BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | SB 647| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- UNFINISHED BUSINESS Bill No: SB 647 Author: Morrell (R) Amended: 6/25/15 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 SENATE FLOOR: 36-0, 5/18/15 AYES: Allen, Anderson, Bates, Beall, Block, Cannella, De León, Fuller, Gaines, Galgiani, Hancock, Hernandez, Hertzberg, Hill, Hueso, Huff, Jackson, Lara, Leno, Leyva, Liu, McGuire, Mendoza, Mitchell, Monning, Moorlach, Morrell, Nguyen, Nielsen, Pan, Roth, Runner, Stone, Vidak, Wieckowski, Wolk NO VOTE RECORDED: Berryhill, Hall, Pavley ASSEMBLY FLOOR: 79-0, 8/20/15 (Consent) - See last page for vote 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 SB 647 Page 2 regarding their activities to the Department of Business Oversight (DBO). Assembly Amendments correct typographical errors. ANALYSIS: Existing law: 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 SB 647 Page 3 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: 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. SB 647 Page 4 Background This bill applies to a special category of real estate brokers known as threshold brokers. 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. 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 SB 647 Page 5 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 modifies. Comments This bill makes three substantive changes to the rules governing threshold brokers, as follows: 1)Adds 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 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: 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)Deletes the requirement that persons who are engaged in the SB 647 Page 6 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. Related/Prior 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, 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: (Verified8/20/15) California Mortgage Association (source) SB 647 Page 7 OPPOSITION: (Verified8/20/15) 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 8/21/15 15:59:34 **** END ****