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 




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          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 




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          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, 




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          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 




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          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




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          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