BILL ANALYSIS Ó
SB 647
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Date of Hearing: June 22, 2015
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Matthew Dababneh, Chair
SB
647 (Morrell) - As Amended April 7, 2015
SENATE VOTE: 36-0
SUBJECT: Real estate investments: securities: qualification
exemption.
SUMMARY: Modifies the provisions of the Real Estate Law that
governs the activities of threshold brokers, 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).
Specifically, this bill:
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 LTV
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
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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 DBO.
EXISTING LAW:
1)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
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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), 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 (SEC), the California Housing Finance
Agency, a person licensed by the DBO 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)
2)Prescribes six different types of property, and maximum LTVs
that correspond to each type of property, for which threshold
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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 SEC, 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)
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FISCAL EFFECT: Unknown.
COMMENTS:
Background:
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.
AB 647 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.
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The following are a few examples of activities in which
threshold brokers can engage:
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.
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.
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.
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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Need for the bill:
AB 647 makes three substantive changes:
1)Creates a new 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
author 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%.
2)Revises the rules for obtaining investor questionnaires from
private money investors: SB 978 (Vargas & Price, Statutes of
2012) 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 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
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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)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 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, the author
is seeking to delete the requirement that real estate
licensees utilizing this exemption additionally report to DBO
regarding their activities.
Previous Legislation:
SB 978 (Vargas & Price, Chapter 669, Statutes of 2012) enacted
several changes to the Real Estate Law and Corporations Code, by
increasing real estate investor protections, and requiring the
Department of Corporations (DOC) to focus greater regulatory
scrutiny on, and provide greater transparency regarding, the
activities of those who solicit investors in connection with
real estate investments.
Recommended Amendments:
1)On page 7, line 22, delete "95818" and insert "95815"
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2)On page 12, line 17 after income-producing properties, insert,
"not described in (B) or (E)
3)On page 12, line 18 & 19, delete "not described in (B) or (E)"
REGISTERED SUPPORT / OPPOSITION:
Support
California Mortgage Association
Opposition
None on file.
Analysis Prepared by:Kathleen O'Malley / B. & F. / (916)
319-3081
SB 647
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