BILL ANALYSIS Ó SB 217 Page 1 SENATE THIRD READING SB 217 (Vargas) As Amended August 25, 2011 Majority vote SENATE VOTE :39-0 BANKING & FINANCE 11-0 APPROPRIATIONS 17-0 ----------------------------------------------------------------- |Ayes:|Eng, Achadjian, Fletcher, |Ayes:|Fuentes, Harkey, | | |Fuentes, Gatto, Harkey, | |Blumenfield, Bradford, | | |Roger Hernández, Lara, | |Charles Calderon, Campos, | | |Morrell, Perea, Torres | |Davis, Donnelly, Gatto, | | | | |Hall, Hill, Lara, | | | | |Mitchell, Nielsen, Norby, | | | | |Solorio, Wagner | |-----+--------------------------+-----+--------------------------| | | | | | ----------------------------------------------------------------- SUMMARY : Allows persons to exempt company registration under the California Finance Lenders Law (CFLL) in order to comply with the Secure and Fair Enforcement of Mortgage Licensing Act of 2008 (SAFE Act). Furthermore, provides clarification on the issuance of mortgage loan originator licenses with the existence of expunged or pardoned felony convictions. Specifically, this bill : 1)Provides that persons not subject to the CFLL may apply to the commissioner of Department of Corporations (DOC) for an exempt company registration for the purpose of sponsoring one or more individuals required to be licensed as mortgage loan originators pursuant to the SAFE Act. Additionally, finds that a mortgage loan originator subject to this provision must meet the following requirements: a) The person to be licensed as a mortgage loan originator must be covered under an exclusive written contract with, and originate mortgage loans solely on behalf of, that exempt person; and, b) The person to be licensed must hold a license from the Insurance Commissioner as an insurance producer for an insurer that controls, is controlled by, or is under common SB 217 Page 2 control with that exempt person. 2)Mandates that an exempt person must comply with all rules and orders that the DOC Commissioner deems necessary to ensure compliance with the SAFE Act and shall pay an annual registration fee established by the commissioner. 3)Clarifies that a financial institution that is the sole lender for loans originated by a CFLL licensed mortgage loan originator employed as an insurance producer for an insurer does not have to become licensed under the CFLL. 4)Provides that an expunged or pardoned felony conviction does not require denial of a mortgage loan originators license or a license endorsement. Allows the commissioner of DOC or the commissioner of the Department of Real Estate (DRE) (depending on the licensing law) to consider the underlying crime, facts, or circumstances of the expunged or pardoned felony conviction when determining whether to issue a license or license endorsement. EXISTING LAW : Title V of the Federal Housing Finance Regulator Reform Act, signed by President Bush on July 30, 2008, established the SAFE Act requiring the establishment of a national registry for mortgage loan originators and required all the states to establish requirements to carry out SAFE Act licensing and registration. California's SAFE Act licensing framework was put into law by SB 36 (Calderon), Chapter 160, Statutes of 2009. In California, employees of those licensees licensed under the CFLL and California Residential Mortgage Lending Act that meet the definition of "mortgage loan originator" must obtain licenses from DOC. Persons licensed by DRE under the Real Estate Law must obtain a mortgage loan originator license endorsement if they meet the "mortgage loan originator" definition. FISCAL EFFECT : According to the Assembly Appropriations Committee, minor and absorbable costs to DOC and DRE to administer the provisions of this bill. COMMENTS : When this bill was previously heard in the Assembly Banking and Finance Committee on June 28, 2011, it addressed two issues relating to licensure under the SAFE Act. The first provision provided a de minimis exemption from SAFE Act licensing if the individual acting as mortgage loan originator SB 217 Page 3 acts on behalf of single licensee brokering loans to one single depository institution so long as the originator does not originate more than five loans in a year. The August 15, 2011, version of the bill eliminates this provision after recent and final SAFE Act regulations (Federal Register /Vol. 76, No. 126 /Thursday, June 30, 2011) issued by the United States Department of Housing and Urban Development (HUD) called into question the ability of states to provide these type of licensing exceptions. The second provision, which still exists in the bill seeks to address an issue facing State Farm Bank, a division of State Farm Insurance Company. State Farm contracts with independent agents that write insurance on behalf of State Farm Insurance. These agents also may originate mortgages on behalf of State Farm Bank. These agents in engaging in mortgage loan originations meet the definition of "mortgage loan originator" under the SAFE Act and as such fall within the registration requirements. However, because they are independent agents and not employees of State Farm, they cannot obtain SAFE Act registration. This bill would allow State Farm Bank, or another entity similarly situated to apply to the commissioner of DOC for an exempt person registration in order to sponsor its agents to become licensed and registered under the SAFE Act. It also requires that an exempt person shall comply with all the rules and orders that the commissioner deems necessary to ensure compliance with the SAFE Act, as well as, pay an annual registration fee. Furthermore, the bill clarifies that in instances when a CFLL license employed by an insurance company, originates loans for a single financial institution, that single financial institution does not have to be licensed under the CFLL. This is intended to ensure that state or federally chartered financial institutions that are already regulated, are not subject to redundant regulation. Additionally, this helps avoid any potential federal preemption complications that could occur if state law forced a national bank to seek a state lending license. In addition to eliminating the de minimis exemption in the previous version of the bill, the August 15th amendments provide that an expunged or pardoned felony conviction shall not require denial of an application for licensure as a mortgage loan originator. The final SAFE Act regulations address the issue of the treatment of pardoned and expunged felony convictions by allowing states to establish parameters that would not lead to SB 217 Page 4 the automatic denial of a license based on the existence of an expunged or pardoned conviction. In its commentary to this change, HUD finds: A state supervisory authority, however, may still consider the conduct underlying the conviction when it makes the required determination of financial responsibility, character, and general fitness. Therefore, under HUD's final rule, a state will not be required to provide that a pardoned conviction renders an individual ineligible for licensing. HUD leaves that determination to the states. Additionally, HUD will not consider an expunged conviction to render an individual ineligible to be licensed under the SAFE Act. In general, an expungement is viewed to completely eliminate the conviction in the eyes of the law and to prevent further legal consequences of the conviction. As raised by one commenter, in some states the submission of an expunged conviction could cause the individual to incur state sanctions.Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081 FN: 0002101