BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 647|
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THIRD READING
Bill No: SB 647
Author: Morrell (R)
Amended: 4/7/15
Vote: 21
SENATE BANKING & F.I. COMMITTEE: 7-0, 4/15/15
AYES: Block, Vidak, Galgiani, Hall, Hueso, Lara, Morrell
SENATE JUDICIARY COMMITTEE: 6-0, 4/28/15
AYES: Jackson, Anderson, Hertzberg, Leno, Monning, Wieckowski
NO VOTE RECORDED: Moorlach
SENATE APPROPRIATIONS COMMITTEE: Senate Rule 28.8
SUBJECT: Real estate investments: securities: qualification
exemption.
SOURCE: California Mortgage Association
DIGEST: This bill 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 (DBO).
ANALYSIS:
Existing law:
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1)Establishes a category of real estate broker known as a
threshold broker, pursuant to the Real Estate Law. 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 (Business and Professions
Code Section 10232).
2)Prescribes six different types of property, and maximum
loan-to-value (LTV) 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).
3)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).
4)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
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)
This bill:
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1)Adds a category of property (land that produces income from
crops, timber, or minerals) and a maximum LTV ratio (60%) to
the list of property types and maximum loan-to-value ratios
for which threshold brokers 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 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.
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:
1)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.
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2)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.
3)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.
4)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.
According to the Bureau of Real Estate, 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.
Comments
This bill makes three substantive changes to the rules governing
threshold brokers, as follows:
1)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. The
sponsor 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
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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%.
2)Revision of the rules for obtaining investor questionnaires
from private money investors: Existing law requires 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 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.
3)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, this bill's sponsor is seeking to delete the requirement
that real estate licensees utilizing this exemption
additionally report to DBO regarding their activities.
Prior and Related Legislation
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,
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and to 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.
FISCAL EFFECT: Appropriation: No Fiscal
Com.:YesLocal: No
SUPPORT: (Verified5/11/15)
California Mortgage Association (source)
OPPOSITION: (Verified5/11/15)
None received
ARGUMENTS IN SUPPORT: The California Mortgage Association
(CMA) is sponsoring this bill to clarify LTV ratios that it
believes are unclear in existing law, eliminate unnecessary
reporting to DBO, and eliminate 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.
Prepared by:Eileen Newhall / B. & F.I. / (916) 651-4102
5/13/15 16:07:06
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