BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  SB 217
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          SENATE THIRD READING
          SB 217 (Vargas)
          As Amended  August 25, 2011
          Majority vote

           SENATE VOTE  :39-0  
           
           BANKING & FINANCE   11-0        APPROPRIATIONS      17-0        
           
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          |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 








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               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
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          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 








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          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


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