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 ----------------------------------------------------------------- |Author: |Berryhill and Pan | |-----------+-----------------------------------------------------| |Version: |August 1, 2016 Amended | ----------------------------------------------------------------- ----------------------------------------------------------------- |Urgency: |No |Fiscal: |Yes | ----------------------------------------------------------------- ----------------------------------------------------------------- |Consultant:|Eileen Newhall | | | | ----------------------------------------------------------------- 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 SB 657 (Berryhill) Page 2 of ? 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. SB 657 (Berryhill) Page 3 of ? 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 SB 657 (Berryhill) Page 4 of ? 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 SB 657 (Berryhill) Page 5 of ? 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 SB 657 (Berryhill) Page 6 of ? -- END --