BILL ANALYSIS Ó SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE Senator Lou Correa, Chair 2013-2014 Regular Session AB 1091 (Skinner) Hearing Date: June 19, 2013 As Amended: May 6, 2013 Fiscal: Yes Urgency: No SUMMARY Would authorize the Commissioner of Corporations (commissioner) to issue citations and levy fines for violations of the California Finance Lenders Law (CFLL) and California Residential Mortgage Lending Act (CRMLA), as specified; prohibit specified acts by CFLL licensees; and revise the de minimis exemption for commercial finance lenders within the CFLL. DESCRIPTION 1. Would revise the de minimis exemption for commercial finance lenders, by providing that the CFLL does not apply to any person who makes five or fewer commercial loans in a 12-month period, provided the loans are incidental to the business of the person relying on the exemption. 2. Would prohibit a CFLL licensee from doing any of the following: a. Violating Section 1695.13 of the Civil Code (which states that it is unlawful for any person to initiate, enter into, negotiate, or consummate any transaction involving residential real property in foreclosure, if such person, by the terms of such transaction, takes unconscionable advantage of the property owner in foreclosure). b. Violating Section 17200 or 17500 of the Business and Professions Code (which state that it is unlawful to engage in unfair or deceptive business practices or advertising practices, as specified). c. Knowingly misrepresenting, circumventing, or concealing, through subterfuge or device, any material aspect or information regarding a transaction to which AB 1091 (Skinner), Page 2 the licensee is a party. d. Committing an act that constitutes fraud or dishonest dealings. 3. Would authorize the DOC commissioner, under both the CFLL and the CRMLA, to issue citations and levy administrative fines to any person that the commissioner has cause to believe is violating any provision of either law or any rule or order issued pursuant to either law. Specifics of the citations and fines would be as follows: a. The citation would have to be in writing, and would have to describe with particularity the basis for the citation. Each citation would have to contain an order to correct the violation or violations identified and provide a reasonable time period or periods in which to do so. Each citation could assess an administrative fine not to exceed $2,500 (per citation, not per violation). b. A citation issued or a fine assessed pursuant to this authority would constitute punishment for a violation of law, and would be in lieu of other administrative discipline by the commissioner for the offense or offenses cited. Notwithstanding this point, the commissioner would be authorized to issue an order to desist and refrain from engaging in a specific business activity or activities to a person issued a citation. c. Citations would become final within 30 days, if not contested by the recipient of the citation. Recipients would be able to contest their citations using procedures set forth in the Administrative Procedures Act (Government Code Sections 11500 et seq.) d. Once all administrative appeal remedies have been exhausted, if a cited person fails to comply with the citation or pay the assessed fine, the commissioner would be authorized to apply to the appropriate superior court for a judgment in the amount of the administrative penalty and an order compelling the cited licensee or person to comply with the order. The application, which would have to include a certified copy of the final order of the commissioner, would constitute a sufficient showing to warrant the issuance of the judgment and order. AB 1091 (Skinner), Page 3 EXISTING LAW 4. Authorizes a de minimis exemption under the CFLL for persons who make no more than one commercial loan in a 12-month period (Financial Code Section 22050). 5. Prohibits a person subject to the CFLL from doing either of the following: a. Making a materially false or misleading statement or representation to a borrower about the terms or conditions of that borrower's loan, when making or brokering the loan (Financial Code Section 22161). b. Advertising, printing, displaying, publishing, distributing, or broadcasting, or causing or permitting to be advertised, printed, displayed, published, distributed, or broadcast in any manner, any statement or representation that is false, misleading, or deceptive, or that omits material information, as specified (Section 22161). 6. Provides that any person who willfully violates any provisions of the CFLL, or who willfully violates any rule or order adopted pursuant to the CFLL, is liable for a civil penalty not to exceed two thousand five hundred dollars ($2,500) for each violation, which must be assessed and recovered in a civil action brought in the name of the people of the State of California by the commissioner in any court of competent jurisdiction (Section 22173). 7. Provides that whenever, in the opinion of the commissioner, any person is engaged in the business as a broker or finance lender, or a mortgage loan originator, without a license from the commissioner, or any licensee is violating any provision of the CFLL, the commissioner may order that person or licensee to desist and to refrain from engaging in the business or further violating the CFLL. If a written request for a hearing is filed by the recipient of an order within 30 days after the order is served, and no hearing is held within 30 days thereafter, the order is rescinded (Section 22712). 8. Provides that any person who violates a provision of the CRMLA, or any rule or order issued pursuant to the CRMLA, is AB 1091 (Skinner), Page 4 liable for a civil penalty not to exceed two thousand five hundred dollars ($2,500) for each violation, which must be assessed and recovered in a civil action brought in the name of the people of the State of California by the commissioner in any court of competent jurisdiction (Section 50501). Further provides that any person who willfully violates any provision of the CRMLA or any rule or order issued pursuant to the CRMLA is, upon conviction, liable for a fine of not more than ten thousand dollars ($10,000) or imprisonment in a county jail for not more than one year, or both that fine and imprisonment. No person may be imprisoned for the violation of any rule or order unless he or she had knowledge of the rule or order. COMMENTS 1. Purpose: This bill is intended to improve DOC's ability to sanction CFLL and CRMLA licensees who violate their licensing laws, and to give DOC more authority to stop the unlicensed activities of persons who require a CFLL or CRMLA license, but have failed to obtain one. It also contains a provision intended to update the commercial portion of the CFLL to minimize unnecessary over-regulation of businesses. 2. Discussion: This bill has three key provisions, each of which is discussed below. a. Changing the De Minimis Exemption for Commercial Lenders in the CFLL: This provision increases the de minimis commercial loan exemption within the CFLL from "more than one loan" to "no more than five loans." Once amended, a person who makes more than five commercial loans in any twelve month period will be subject to licensure under the CFLL, but a person who makes five or fewer commercial loans in any twelve month period will be exempt. This change is intended to exempt from the CFLL commercial financing transactions that are structured as loans by entities that are not otherwise lenders. b. Authorizing DOC to Discipline CFLL Licensees for a Variety of Bad Acts Not Expressly Listed in the CFLL: These provisions are intended clarify existing law, and make it easier for DOC to bring enforcement actions against licensed and unlicensed persons who engage in these bad acts. These law changes are not intended to AB 1091 (Skinner), Page 5 suggest that the acts described are currently lawful, when performed by licensees or unlicensed persons subject to the CFLL. c. Citation and Fine Provisions: These provisions are based on similar authority that was provided to the Department of Real Estate through enactment of SB 53 (Calderon and Vargas), Chapter 717, Statutes of 2011. The arguments in favor of extending citation and fine authority to DOC are similar to those offered in 2011 in support of SB 53. At present, DOC lacks the authority to issue an on-the-spot "fix-it ticket" to a licensee that has been found to have violated or to be violating one or more provisions of the CFLL or CRMLA. For that reason, if a DOC examiner identifies a violation during a routine audit or investigation, the examiner must return to the office and write up his/her findings, then send those findings up the chain of command for review and approval. In all but the most serious cases, DOC sends a letter to the licensee once the examiner's findings have been approved, informing the licensee of the violation(s), and ordering that corrective action be taken. While a lengthy review of examination findings may be appropriate in complex cases, simpler cases could be more efficiently handled by granting DOC examiners on-the-spot citation authority. Licensees would not lose the ability to appeal, but straightforward findings, about which both DOC and licensee agree, can be handled far more expeditiously than under existing law. Granting DOC citation authority will help both consumers and licensees, by allowing DOC examination staff to more quickly share the results of their inquiries with licensees, and by directing licensees to more quickly correct those items found to be in violation. DOC already has this authority under the California Deferred Deposit Transaction Law (Financial Code Section 23058), Franchise Investment Law (Corporations Code Section 31406), and the Check Sellers, Bill Payers and Proraters Law (Financial Code Section 12107). 3. Summary of Arguments in Support: None received. 4. Summary of Arguments in Opposition: None received. 5. Amendments: Staff recommends several technical amendments AB 1091 (Skinner), Page 6 to clarify language, remove duplication, and more clearly group code sections of similar intent. All of the amendments have been reviewed by staff of DOC; no concerns were noted. a. Page 3, line 18, strike "no" and page 3, line 19, strike more than five" and insert: five or fewer b. Page 3, strike lines 29 and 30. Instead of creating a new Section 22173, amend existing Section 22161, by adding the language that appears on lines 31 through 38. Revise that language slightly, by striking the reference to Business and Professions Code Section 17500 that appears on page 3, line 33, and by applying the provisions to "persons subject to this division" rather than only to licensees. c. Page 5, line 4 and page 6, line 22, strike "penalty" and insert: fine d. Page 5, strike lines 9 through 17. Instead of creating a new Section 22709.5, amend Section 22712 as follows: 22712. (a) Whenever, in the opinion of the commissioner, any person is engaged inthebusiness as a broker or finance lender, or a mortgage loan originator, as defined in this division, without a license from the commissioner, or any licensee is violating any provision of this division, the commissioner may order that person or licensee to desist and to refrain from engaging in the business or further violating this division. If, within 30 days after the order is served, a written request for a hearing is filed and no hearing is held within 30 days thereafter, the order is rescinded. For purposes of this section, "licensee" includes a mortgage loan originator. (b) Notwithstanding subdivision (a), if, after investigation, the commissioner has reasonable grounds to believe that any person is conducting business in an unsafe or injurious manner, the commissioner shall, by written order addressed to that person, direct the discontinuance of the unsafe or injurious practices. The order shall be effective immediately, but shall not become final except in accordance with the provisions of Section 22717. 6. Prior and Related Legislation: AB 1091 (Skinner), Page 7 a. SB 53 (Calderon and Vargas), Chapter 717, Statutes of 2011: Among its provisions, authorized DRE to issue citations and levy fines upon persons engaging in violations of the Real Estate Law. b. SB 94 (Calderon), Chapter 630, Statutes of 2009: Among its provisions, made it a violation of the CFLL for any person to make a false, deceptive, or misleading statement or representation in connection with a loan. LIST OF REGISTERED SUPPORT/OPPOSITION Support None received Opposition None received Consultant: Eileen Newhall (916) 651-4102