Amended in Assembly August 1, 2016

Amended in Assembly June 13, 2016

Amended in Senate June 23, 2015

Amended in Senate April 21, 2015

Senate Bill No. 657

Introduced by Senators Berryhill and Pan

(Principal coauthor: Assembly Member Dababneh)

(Coauthor: Assembly Member Cooley)

February 27, 2015

An act to amend Sections 50003 and 50201 of the Financial Code, relating to mortgages.

LEGISLATIVE COUNSEL’S DIGEST

SB 657, as amended, Berryhill. The California Residential Mortgage Lending Act: lenders: licensees.

Existing law defines specified terms for purposes of the California Residential Mortgage Lending Act, which generally prohibits a person from engaging in the business of making residential mortgage loans or servicing residential mortgage loans without first obtaining a license from the Commissioner of Business Oversight in accordance with the act. Existing law defines a lender as a person who is an approved lender for the Federal Housing Administration, the Veterans Administration, the Farmers Home Administration, the Government National Mortgage Association, the Federal National Mortgage Association, or the Federal Home Loan Mortgage Corporation, who directly makes residential mortgage loans, and who makes the credit decision in the loan transactions. Existing law requires a licensee issued a license for purposes of making or servicing residential mortgage loans to continuously maintain a minimum tangible net worth of $250,000.

This bill would specify that the term “lender” includes a person, other than a natural person, and a natural person who is also an independent contractor, who engages in the activities of a loan processor or underwriter for residential mortgage begin delete loans. end delete begin insert loans, but does not solicit loan applicants, originate mortgage loans, or fund mortgage loans, as specified. end insert The bill would authorize the commissioner to require a licensee who is engaged in the processing or underwriting of residential mortgage loans to continuously maintain a minimum tangible net worth in an amount that is greater than $250,000, but that does not exceed the net worth required of an approved lender under the Federal Housing Administration.

Vote: majority. Appropriation: no. Fiscal committee: yes. State-mandated local program: no.

The people of the State of California do enact as follows:

SECTION 1.  

Section 50003 of the Financial Code is amended
to read:

50003.  

(a) “Annual audit” means a certified audit of the
licensee’s books, records, and systems of internal control performed
by an independent certified public accountant in accordance with
generally accepted accounting principles and generally accepted
auditing standards.

(b) “Borrower” means the loan applicant.

(c) “Buy” includes exchange, offer to buy, or solicitation to
buy.

(d) “Commissioner” means the Commissioner of Business
Oversight.

(e) “Control” means the possession, directly or indirectly, of
the power to direct, or cause the direction of, the management and
policies of a licensee under this division, whether through voting
or through the ownership of voting power of an entity that
possesses voting power of the licensee, or otherwise. Control is
presumed to exist if a person, directly or indirectly, owns, controls,
or holds 10 percent or more of the voting power of a licensee or
of an entity that owns, controls, or holds, with power to vote, 10
percent or more of the voting power of a licensee. No person shall
be deemed to control a licensee solely by reason of his or her status
as an officer or director of the licensee.

(f) “Depository institution” has the same meaning as in Section
3 of the Federal Deposit Insurance Act, and includes any credit
union.

(g) “Engage in the business” means the dissemination to the
public, or any part of the public, by means of written, printed, or
electronic communication or any communication by means of
recorded telephone messages or spoken on radio, television, or
similar communications media, of any information relating to the
making of residential mortgage loans, the servicing of residential
mortgage loans, or both. “Engage in the business” also means,
without limitation, making residential mortgage loans or servicing
residential mortgage loans, or both.

(h) “Federal banking agencies” means the Board of Governors
of the Federal Reserve System, the Comptroller of the Currency,
the National Credit Union Administration, and the Federal Deposit
Insurance Corporation.

(i) “In this state” includes any activity of a person relating to
making or servicing a residential mortgage loan that originates
from this state and is directed to persons outside this state, or that
originates from outside this state and is directed to persons inside
this state, or that originates inside this state and is directed to
persons inside this state, or that leads to the formation of a contract
and the offer or acceptance thereof is directed to a person in this
state (whether from inside or outside this state and whether the
offer was made inside or outside the state).

(j) “Institutional investor” means the following:

(1) The United States or any state, district, territory, or
commonwealth thereof, or any city, county, city and county, public
district, public authority, public corporation, public entity, or
political subdivision of a state, district, territory, or commonwealth
of the United States, or any agency or other instrumentality of any
one or more of the foregoing, including, by way of example, the
Federal National Mortgage Association and the Federal Home
Loan Mortgage Corporation.

(2) Any bank, trust company, savings bank or savings and loan
association, credit union, industrial bank or industrial loan
company, personal property broker, consumer finance lender,
commercial finance lender, or insurance company, or subsidiary
or affiliate of one of the preceding entities, doing business under
the authority of or in accordance with a license, certificate, or
charter issued by the United States or any state, district, territory,
or commonwealth of the United States.

(3) Trustees of pension, profit-sharing, or welfare funds, if the
pension, profit-sharing, or welfare fund has a net worth of not less
than fifteen million dollars ($15,000,000), except pension,
profit-sharing, or welfare funds of a licensee or its affiliate,
self-employed individual retirement plans, or individual retirement
accounts.

(4) A corporation or other entity with outstanding securities
registered under Section 12 of the federal Securities Exchange Act
of 1934 or a wholly owned subsidiary of that corporation or entity,
provided that the purchaser represents either of the following:

(A) That it is purchasing for its own account for investment and
not with a view to, or for sale in connection with, any distribution
of a promissory note.

(B) That it is purchasing for resale pursuant to an exemption
under Rule 144A (17 C.F.R. 230.144A) of the Securities and
Exchange Commission.

(5) An investment company registered under the Investment
Company Act of 1940; or a wholly owned and controlled subsidiary
of that company, provided that the purchaser makes either of the
representations provided in paragraph (4).

(6) A residential mortgage lender or servicer licensed to make
residential mortgage loans under this law or an affiliate or
subsidiary of that person.

(7) Any person who is licensed as a securities broker or
securities dealer under any law of this state, or of the United States,
or any employee, officer, or agent of that person, if that person is
acting within the scope of authority granted by that license or an
affiliate or subsidiary controlled by that broker or dealer, in
connection with a transaction involving the offer, sale, purchase,
or exchange of one or more promissory notes secured directly or
indirectly by liens on real property or a security representing an
ownership interest in a pool of promissory notes secured directly
or indirectly by liens on real property, and the offer and sale of
those securities is qualified under the California Corporate
Securities Law of 1968 or registered under federal securities laws,
or exempt from qualification or registration.

(8) A licensed real estate broker selling the loan to an
institutional investor specified in paragraphs (1) to (7), inclusive,
or paragraph (9) or (10).

(9) A business development company as defined in Section
2(a)(48) of the Investment Company Act of 1940 or a small
business investment company licensed by the United States Small
Business Administration under Section 301(c) or (d) of the Small
Business Investment Act of 1958.

(10) A syndication or other combination of any of the foregoing
entities that is organized to purchase a promissory note.

(11) A trust or other business entity established by an
institutional investor for the purpose of issuing or facilitating the
issuance of securities representing undivided interests in, or rights
to receive payments from or to receive payments primarily from,
a pool of financial assets held by the trust or business entity,
provided that all of the following apply:

(A) The business entity is not a sole proprietorship.

(B) The pool of assets consists of one or more of the following:

(i) Interest-bearing obligations.

(ii) Other contractual obligations representing the right to receive
payments from the assets.

(iii) Surety bonds, insurance policies, letters of credit, or other
instruments providing credit enhancement for the assets.

(C) The securities will be either one of the following:

(i) Rated as “investment grade” by Standard and Poor’s
Corporation or Moody’s Investors Service, Inc. “Investment grade”
means that the securities will be rated by Standard and Poor’s
Corporation as AAA, AA, A, or BBB or by Moody’s Investors
Service, Inc. as Aaa, Aa, A, or Baa, including any of those ratings
with “+” or “--” designation or other variations that occur within
those ratings.

(ii) Sold to an institutional investor.

(D) The offer and sale of the securities is qualified under the
California Corporate Securities Law of 1968 or registered under
federal securities laws, or exempt from qualification or registration.

(k) “Institutional lender” means the following:

(1) The United States or any state, district, territory, or
commonwealth thereof, or any city, county, city and county, public
district, public authority, public corporation, public entity, or
political subdivision of a state, district, territory, or commonwealth
of the United States, or any agency or other instrumentality of any
one or more of the foregoing, including, by way of example, the
Federal National Mortgage Association and the Federal Home
Loan Mortgage Corporation.

(2) Any bank, trust company, savings bank or savings and loan
association, credit union, industrial loan company, or insurance
company, or service or investment company that is wholly owned
and controlled by one of the preceding entities, doing business
under the authority of and in accordance with a license, certificate,
or charter issued by the United States or any state, district, territory,
or commonwealth of the United States.

(3) Any corporation with outstanding securities registered under
Section 12 of the Securities Exchange Act of 1934 or any wholly
owned subsidiary of that corporation.

(4) A residential mortgage lender or servicer licensed to make
residential mortgage loans under this law.

(l) “Law” means the California Residential Mortgage Lending
Act.

(m) “Lender” means a person that satisfies either of the
following:

(1) The person is or does all of the following:

(A) The person is an approved lender for the Federal Housing
Administration, Veterans Administration, Farmers Home
Administration, Government National Mortgage Association,
Federal National Mortgage Association, or Federal Home Loan
Mortgage Corporation.

(B) The person directly makes residential mortgage loans.

(C) The person makes the credit decision in the loan
transactions.

(2) The person is either of the following:

(A) Is not a natural person and engages in the activities of a
loan processor or underwriter for a residential mortgage begin delete loan. end delete begin insert loan
but does not solicit loan applicants, originate mortgage loans, or
fund mortgage loans unless the person is also a lender under
paragraph (1). end insert

(B) Is a natural person and an independent contractor who
engages in the activities of a loan processor or underwriter for a
residential mortgage loan as described in subdivision (c) of Section

begin delete 50003.6. end delete begin insert 50003.6 but does not solicit loan applicants, originate
mortgage loans, or fund mortgage loans unless the person is also
a lender under paragraph (1). end insert

(n) “Licensee” means, depending on the context, a person
licensed under Chapter 2 (commencing with Section 50120),
Chapter 3 (commencing with Section 50130), or Chapter 3.5
(commencing with Section 50140).

(o) “Makes or making residential mortgage loans” or “mortgage
lending” means processing, underwriting, or as a lender using or
advancing one’s own funds, or making a commitment to advance
one’s own funds, to a loan applicant for a residential mortgage
loan.

(p) “Mortgage loan,” “residential mortgage loan,” or “home
mortgage loan” means a federally related mortgage loan as defined
in Section 1024.2 of Title 12 of the Code of Federal Regulations,
or a loan made to finance construction of a one-to-four family
dwelling.

(q) “Mortgage servicer” or “residential mortgage loan servicer”
means a person that (1) is an approved servicer for the Federal
Housing Administration, Veterans Administration, Farmers Home
Administration, Government National Mortgage Association,
Federal National Mortgage Association, or Federal Home Loan
Mortgage Corporation, and (2) directly services or offers to service
mortgage loans.

(r) “Nationwide Mortgage Licensing System and Registry”
means a mortgage licensing system developed and maintained by
the Conference of State Bank Supervisors and the American
Association of Residential Mortgage Regulators for the licensing
and registration of licensed mortgage loan originators.

(s) “Net worth” has the meaning set forth in Section 50201.

(t) “Own funds” means (1) cash, corporate capital, or warehouse
credit lines at commercial banks, savings banks, savings and loan
associations, industrial loan companies, or other sources that are
liability items on a lender’s financial statements, whether secured
or unsecured, or (2) a lender’s affiliate’s cash, corporate capital,
or warehouse credit lines at commercial banks or other sources
that are liability items on the affiliate’s financial statements,
whether secured or unsecured. “Own funds” does not include funds
provided by a third party to fund a loan on condition that the third
party will subsequently purchase or accept an assignment of that
loan.

(u) “Person” means a natural person, a sole proprietorship, a
corporation, a partnership, a limited liability company, an
association, a trust, a joint venture, an unincorporated organization,
a joint stock company, a government or a political subdivision of
a government, and any other entity.

(v) “Residential real property” or “residential real estate” means
real property located in this state that is improved by a one-to-four
family dwelling.

(w) “SAFE Act” means the federal Secure and Fair Enforcement
for Mortgage Licensing Act of 2008 (Public Law 110-289).

(x) “Service” or “servicing” means receiving more than three
installment payments of principal, interest, or other amounts placed
in escrow, pursuant to the terms of a mortgage loan and performing
services by a licensee relating to that receipt or the enforcement
of its receipt, on behalf of the holder of the note evidencing that
loan.

(y) “Sell” includes exchange, offer to sell, or solicitation to sell.

(z) “Unique identifier” means a number or other identifier
assigned by protocols established by the Nationwide Mortgage
Licensing System and Registry.

(aa) For purposes of Sections 50142, 50143, and 50145,
“nontraditional mortgage product” means any mortgage product
other than a 30-year fixed rate mortgage.

(ab) For purposes of Section 50141, “expungement” means the
subsequent order under the provisions of Section 1203.4 of the
Penal Code allowing such individual to withdraw his or her plea
of guilty and to enter a plea of not guilty, or setting aside the verdict
of guilty or dismissing the accusation, information, or indictment.
With respect to criminal convictions in another state, that state’s
definition of expungement will apply.

SEC. 2.  

Section 50201 of the Financial Code is amended to
read:

50201.  

(a) A licensee issued a license for purposes of making
or servicing residential mortgage loans, including a licensee
employing one or more mortgage loan originators, shall
continuously maintain a minimum tangible net worth at all times
of two hundred fifty thousand dollars ($250,000). The
commissioner, in his or her discretion, may require a lender who
engages in the activities described in paragraph (2) of subdivision
(m) of Section 50003 to continuously maintain a minimum tangible
net worth of an amount that is greater than two hundred fifty
thousand dollars ($250,000), but that does not exceed the net worth
required of an approved lender under the Federal Housing
Administration.

(b) Tangible net worth shall be computed in accordance with
generally accepted accounting principles.

(c) The commissioner may promulgate rules or regulations with
respect to the requirements for minimum net worth, as are
necessary to accomplish the purposes of this division and comply
with the SAFE Act.