BILL ANALYSIS Ó SENATE COMMITTEE ON BANKING AND FINANCIAL INSTITUTIONS Senator Marty Block, Chair 2015 - 2016 Regular Bill No: SB 647 Hearing Date: April 15, 2015 ----------------------------------------------------------------- |Author: |Morrell | |-----------+-----------------------------------------------------| |Version: |April 7, 2015 | ----------------------------------------------------------------- ----------------------------------------------------------------- |Urgency: |No |Fiscal: |Yes | ----------------------------------------------------------------- ----------------------------------------------------------------- |Consultant:|Eileen Newhall | | | | ----------------------------------------------------------------- Subject: Real estate investments: securities: qualification exemption SUMMARY Modifies the provisions of the Real Estate Law that govern the activities of threshold brokers, as defined, and deletes a requirement that certain persons engaged in the offer or sale of real-estate securities submit information regarding their activities to the Department of Business Oversight. DESCRIPTION 1. Adds a category of property (land that produces income from crops, timber, or minerals) and a maximum loan-to-value (LTV) ratio (60%) to the list of property types and maximum loan-to-value ratios for which real estate licensees are authorized to solicit investors. 2. Clarifies the requirement for threshold brokers to obtain a completed investor questionnaire from persons to whom they offer or sell notes and deeds of trust by specifying that the investor questionnaire must be obtained at least two business days and not more than one year prior to completing each sale. Further clarifies that, after obtaining an initial questionnaire, any subsequent questionnaire from the same person need only reflect any material changes from the immediately preceding questionnaire. 3. Deletes the requirement that threshold brokers obtain SB 647 (Morrell) Page 2 of ? updated annual questionnaires from persons to whom notes and deeds of trust are offered or on whose behalf they are serviced. 4. Deletes the requirement that persons who are engaged in the business of purchasing, selling, financing, or brokering real estate, who rely upon a securities law exemption authorized by Corporations Code Section 25100(p), submit information about their offering to the Department of Business Oversight, as specified. EXISTING LAW 5. Pursuant to the Real Estate Law, establishes a category of real estate broker known as a threshold broker. Generally speaking, threshold brokers are real estate brokers who make, broker, and/or service mortgage loans on behalf of private individuals and small pension plans. More specifically, threshold brokers are brokers who intend or reasonably expect to do any of the following in any consecutive 12-month period: a. Negotiate a combination of 10 or more real property loans or business opportunities, or sales contracts or promissory notes secured by real property loans or business opportunities, in an aggregate amount of $1 million or more. The real estate licensee can either act on behalf of another party (i.e., act as a broker), or can be the owner of the property or the sales contracts or notes (i.e., act as a lender). b. Collect payments of at least $250,000, in the aggregate, on behalf of themselves, or on behalf of lenders, or owners of promissory notes secured by real property (i.e., act as a servicer). If the lender or purchaser is an institutional lender, loans or sales negotiated by a broker, or for which a broker collects payments or provides other servicing for the owner of the note or contract, are not counted toward the threshold broker criteria. Institutional lenders include federal housing entities and government-sponsored enterprises (e.g., Fannie Mae, Freddie Mac, the Federal Housing Administration, and the Veterans Administration), SB 647 (Morrell) Page 3 of ? depository institutions regulated by either the state or federal government, pensions and other profit-sharing funds with a net worth of at least $15 million, corporations registered with the Securities and Exchange Commission, the California Housing Finance Agency, a person licensed by the California Department of Corporations as a residential mortgage lender or servicer, or an institutional investor that issues mortgage-backed securities in accordance with a specified section of the California Financial Code (Business and Professions Code Section 10232). 6. Prescribes six different types of property, and maximum LTVs that correspond to each type of property, for which threshold brokers are authorized to solicit the backing of investors. These property types and maximum LTVs include owner-occupied single-family residences (80%); non-owner occupied single family residences (75%), commercial and income-producing properties (65%); single-family residentially zoned lot or parcel with specified improvements (65%); land that has been zoned for, and, if required, approved for subdivision as commercial or residential development (50%); and other real property (35%) (Business and Professions Code Sections 10232.3 and 10238). 7. Requires threshold brokers to obtain a completed investor questionnaire from each person to whom notes and deeds of trust or interests therein are offered or sold, and, on an annual basis, obtain an updated investor questionnaire from each person to whom notes and deeds of trust or interests therein are offered or sold, or on whose behalf they are serviced (Business and Professions Code Section 10232.45). 8. Requires persons who are engaged in the business of purchasing, selling, financing, or brokering real estate, who rely upon a securities law exemption authorized by Corporations Code Section 25102(e), 25102(f), 25102(h), 25102(n), or 25100(p) for offerings that involve the offer or sale of securities to non-accredited investors, in transactions that are not registered by the Securities and Exchange Commission, submit information to DBO about those offerings. This information includes the names of the issuer's principals, the offering disclosure documents provided to prospective purchasers, a list of all state and SB 647 (Morrell) Page 4 of ? federal licenses required to further the purposes of the investment, and the names of all licensed persons that will undertake the activities (Corporations Code Section 25102.2) COMMENTS 1. Purpose: This bill is sponsored by the California Mortgage Association (CMA) to clarify provisions of the Real Estate Law that govern threshold brokers. 2. Background: This bill applies to a special category of real estate brokers known as threshold brokers. As discussed above, threshold brokers can generally be thought of as those who make, broker, and/or service mortgage loans on behalf of private individuals and small pension plans. The following are a few examples of activities in which threshold brokers can engage: a. The broker can receive money from an individual investor or a small pension plan, and can lend that money on behalf of the small investor or pension plan to an individual or a business owner seeking to purchase or refinance real property. In this instance, the threshold broker is acting as a broker. b. The broker can arrange a loan made by an individual investor or a small pension plan directly to an individual or business owner seeking to purchase or refinance real property. In this instance, the threshold broker is acting as a broker. c. The broker can fund a loan from a line of credit obtained from a depository institution, mortgage bank, or insurance company, or from personal funds, and then sell all or part interest in that loan to a private investor or investors. In this instance, the threshold broker is acting as a lender. d. The broker can service any of the types of loans described immediately above (i.e., collect monthly mortgage payments from the borrower, and transmit them to the investor/pension plan). In this instance, the broker is acting as a servicer. SB 647 (Morrell) Page 5 of ? According to the Bureau of Real Estate (BRE). there were 317 threshold brokers operating in California during 2013 (the most recent year for which data are available). These brokers made, arranged, and serviced over $12.4 billion in loans. Because they handle large amounts of money on a regular basis, threshold brokers are subject to special reporting and disclosure requirements not imposed on other real estate licensees. Furthermore, because the people who invest in loans brokered by threshold brokers are generally less sophisticated than large institutional investors, the law imposes certain restrictions on loans that may be funded with private money. It is these disclosure requirements and these loan restrictions that this bill proposes to modify. 1. Discussion: This bill makes three substantive changes, as follows: a. Addition of a category of property and maximum LTV to the list of property types and LTVs for which threshold brokers are authorized to solicit investors : The six property types and LTVs in existing law have not been updated in decades. CMA is seeking to add an additional category (land that produces income from crops, timber, or minerals) and corresponding LTV (60%) to better distinguish this type of property. Under existing law, it is unclear whether this type of property should be treated as "commercial and income-producing property" with a maximum LTV of 65% or as "other real property" with a maximum LTV of 35%. b. Revision of the rules for obtaining investor questionnaires from private money investors : SB 978 required threshold brokers to obtain initial investor questionnaires from persons to whom they offered or sold investments, and to obtain updated questionnaires on an annual basis from those to whom they offered or sold investments, or on whose behalf they serviced investments. SB 647 deletes the requirement that updated annual questionnaires be obtained from those who are solicited to purchase investments, but do not purchase them, and from those on whose behalf investments are SB 647 (Morrell) Page 6 of ? serviced. These changes are intended to focus the requirement to obtain updated annual questionnaires on only those investors who purchase new investments. SB 647 also clarifies the timing with which the initial and annual updated questionnaires must be obtained by requiring them to be obtained at least two business days and not more than one year prior to completing each sale. c. Deletion of the requirement that persons who are engaged in the business of purchasing, selling, financing, or brokering real estate, who rely upon a securities law exemption authorized by Corporations Code Section 25100(p), submit information about their offering to DBO : Section 25100(p) provides a securities exemption to real estate licensees who sell whole (i.e., unfractionalized) notes, where a single investor is backing the loan. Because these transactions are already heavily regulated under Article 5 of the Real Estate Law, CMA is seeking to delete the requirement that real estate licensees utilizing this exemption additionally report to DBO regarding their activities. 2. Summary of Arguments in Support: CMA is sponsoring this bill for the reasons stated immediately above. The bill clarifies LTV ratios that are unclear in existing law, eliminates unnecessary reporting to the Department of Business Oversight, and eliminates an obligation to obtain financial questionnaires from people who are not buying anything. CMA does not believe that these changes undermine consumer protection in the real estate or securities laws. 3. Summary of Arguments in Opposition: None received. 4. Prior and Related Legislation: a. SB 978 (Vargas and Price), Chapter 669, Statutes of 2012): Added protections for real estate investors that invest their money with threshold real estate brokers; required threshold brokers to make reasonable efforts to ensure that all persons they solicit and to whom they sell real estate securities have the capacity to understand the fundamental aspects of the investments and can bear the economic risk of the investment, and to SB 647 (Morrell) Page 7 of ? evaluate the suitability of the investment for the purchaser; required the Commissioner of Business Oversight to require issuers who operate pursuant to the securities law permitting exemption contained in Corporations Code Section 25102(f) to file a notice of transactions; and required issuers that are engaged in the business of purchasing, selling, financing or brokering real estate, who rely on specified Corporations Code permitting exemptions to submit information regarding the nature of their proposed offerings to the Commissioner of Business Oversight, as specified. LIST OF REGISTERED SUPPORT/OPPOSITION Support California Mortgage Association (sponsor) Opposition None received -- END --