BILL ANALYSIS Ó SB 376 Page 1 Date of Hearing: June 14, 2011 ASSEMBLY COMMITTEE ON BUSINESS, PROFESSIONS AND CONSUMER PROTECTION Mary Hayashi, Chair SB 376 (Fuller) - As Amended: April 7, 2011 SENATE VOTE : 40-0 SUBJECT : Real estate brokers. SUMMARY : Revises the definition of "real estate broker" to allow brokers to make, arrange, or service chattel mobilehome loans under their Department of Real Estate (DRE) license, without having to secure an additional finance lender or broker license from the Department of Corporations. Specifically, this bill : 1)Defines "real estate broker" to include a person who, among other things: a) Solicits borrowers or lenders for or negotiates loans or collects payments or performs services for borrowers or lenders or note owners in connection with loans secured directly or collaterally by liens on real property, or chattel mobilehome loans if the mobilehome has been registered pursuant to current law, or on a business opportunity; or b) Sells or offers to sell, buys or offers to buy, or exchanges or offers to exchange a real property sales contract, or a promissory note secured directly or collaterally by a lien on real property, or chattel mobilehome loans if the mobilehome has been registered pursuant to current law, or a business opportunity, and performs services for the holders thereof. 2)Specifies that a person licensed as a real estate broker who acts pursuant to specified current law or a) or b), above, and who makes, arranges, or services chattel mobilehome loans, if the mobilehome has been registered pursuant to current law, need only meet the requirements for licensure under the Real Estate Law. EXISTING LAW SB 376 Page 2 Federal law: 1)Pursuant to the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act), requires all states to license and register their mortgage loan originators through a nationwide registry. 2)Under the SAFE Act, defines "mortgage loan originator" as (generally speaking) one who takes a residential mortgage loan application or offers or negotiates terms of a residential mortgage loan for compensation or gain. 3)Under the SAFE Act, redefines "residential mortgage loans" (mortgage loan secured by real property) to include chattel loans on mobilehomes, whether or not they are attached to real property. California Real Estate Law: 1)Licenses and regulates real estate brokers under DRE. 2)Defines "real estate broker" to include a person who, among other things: a) Solicits borrowers or lenders for or negotiates loans or collects payments or performs services for borrowers or lenders or note owners in connection with loans secured directly or collaterally by liens on real property or on a business opportunity; or b) Sells or offers to sell, buys or offers to buy, or exchanges or offers to exchange a real property sales contract, or a promissory note secured directly or collaterally by a lien on real property or a business opportunity, and performs services for the holders thereof. 3)Defines a "mortgage loan originator" as an individual who takes a residential mortgage loan application or offers or negotiates terms of a residential mortgage loan for compensation or gain. 4)Defines "residential mortgage loan" as any loan primarily for personal, family, or household use that is secured by a mortgage, deed of trust, or other equivalent consensual security interest on a dwelling, or residential real estate SB 376 Page 3 upon which is constructed or intended to be constructed a dwelling. "Dwelling" means a residential structure that contains one to four units, whether or not that structure is attached to real property, and includes an individual mobilehome if it is used as a residence. 5)Requires a mortgage loan originator to obtain and maintain a real estate license and to obtain and maintain a real estate license endorsement, as specified, identifying that individual as a licensed mortgage loan originator. California Financial Code: 1)Defines "residential mortgage loan" as any loan primarily for personal, family, or household use that is secured by a mortgage, deed of trust, or other equivalent consensual security interest on a dwelling as defined in the federal Truth in Lending Act, or residential real estate upon which is constructed or intended to be constructed a dwelling. "Dwelling" means a residential structure that contains one to four units, whether or not that structure is attached to real property, and includes an individual mobilehome if it is used as a residence. 2)Defines "mortgage loan originator" as an individual who, for compensation or gain, or in the expectation of compensation or gain, takes a residential mortgage loan application or offer or negotiates terms of a residential mortgage loan. 3)Provides that a mortgage loan originator does not include an individual who is already licensed pursuant to provisions of the Real Estate Law and the SAFE Act. 4)Specifies that no person shall engage in the business of a finance lender or broker without obtaining a license from the Commissioner of the Department of Corporations (Commissioner). 5)Specifies that no person shall engage in the business of a mortgage loan originator without submitting an application to obtain a license as specified from the Commissioner. 6)Specifies that every licensee engaging in the business of making or brokering residential mortgage loans shall require that every mortgage loan originator employed or compensated by that licensee obtain and maintain a mortgage loan originator SB 376 Page 4 license from the Commissioner or obtain a license endorsement from the Commissioner of Real Estate. 7)Specifies that a finance lender or broker may not make or broker a residential mortgage loan unless that loan is offered by, negotiated by, or applied for through a licensed mortgage loan originator. California Health and Safety Code: Requires annual registration of mobilehomes with the Department of Housing and Community Development. FISCAL EFFECT : Unknown COMMENTS : Purpose of this bill . According to the author's office, "Recently enacted federal and state statutes have redefined a mortgage loan secured by real property to include chattel loans on mobile homes. This will prevent lending of mobile home chattel loans by requiring mobile home park owners to become licensed finance lenders. This bill will exempt those who issue chattel mobile home loans from this requirement so that these loans may continue." Background . The SAFE Act, part of the Housing and Economic Recovery Act of 2008, requires all states to license and register their mortgage loan originators through a nationwide registry. California began pursuing legislation to comply with the SAFE act in 2009, and continues refining state law in conformity with regulations implementing the SAFE Act, which are still being developed. According to the Western Manufactured Housing Communities Association (WMA), sponsor of this bill, the SAFE Act and newly amended provisions of the federal Truth in Lending Act pose a substantial problem for the state's mobile home parks. Before these federal measures and state legislation implementing the SAFE Act were in place, park owners were making seller carry back chattel loans on used mobile homes using their own money to fund the loans. This was necessary because traditional lenders were not willing to make $5,000 to $20,000 chattel loans on used mobile homes that park owners acquired through default, abandonment, or warehouse liens. Park owners were not required SB 376 Page 5 to be licensed as lenders by the Department of Corporations, because these loans were not categorized as "engaged in the business of chattel lending" and did not trigger the need for a finance lender license. WMA states, "The S.A.F.E. Act redefined Residential Mortgage Loans to include chattel loans on mobile homes whether or not they were attached to real property?Thus, park owners who are engaged in making seller carry back loans on mobilehomes?are required to be licensed as mortgage loan originators (MLOs) and to be licensed as a consumer finance lender by the Department of Corporations in order to finance homes which they own and self-finance. This is a very costly and difficult process for a parkowner who makes an occasional seller financed chattel loan. "The process of becoming a licensed finance lender takes months, as does the mortgage loan originator license?Congress has essentially created a legal fiction by folding chattel loans on mobile homes into the definition of a mortgage loan secured by real property. Lending on these used homes will cease if relief from the S.A.F.E Act is not provided by legislation." This bill amends California Real Estate Law to allow property management companies that manage mobilehome parks and already must be licensed as real estate brokers by DRE to make used mobile home loans under their DRE Broker license and an MLO license endorsement (required under the SAFE Act), without having to acquire an additional finance lender license from the Department of Corporations. Support . The Western Manufactured Housing Communities Association states, "WMA is sponsoring SB 367?to allow property management companies who manage properties for a fee and are already required to be licensed as Real Estate Brokers by the Department of Real Estate to make these used mobilehome loans under their DRE Broker license and an MLO license instead of having to acquire an additional license as a finance lender by the Department of Corporations." Related Legislation . AB 278 (Hill) authorizes the Real Estate Commissioner to adopt regulations that establish a system for the issuance of citations to DRE licensees and for issuance of administrative citations to unlicensed persons acting in the capacity of a real estate licensee. This bill is pending in Senate Business, Professions and Economic Development Committee. SB 376 Page 6 SB 6 (Ron Calderon and Vargas) updates California's Real Estate Law, Appraisal Law, and Civil Code to reflect recent changes enacted at the federal level pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). This bill is pending in Assembly Business, Professions and Consumer Protection Committee. SB 53 (Ron Calderon and Vargas) revises the Real Estate Law to give DRE more enforcement tools to regulate mortgage fraud as well as other violations of the Real Estate Law. This bill is pending in Assembly Business, Professions and Consumer Protection Committee. SB 510 (Correa) establishes various minimum requirements for an individual to become a real estate brokerage branch manager and authorizes the Commissioner of DRE to discipline a branch manager for failure to supervise branch operations. This bill is pending in Assembly Rules. SB 706 (Price) makes numerous enforcement enhancements to DRE and the Office of Real Estate Appraisers; requires licensing boards to post information about licensees on the internet, as specified; and, makes updating and conforming changes. This bill is pending in Assembly Rules. Previous Legislation . SB 1137 (Committee on Banking, Finance and Insurance) Chapter 287, Statutes of 2010, made technical and clarifying changes pursuant to the implementation of the SAFE Act and SB 36 of 2009. SB 36 (Ron Calderon) Chapter 160, Statutes of 2009, brings California in compliance with the SAFE Act by requires licensing of all mortgage loan originators, as well as registration with the Nationwide Mortgage Licensing System and Registry. AB 34 (Nava) of 2009 establishes requirements for state mortgage loan originator licenses to conform to the SAFE Act. This bill was substantially amended to address an unrelated issue. SB 491 (Maldonado) of 2009 begins the process of amending California's mortgage lending and brokering laws in compliance with the SAFE Act. This bill was held in Senate Banking, SB 376 Page 7 Finance and Insurance Committee. SB 1240 (Machado) of 2007 requires real estate brokers that make, arrange, or service residential mortgage loans on property containing one to four residential units to notify DRE within 30 days of entering the mortgage field and upon exiting that field, and requires these brokers to file specified reports with DRE on an annual or biannual basis. This bill was vetoed by the Governor citing that recent federal legislation provided for a comprehensive loan originator licensing system that establishes national standards, and encouraging the Legislature to pursue legislation to implement the federal legislation. REGISTERED SUPPORT / OPPOSITION : Support Western Manufactured Housing Communities Association (sponsor) Opposition None on file Analysis Prepared by : Angela Mapp / B.,P. & C.P. / (916) 319-3301