BILL ANALYSIS Ó
SENATE COMMITTEE ON
BANKING AND FINANCIAL INSTITUTIONS
Senator Steven Glazer, Chair
2015 - 2016 Regular
Bill No: SB 657 Hearing Date: August 17,
2016
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|Author: |Berryhill and Pan |
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|Version: |August 1, 2016 Amended |
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|Urgency: |No |Fiscal: |Yes |
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|Consultant:|Eileen Newhall |
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Subject: The California Residential Mortgage Lending Act:
lenders: licensees
SUMMARY This bill revises the definition of a lender under the
California Residential Mortgage Lending Act (CRMLA) to include
persons who act as loan processors or underwriters for
residential mortgage loans, as specified.
DESCRIPTION
1. Adds the following persons to the definition of a lender
under the CRMLA:
a. An entity that 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 specified.
b. An entity that is not a natural person, who engages
in the activities of a loan processor or underwriter for
a residential mortgage loan, as specified.
2. Authorizes the commissioner to require a CRMLA licensee who
is a loan processor or underwriter to maintain a minimum
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tangible net worth in excess of $250,000, but that does not
exceed the net worth required of an approved lender under
the Federal Housing Administration (FHA).
EXISTING LAW
3. Authorizes the CRMLA (Financial Code Section 50000 et
seq.), administered by the Department of Business Oversight
(DBO), to regulate the activities of residential mortgage
lending and servicing in California. Provides that no
person may engage in the business of making or servicing
residential mortgage loans in California without first
obtaining a license as a mortgage lender or mortgage
servicer under the CRMLA, unless that person or transaction
is exempt from licensure (Financial Code Section 50002).
4. Defines "makes or making residential mortgage loans" or
"mortgage lending," pursuant to the CRMLA, as processing,
underwriting, or advancing one's own funds to a loan
applicant for a residential mortgage loan (Financial Code
Section 50003).
5. Defines a "lender," pursuant to the CRMLA, as a person that
meets all of the following criteria:
a. Is an approved lender for the FHA, Veterans
Administration, Farmers Home Administration, Government
National Mortgage Association, Federal National Mortgage
Association, or Federal Home Loan Mortgage Corporation;
b. Directly makes residential mortgage loans;
c. Makes the credit decision in the loan transactions.
6. Prohibits an independent contractor from engaging in the
activities of a loan processor or underwriter for a
residential mortgage loan, unless that independent
contractor obtains and maintains both a license under the
CRMLA and a mortgage loan originator license (Financial Code
Section 50003.6).
7. Requires all CRMLA licensees to maintain a minimum tangible
net worth at all times of $250,000, computed in accordance
with generally accepted accounting principles.
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COMMENTS
1. Purpose: This bill is sponsored by the author to mitigate
the unintended negative consequences in California of a
policy change adopted by the federal Department of Housing
and Urban Development (HUD) in September, 2015. By changing
the definition of lender under the CRMLA, this bill allows
certain entities that are currently licensed under the CRMLA
and currently doing business in California to continue doing
business as licensed CRMLA lenders in this state.
2. Senate Rule 29.10(d) : The current contents of SB 657 were
amended into the bill in the Assembly. Because this bill
has not previously been heard in the Senate in its current
form, it is back before this Committee pursuant to Senate
Rule 29.10(d). Pursuant to Senate Rule 29.10(d), this
Committee has two options when it considers SB 657: a)
concur in the Assembly amendments, and return the bill to
the Senate Floor; or b) hold the bill in Committee. The
bill cannot be amended.
3. Background and Discussion: This bill is focused on entities
that process and underwrite residential mortgage loans in
California. Its intent is to maintain the status quo under
the CRMLA, by allowing loan processors and underwriters that
are currently licensed under the CRMLA to remain licensed
under that law.
As explained by the California Bankers Association and
California Mortgage Bankers Association in their letter of
support for this bill, companies that specialize in
providing mortgage loan processing, underwriting, and
compliance services to lenders represent an important
component of mortgage loan origination in California. These
third parties facilitate the flow of loans to consumers and
provide much-needed capacity and technical expertise to
lenders of all sizes, allowing those lenders to more
efficiently serve their borrowers.
The CRMLA requires these third party specialists to hold
licenses in California, because the CRMLA's definition of
"making a residential mortgage loan" includes the activities
of loan processing and loan underwriting. Until September,
2015, several of these third parties also met the definition
of "lender" under the CRMLA, because these third parties
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were approved as "non-supervised mortgagees" by the FHA, and
the CRMLA definition of a lender includes entities that are
approved by one or more specified federal housing agencies
or government-sponsored enterprises.
However, in September, 2015, HUD (which oversees the FHA),
changed the definition of non-supervised lenders and
mortgagees in its Mortgagee Handbook; instead of referring
to these entities as "financial entities," the FHA began
referring to them as "lending institutions." This change
had the effect of excluding third party processors and
underwriters from the definition of non-supervised lenders
and mortgagees, because these third parties do not originate
or fund loans (i.e., they do not lend). The change to HUD's
Mortgagee Handbook created a Catch-22 in California, by
creating a category of entities that require CRMLA licenses,
but that no longer meet the CRMLA definition of entities
that are eligible to obtain those licenses. This bill
modifies the definition of "lender" under the CRMLA, to
ensure that these loan processors and underwriters are
eligible to obtain and maintain CRMLA licenses.
4. Net Worth Requirement: The CRMLA requires its licensees to
maintain a minimum tangible net worth of $250,000. This
bill authorizes DBO to require loan processors and
underwriters licensed under the CRMLA to maintain net worths
higher than $250,000, but caps the net worth requirement
that may be imposed on loan processors and underwriters at
the amount that is required of FHA-approved lenders. This
provision is intended to ensure that loan processors and
underwriters, who are no longer FHA-approved lenders due to
the Mortgagee Handbook change, can still be required to
maintain the net worth required of FHA-approved lenders.
5. Summary of Arguments in Support:
a. This bill's authors state, "In 2015, FHA said that
its federal lender approval should and would no longer be
granted or allowed to third party processors and
underwriters who did not themselves actually lend.
Consequently, because of this policy change, these
individuals will have to surrender their current FHA
lender approval. The ultimate effect of this change in
HUD policy means that current California licensees that
rely on the FHA approval to satisfy the California
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requirement will have a challenge in technically meeting
the definition of 'lender' in the CRMLA. So although
they have been active and in good standing in California,
through no action or fault of their own making and based
on a policy shift by a federal entity, some California
independent contractors may no longer be able to do
business in California under the CRMLA."
This bill would make it clear that this category of CRMLA
mortgage lender licensees, which engage solely in
mortgage loan processing and underwriting and can no
longer be FHA/HUD approved lenders, can still be licensed
in California and remain subject to DBO jurisdiction and
oversight, just as they are now.
b. The California Bankers Association and California
Mortgage Bankers Association wrote a joint letter of
support for this bill, stating, "SB 657 will make a
small, but necessary technical adjustment to the CRMLA to
address a change in FHA classifications that negatively
impacts the license approval process for certain
licensees. We believe SB 657 achieves two important
public policy objectives; first, it prevents a potential
disruption in services critical to the flow of mortgage
capital into the California marketplace; and second, it
prevents potential loss of jobs to Californians if there
was a disruption in the ability of a small but important
set of current RML licensed companies to operate under
the CRMLA." SB 657 maintains the status quo for loan
processors and underwriters, and ensures that these
companies can continue to do business in California.
6. Summary of Arguments in Opposition: None received.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
California Bankers Association
California Mortgage Bankers Association
Opposition
None received
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