarify that applications and other documents held in the Nationwide Mortgage Licensing System and Registry are deemed to be valid original records, upon printing to paper. 5. Would clarify the CFLL by expressly stating that: a. An individual may not engage in the business of a mortgage loan originator with respect to any dwelling located in this state, without first obtaining and maintaining annually a license in accordance with the requirements of the CFLL; b. A registered mortgage loan originator is exempt from licensure under the CFLL when that individual is employed by a depository institution, a subsidiary of a depository institution owned and controlled by a depository institution and regulated by a federal banking agency, or an institution regulated by the Farm Credit Administration; c. A finance lender, finance broker, or mortgage loan originator licensed under the CFLL may not pay any commission, fee, or other compensation to an unlicensed individual for conducting activities that require a license, unless that unlicensed individual is exempt from licensure pursuant to the CFLL. EXISTING LAW 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). The SAFE Act required all states to license and register their mortgage loan AB 2666 (Comm. on B. & F.), Page 3 originators, as defined, through a nationwide organization called the Nationwide Mortgage Licensing System and Registry. Any state that failed to implement a mortgage loan originator licensing system, in compliance with the SAFE Act, by July 30, 2009 risked direct intervention by the U.S. Department of Housing and Urban Development (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. Authority for SAFE Act oversight was transferred from HUD to the Consumer Financial Protection Bureau (CFPB) in July 2011. Existing law, pursuant to SB 36 (Calderon), Chapter 160, Statutes of 2009, SB 1137 (Committee on Banking, Finance & Insurance), Chapter 287, Statutes of 2010, and SB 217 (Vargas), Chapter 444, Statutes of 2011, conforms California's Real Estate Law, CFLL, and CRMLA to the SAFE Act, thus preserving California's ability to continue regulating mortgage loan origination by non-depository institutions operating in California. COMMENTS 1. Background and Discussion: The federal SAFE Act was enacted in July of 2008, and gave jurisdiction to HUD to implement regulations clarifying its operation. On June 30th, 2011, shortly before its authority to administer the SAFE Act was transferred to the CFPB, HUD issued its final rules implementing the SAFE Act (Federal Register Volume 76, Number 126, Thursday, July 30th, 2011, pp. 38464 - 38501). SB 217, referenced above, was enacted to incorporate some of the changes reflected in the HUD final regulations, and to authorize certain companies, which did not require lending licenses from the state of California, but whose employees engaged in activities which required mortgage loan originator licenses pursuant to the SAFE Act, to obtain so-called "exempt company registrations" from DOC. These exempt company registrations allow the companies to sponsor their employees on the Nationwide Mortgage Licensing System and Registry (a database used to facilitate the licensing of mortgage loan originators nationwide), and thus enable their employees to obtain mortgage loan originator licenses. AB 2666 further clarifies some of the changes made by SB 217, proposes additional changes to incorporate additional portions of the final HUD regulations into California law, AB 2666 (Comm. on B. & F.), Page 4 and proposes changes to close what DOC views as loopholes in existing law. The logic behind each of the changes is as follows: a. Definition of expungement: SB 217 (Vargas), Chapter 444, Statutes of 2011, authorized the Commissioner of Corporations to consider the underlying facts and circumstances of an expunged or pardoned felony conviction in making mortgage loan originator licensing decisions, but did not define the term expungement. This bill would add that definition. b. Mortgage loan originator licensing exemption for employees of government agencies and housing finance agencies: In its final rule, HUD stated that the SAFE Act does not cover employees of government agencies or housing finance agencies who act as loan originators in accordance with their duties as employees of such agencies. This bill would incorporate that finding into the CFLL and CRMLA, to save government entities the cost of paying for mortgage loan originator licenses for their employees whose tasks would otherwise require them to obtain mortgage loan originator licenses. The California Department of Veterans Affairs is expected to be among the beneficiaries of this change. c. Mortgage loan originator licensing exemption for employees of bona fide nonprofit organizations: In its final rule, HUD stated that individuals who act as loan originators with respect to certain kinds of loans as employees of bona fide nonprofit organizations, as defined in the final rule, are not subject to the licensing or registration requirements of the SAFE Act. AB 2666 incorporates that finding into the CFLL and CRMLA. Habitat for Humanity and HUD-certified housing counseling agencies are expected to be among the beneficiaries of this change. d. Exempt company registration: This provision expands the authority granted to certain insurance companies by last year's SB 217 to any company that is expressly "not subject to" the CFLL or expressly "exempt from" the CRMLA. The exempt company registration procedure is intended to help companies that are not required to be licensed as mortgage lenders by the state of California, but whose employees meet the SAFE Act definition of a AB 2666 (Comm. on B. & F.), Page 5 mortgage loan originator (and who thus require mortgage loan originator licenses). With an exempt company registration, a company may officially sponsor its mortgage loan originator employees on the Nationwide Mortgage Licensing System and Registry. Such sponsorship is required before an individual may obtain a mortgage loan originator license. Without sponsorship by a recognized entity on the Nationwide Mortgage Licensing System and Registry, an individual who has otherwise fulfilled the requirements to become a licensed mortgage loan originator is unable to work in that capacity pursuant to the SAFE Act and California law. e. Deeming Electronic Records Valid when Printed: California's Corporate Securities Law contains a provision which states that any document held by a central depository is deemed to be a valid original document upon reproduction to paper. This bill would add similar language to the CFLL and CRMLA. Although DOC is unaware of any challenges to date, regarding the validity of records held on the Nationwide Mortgage Licensing System and Registry, it is seeking this technical change to preclude future challenges. f. Technical Clarifications to the CFLL: DOC staff are also seeking three technical changes to the CFLL, to help DOC enforce the SAFE Act provisions of the CFLL as intended pursuant to SB 36. 2. Summary of Arguments in Support: The San Luis Obispo County Housing Trust Fund and Housing Trust Fund of Santa Barbara County support the bill, based on the provision that exempts employees of bona fide nonprofit organizations from the requirement to be licensed as mortgage loan originators, if certain requirements are followed by the nonprofits. This exemption will help both groups offer down payment and other forms of homebuyer assistance to low- to moderate-income and first-time homebuyers, without having to comply with costly SAFE Act mortgage loan originator licensing requirements. 3. Summary of Arguments in Opposition: None received. 4. Prior and Related Legislation: Referenced above. LIST OF REGISTERED SUPPORT/OPPOSITION AB 2666 (Comm. on B. & F.), Page 6 Support San Luis Obispo County Housing Trust Fund Housing Trust Fund of Santa Barbara County Opposition None received Consultant: Eileen Newhall (916) 651-4102