BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | SB 657| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- UNFINISHED BUSINESS Bill No: SB 657 Author: Berryhill (R) and Pan (D), et al. Amended: 8/1/16 Vote: 21 PRIOR VOTES NOT RELEVANT SENATE BANKING & F.I. COMMITTEE: 7-0, 8/17/16 (pursuant to Senate Rule 29.10) AYES: Glazer, Galgiani, Hall, Hueso, Lara, Morrell, Vidak ASSEMBLY FLOOR: 78-0, 8/11/16 (Consent) - See last page for vote SUBJECT: The California Residential Mortgage Lending Act: lenders: licensees SOURCE: Author DIGEST: 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. Assembly Amendments delete the prior version of the bill and replace it with the current language. ANALYSIS: SB 657 Page 2 Existing law: 1)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). 2)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). 3)Defines a "lender," pursuant to the CRMLA, as a person that meets all of the following criteria: a) Is an approved lender for the Federal Housing Administration (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; and c) Makes the credit decision in the loan transactions. 4)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). SB 657 Page 3 5)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. This bill: 6)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. 7)Authorizes the Commissioner of Business Oversight to require a lender who is a loan processor or underwriter to maintain a minimum tangible net worth in excess of $250,000, but that does not exceed the net worth required of an approved lender under the FHA. Comments 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. SB 657 Page 4 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 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 SB 657 Page 5 the CRMLA, to ensure that these loan processors and underwriters are eligible to obtain and maintain CRMLA licenses. FISCAL EFFECT: Appropriation: No Fiscal Com.:YesLocal: No According the Assembly Appropriations Committee, there would be no additional state costs. SUPPORT: (Verified8/15/16) California Bankers Association California Mortgage Bankers Association OPPOSITION: (Verified8/15/16) None received ARGUMENTS IN SUPPORT: The California Bankers Association and California Mortgage Bankers Association write, "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, 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. ASSEMBLY FLOOR: 78-0, 8/11/16 AYES: Achadjian, Alejo, Travis Allen, Arambula, Atkins, Baker, Bigelow, Bloom, Bonilla, Bonta, Brough, Brown, Burke, Calderon, Campos, Chang, Chau, Chávez, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle, Daly, Dodd, Eggman, Frazier, Beth SB 657 Page 6 Gaines, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gordon, Gray, Grove, Hadley, Harper, Holden, Irwin, Jones, Jones-Sawyer, Kim, Lackey, Levine, Linder, Lopez, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Nazarian, Obernolte, O'Donnell, Olsen, Patterson, Quirk, Ridley-Thomas, Rodriguez, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Wagner, Waldron, Weber, Wilk, Williams, Wood, Rendon NO VOTE RECORDED: Roger Hernández, Low Prepared by: Eileen Newhall / B. & F.I. / (916) 651-4102 8/17/16 16:41:02 **** END ****