BILL ANALYSIS �
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Juan Vargas, Chair
SB 217 (Vargas) Hearing Date: September 8,
2011
As Amended: September 1, 2011
Fiscal: Yes
Urgency: No
VOTES: 9/07/11 Assembly Floor78-0
8/17/11 Assembly Appr. 17-0
6/27/11 Assembly B. & F.11-0
Senate votes not relevant
SUMMARY Would update California's Secure Enforcement for
Mortgage Licensing Act (SAFE Act) law to reflect
recently-released federal regulations and help solve SAFE Act
compliance challenges being faced by certain insurance companies
admitted to transact business in California.
DESCRIPTION
1. Would provide that an expunged or pardoned felony
conviction does not require denial of a mortgage loan
originator license by the Department of Corporations (DOC)
or denial of a mortgage loan originator license endorsement
by the Department of Real Estate (DRE), and would instead
authorize DOC and DRE to consider the underlying crime,
facts, and circumstances of the expunged or pardoned felony
conviction when reviewing the license or license endorsement
application of an applicant with an expunged or pardoned
felony conviction.
2. Would authorize a person exempt from licensure under the
California Finance Lenders (CFLL) Law to apply to the
Commissioner of Corporations for an exempt company
registration, for purposes of sponsoring one or more
individuals required to be licensed as mortgage loan
originators under the SAFE Act, as specified.
3. Would authorize a mortgage loan originator who is an
insurance producer for an insurer authorized to transact
business in California to originate loans through a licensed
finance lender or a person with an exempt registration, and
SB 217 (Vargas), Page 2
would authorize that CFL or exempt person to originate loans
on behalf of a single entity exempt from the CFLL.
EXISTING LAW
Existing federal law provides for the SAFE Act, pursuant to
Title V of the provisions of the Housing and Economic Recovery
Act of 2008 (HR 3221; Public Law 110-289). The SAFE Act
required all states to license and register their mortgage loan
originators, as defined, through a nationwide organization
called the Nationwide Mortgage Licensing System and Registry.
Any state that failed to implement a mortgage loan originator
licensing system, in compliance with the SAFE Act, by July 30,
2009 risked direct intervention by the U.S. Department of
Housing and Urban Development (HUD). Under the SAFE Act, HUD is
authorized to establish and maintain a mortgage loan originator
system in any state that fails to voluntarily comply with SAFE.
Existing law, pursuant to SB 36 (Calderon), Chapter 160,
Statutes of 2009 and SB 1137 (Committee on Banking, Finance &
Insurance), Chapter 287, Statutes of 2010, conforms California's
Real Estate Law, Finance Lenders Law, and Residential Mortgage
Lending Act to the SAFE Act, thus preserving California's
ability to continue regulating mortgage loan origination by
non-depository institutions operating in California.
COMMENTS
1. Background and Discussion: SB 217 contains two separate
provisions, both of which are intended to update
California's SAFE Act laws. One provision updates
California law to reflect changes contained in
recently-released final rules issued by HUD. The other
provision helps alleviate SAFE Act compliance challenges
being experienced by State Farm and Primerica Insurance
Companies.
a. Provision Proposed To Grant DRE and DOC Greater
Licensing Flexibility With Respect to Applicants With
Expunged or Pardoned Felony Convictions (revision of
Business and Professions Code Section 10166.05, revision
of Financial Code Sections 220109.1 and 50141): On
Thursday, June 30th, HUD issued its final rules
implementing the SAFE Act. Although the final rules
contained few surprises, they did include one unexpected
SB 217 (Vargas), Page 3
change, which provided state regulators with greater
discretion regarding the review of mortgage loan
originator license applications submitted by persons with
expunged or pardoned felony convictions. California's
current law on this topic mirrors the SAFE Act Model Law,
which gives state regulators virtually no discretion to
review the facts of each case, when reviewing a mortgage
loan originator license application submitted by someone
with an expunged or pardoned felony conviction. Under
the Model Law, state regulators must disregard pardoned
felony convictions; they cannot disregard expunged
convictions, nor can they consider the facts and
circumstances surrounding an expunged or pardoned felony
conviction when making a licensing decision.
Under the HUD final rule, and the changes contained in SB
217, DRE and DOC may consider the facts and circumstances
surrounding each individual applicant with an expunged or
pardoned felony conviction, when reviewing that applicant
for licensure as a mortgage loan originator. This
additional discretion should work to the advantage of
some applicants, who would have previously been denied
licenses or license endorsements automatically, because
of prior pardoned or expunged felony convictions. These
applicants might now be granted those licenses or license
endorsements, subject to review of the facts and
circumstances of their cases by DRE and/or DOC.
b. Provision Proposed on Behalf of State Farm and
Primerica (addition of Financial Code Section 22065):
State Farm owns both a federally-chartered bank (State
Farm Bank) and a group of insurance companies licensed to
issue insurance policies in California (State Farm
Insurance Companies). State Farm Insurance Companies
contract with independent contractor agents, who write
insurance only on behalf of State Farm Insurance
Companies, and who, from time to time, originate
mortgages solely on behalf of State Farm Bank. The
activities of these exclusive, independent contractor
agents on behalf of State Farm Bank meet the SAFE Act
definition of mortgage loan origination. However,
because these agents are not employees of State Farm
Bank, they cannot legally obtain SAFE Act registrations,
as can bank employees. Because State Farm Bank is
federally chartered and regulated, it is not required to
hold a lending license from DOC, and cannot provide the
SB 217 (Vargas), Page 4
sponsorship necessary under the SAFE Act to get its
agents licensed as mortgage loan originators.
State Farm is seeking a way to get its exclusive,
independent contractor agents licensed as mortgage loan
originators. This bill achieves that aim by authorizing
State Farm Bank, or any other similarly situated entity
exempt from licensure under the CFLL, to register with
DOC as an exempt entity, for purposes of obtaining formal
recognition by DOC. With that formal recognition, State
Farm Bank can register on the Nationwide Mortgage
Licensing System and Registry (NMLSR). Once recognized
by DOC as an exempt entity and registered on the NMLSR,
State Farm agents will be able to obtain mortgage loan
originator licenses from DOC.
Primerica Life Insurance Company employs independent agents
who, from time to time, originate mortgage loans
exclusively on behalf of Citibank, a Primerica affiliate.
Unlike State Farm Insurance Company, Primerica holds a
CFLL license from DOC, and is thus able to provide the
sponsorship necessary to gets its agents licensed as
mortgage loan originators. Yet, the CFL creates a
Catch-22 for Primerica, because the CFLL contains a
provision that prohibits its licensees from brokering
loans to entities that lack CFLL licenses. Like State
Farm Bank, Citibank is exempt from licensure under the
CFLL (the CFLL exempts any company doing business under
any law of any state or of the United States relating to
banks). Because Primerica's independent insurance agent
employees broker loans to an entity exempt from the CFLL,
language is necessary to ensure that Primerica's mortgage
loan originator employees may broker loans to Citibank.
The language proposed to be added to Financial Code
Section 22065(c) provides this fix, and would allow any
other similarly situated insurance company to broker
mortgage loans to a single entity exempt from the CFLL.
2. Summary of Arguments in Support: Primerica Life Insurance
Company, State Farm, the National Association of Insurance
and Financial Advisors of California (NAIFA-California),
Association of California Life and Health Insurance
Companies, and the California Bankers Association support
the provisions of the bill that would help facilitate the
ability of admitted insurers to broker residential mortgage
loans exclusively to a single bank, subject to SAFE Act
SB 217 (Vargas), Page 5
licensing requirements.
The California Mortgage Association and California Association
of Mortgage Professionals support the provisions of the bill
that would give DRE and DOC more discretion to evaluate the
facts and circumstances surrounding expunged and pardoned
felony convictions when considering mortgage loan originator
license applications from these individuals.
3. Summary of Arguments in Opposition: None received.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
Association of California Life and Health Insurance Companies
California Association of Mortgage Professionals
California Bankers Association
California Mortgage Association
National Association of Insurance and Financial Advisors of
California
Primerica Life Insurance Company
State Farm Insurance Company
Opposition
None received
Consultant: Eileen Newhall (916) 651-4102