BILL ANALYSIS Ó SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE Senator Noreen Evans, Chair 2013-2014 Regular Session SB 1459 (Comm. on B. & F.I.) Hearing Date: April 30, 2014 As Amended: April 21, 2014 Fiscal: Yes Urgency: No SUMMARY Would revise the educational requirements for mortgage loan originators (MLOs) licensed under the California Finance Lenders Law (CFLL) and California Residential Mortgage Lending Act (CRMLA) by requiring training related specifically to California law and regulations. DESCRIPTION 1. Would require persons applying for an MLO license under the CFLL and CRMLA to complete two hours of pre-licensing education on relevant California law and regulations. 2. Would require MLO licensees under the CFLL and CRMLA to complete one hour of continuing education annually related to relevant California law and regulations. 3. Would clarify both the CFLL and CRMLA by providing that applicants for an MLO license under both laws must pass a qualified written test developed or otherwise deemed acceptable by the Nationwide Mortgage Licensing System and Registry (NMLSR; this bill would add the italicized words). EXISTING FEDERAL LAW: 1. Provides for the Secure and Fair Enforcement For Mortgage Licensing (SAFE) Act, pursuant to Title V 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 MLOs, as defined, through a nationwide organization called the NMLSR. Any state that failed to implement an MLO 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, SB 1459 (Comm. on B. & F.I.), Page 2 HUD was authorized to establish and maintain an MLO licensing system in any state that failed to voluntarily comply with the federal SAFE Act. 2. Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank, H.R. 4173, Public Law 111-203), transferred authority for implementing the SAFE Act from HUD to the federal Consumer Financial Protection Bureau (CFPB). SB 1459 (Comm. on B. & F.I.), Page 3 EXISTING STATE LAW 1. Pursuant to SB 36 (Calderon), Chapter 160, Statutes of 2009, 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 nondepository institutions operating in California. 2. Pursuant to SB 217 (Vargas, Chapter 444, Statutes of 2011) and AB 2666 (Committee on Banking and Finance, Chapter 264, Statutes of 2012), companies that are not required to hold a lending license by California, but whose employees meet the SAFE Act definition of an MLO, may apply to the Department of Business Oversight (DBO; the Department) for exempt company registrations. Those exempt company registrations allow the employees of those companies to be eligible to obtain MLO licenses. COMMENTS 1. Purpose: This bill is intended to ensure that persons who hold California MLO licenses issued by DBO are knowledgeable about California laws and regulations regarding mortgage lending and mortgage brokering. 2. Background: The federal SAFE Act and California's implementing legislation (SB 36 and subsequent bills, cited above) generally require all individuals who meet the SAFE Act definition of an MLO to obtain a license from the state to undertake those activities, if they work for a nondepository institution regulated by the state, or to register with the NMLSR, if they work for a depository institution that is state- or federally-regulated. In California, employees of CFLL licensees and CRMLA licensees must obtain an MLO license from DBO if they wish to engage in mortgage loan origination activities. Bureau of Real Estate (BRE) licensees who engage in mortgage loan origination must obtain an MLO license endorsement from BRE. This bill would modify the education requirements applicable to applicants for and recipients of DBO-issued MLO licenses. It would not modify the education requirements applicable to applicants for and recipients of BRE-issued MLO license endorsements, as described later in this analysis. SB 1459 (Comm. on B. & F.I.), Page 4 3. Discussion: Under California law, an applicant for an MLO license or license endorsement must pass a qualified written test developed by NMLSR and administered by a test provider approved by NMLSR. (Technically, the CFLL and CRMLA refer to a written test developed by NMLSR, while the Real Estate Law refers to a written test developed or otherwise deemed acceptable by NMLSR; this bill would conform all three laws to the language used in the Real Estate Law). Under all three state laws, a written test may not be treated as a qualified written test unless it adequately measures the applicant's knowledge and comprehension in appropriate subject areas, including ethics; federal law and regulation relating to mortgage origination; state law and regulation relating to mortgage origination; and federal and state law and regulation, including instruction on fraud, consumer protection, the nontraditional mortgage marketplace, and fair lending issues. These requirements are based on the national SAFE Act and are thus uniform across all fifty states. Until last year, MLO applicants had to pass two separate tests in order to become licensed - a national SAFE test and a state test specific to the state in which the applicant wished to become licensed. In April 2013, in an effort to simplify and achieve greater uniformity in the SAFE Act's testing requirements, NMLSR introduced the concept of a state test that could be used in all fifty states. They offered two different options: 1) a National Test with Uniform State Content (i.e., a single test that tested applicants on both national and state content) and 2) a stand-alone Uniform State Test (UST), which tested applicants only on state content. The National Test with Uniform State Content was intended to eliminate the need for a stand-alone state test in the states that adopted it. The stand-alone UST was a temporary offering, available for only one year, and was intended to allow MLO applicants who had already passed the national test (without state content) to satisfy the state test requirement using a state test whose questions were identical in all states that chose to adopt it. According to NMLS, 39 state mortgage agencies had adopted the concept of uniform state testing as of January 1, 2014. Neither DBO nor BRE were among them. SB 1459 (Comm. on B. & F.I.), Page 5 SB 1459 is not necessary to authorize DBO or BRE to adopt the concept of uniform state testing; the Department and the Bureau may do so through regulation, and both plan to initiate rulemakings to do so later this year. DBO is seeking enactment of SB 1459 in expectation of the move toward uniform state testing. Although the Department favors the uniform state testing approach, the Department is concerned that, by moving away from a California-specific test to a uniform state test that can be used in all fifty states, its MLO applicants and MLO licensees will not be required to learn California-specific law and regulations. The National Test with Uniform State Content tests applicants on their knowledge of high level state-related content that is based on the SAFE Act and the Conference of State Bank Supervisors/American Association of Residential Mortgage Regulators Model State Law (MSL), which many states, including California, used to implement the SAFE Act. It does not test applicants on the laws specific to the individual states in which they wish to work. SB 1459 would fill the gap left by moving from a California-specific test to a uniform state test with pre-licensing and continuing education on California-specific law and regulation. According to DBO, the topics to be covered as part of these new educational requirements would be established by the Department through regulation. BRE indicates that it will follow the lead of DBO, to ensure that all of California's MLO licensees are subject to the same test. 4. Why Not Change the Real Estate Law, Also? As noted above, the MLO licensing requirements for BRE licensees are very different than those for employees of DBO licensees. Before becoming eligible to obtain an MLO license endorsement from BRE, an individual must first become licensed as a real estate salesperson or real estate broker. Both the real estate salesperson and real estate broker licenses require considerable pre-licensing education and continuing education on California-specific laws and regulations. Thus, there is no need to add California-specific educational requirements to the Real Estate Law to reflect adoption of the UST. SB 1459 (Comm. on B. & F.I.), Page 6 5. Summary of Arguments in Support: The California Mortgage Bankers Association supports SB 1459 on grounds that adoption of the Uniform State Test by California will help small and independent mortgage lending companies grow and will lower consumer costs by strengthening competition in the mortgage markets. 6. Summary of Arguments in Opposition: None received. LIST OF REGISTERED SUPPORT/OPPOSITION Support California Mortgage Bankers Association Opposition None received Consultant: Eileen Newhall (916) 651-4102