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
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|Author: |Morrell |
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|Version: |April 7, 2015 |
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|Urgency: |No |Fiscal: |Yes |
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|Consultant:|Eileen Newhall |
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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
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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),
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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
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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.
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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
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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
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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
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