Updated December 8, 2008
September 15, 2008

Legislative Committee
Real Estate Finance Committee

(This material is for discussion purposes only and has not been approved by the Legislative, Real Estate Finance or Executive Committees or the Board of Directors.)

Issue:
What should C.A.R. any of the following options to guide California's implementation of the new federal requirement for a licensing program for mortgage loan originators?

Action:
Optional

Options:

1.  Sponsor or support a single Loan Originator License administered by a state agency.

2.  Sponsor or support a DRE License Endorsement allowing loan origination by a real estate licensee. This option would be administered by DRE, and paralleled by other regulators.

3.  Oppose the required state implementation. This option (if successful) would rely instead on HUD to set up a federal license for mortgage loan originators, and would require opposition to implementation bills sponsored by regulators and other mortgage lending groups.

4. Do nothing. This option would result in neutrality on the implementation legislation of others except as necessary to protect competitive equality for REALTORS®.

5.  Other.

Status/Summary:
In August of 2008 the federal government passed HR 3221, a comprehensive bill regulating many aspects of the housing industry, including loan limits, tax treatment and finance. Among its provisions is an article requiring the states to set up a licensing and regulatory program for mortgage loan originators. Loan originators employed by depository institutions (e.g. banks) are required to join a national registry; those not affiliated with a depository are required to be (annually) licensed and regulated at the state level in addition to joining the national registry. State regulators (Departments of Real Estate, Corporations and Financial Institutions) have been directed to work together to help craft a new statute in order to comply with federal law.

At the October 2008 meetings, staff was directed to identify and report what options remain available, and evaluate them in terms of cost, effect on policy considerations and political viability.

Discussion

Historic C.A.R. policy to resist a special license or endorsement for mortgage loan brokerage has been effectively trumped by the inclusion of the S.A.F.E. Act within this years housing bill. Ironically, the author and strong proponent of the new requirement was the senior senator from California, Sen. Feinstein. Because of the new mandate for "loan originator" licensing, the question is no longer whether, but rather what form the new license should take.

New Federal Requirements
HR 3221, the new federal housing bill, included the “Secure and Fair Enforcement for Mortgage Licensing Act of 2008” or SAFE Act, which requires states to implement a mortgage loan originator program that includes at least the following features:

1. Background Check
2. Examination-based license
3. Annual “maintenance” of the resulting license (i.e. continuing education)
4. Annual reporting to the regulator
5. Net worth or bonding (a client recovery fund like California’s can satisfy this requirement)
6. Registration on the national registry maintained by federal regulators.
7. Applies to all individual “loan originators,” but employees of depository institutions are only required to register and need not acquire a license.

The 2007 C.A.R. Task Force
Mortgage loan brokerage has been a troubling area of practice within the real estate license for many years. In 2007 C.A.R. appointed a Mortgage Loan Broker Licensing Task Force to examine whether C.A.R. should propose additional regulation of mortgage loan brokerage, up to and including separating the function from the real estate license. The Task Force was particularly concerned about undisclosed dual roles ("writing the offer and writing the loan app.") played by the same licensee.

In 2008, but prior to passage of the SAFE Act, the Task Force also recommended that C.A.R. sponsor legislation to create a separate license for mortgage loan brokerage within DRE. The proposed license would have had its own exam, license fee (estimated at about $1300 per year), recovery account and administration within DRE. The Board of Directors rejected the proposal, and reiterated C.A.R.'s existing policy against license specialization. Please see archived June 2008 Board of Director’s materials for the final report of the Task Force.

In 2008, C.A.R. supported SB 1053/1240 (Machado) which would have created an enhanced regulatory program within DRE without (quite) creating a special license or endorsement and which would have complied with much of the SAFE Act. The bill was vetoed by the Governor. The administration's three financial regulatory departments (Real Estate, Corporations and Financial Institutions) have been directed to work together to come up with an implementation proposal, but have not yet decided upon a recommended approach. It seems clear that they have reached consensus that they will NOT choose Option 3 (above) which gives over control of the system to federal authorities.

An important threshold question is whether C.A.R. should invest political capital in this effort at all. While the availability of loans is of course vital to closing transactions, other finance-related trade groups (bankers, mortgage bankers, mortgage brokers, credit unions) are also well represented and have many more of their members that actually would be governed by the new mandate. In addition, three different state regulators (Departments of Corporations, Financial Institutions and Real Estate) are meeting to recommend a response. Unfortunately, there seems to be no likely scenario in which the C.A.R. traditional dual policy of both holding on to mortgage authority and avoiding specialization can be preserved.

The biggest potential risk of taking no position is that these other groups might come up with a "solution" that creates an un-level playing field for real estate licensees that do want to originate loans, or which is unduly expensive for them. For example, the other groups might draft a proposal that requires a bond or net worth requirement that is prohibitively expensive or which does not use the DRE client recovery fund approach instead of a bond.

Potential Costs
The Conference of State Bank Supervisors (CSBS) which is in charge of implementing the required federal program (including a registry of licensed loan originators) has previously suggested that the registration alone will cost $100-150 per year. With the additional component of overseeing enforcement, and including some form of financial responsibility, it is hard to imagine that the cost of a new license will be less than $200-300 per year. DRE and DOC are preparing cost comparisons for a separate license administered by DOC versus an "add on" endorsement that could be offered to real estate licensees and others.

In the past, C.A.R. has attempted to preserve an "umbrella" license that allows any competent licensee to do any or all business activities available within the scope of the license, even if it increases the license cost for all. If all real estate licensees are required to have the new lending authority as part of their license, it will require all REALTORS® to re-test, take annual continuing education and would likely quintuple the cost of the license.

Is it worthwhile to try and build this new lending authority into all real estate licenses in spite of the cost, or should the legislation only permit, rather than require, licensees to seek the new authority?

Who will enforce the new license?
The choice between a lending endorsement on the DRE license, and an entirely separate license (which, of course, a real estate licensee could still seek), is really a choice as to where the cost of regulation will fall. If the loan originator license is separated from the DRE (likely going to DOC) it would probably transfer some significant costs of regulation that are currently borne by DRE to the new regulator. DRE has claimed for many years that mortgage brokers are disproportionately expensive to regulate and are subsidized by other licensees. Under a separate license, these more expensive licensees and their license authority would be moved to the other regulator. The cost to the Department will be reduced.

On the other hand, if a REALTOR that wanted to originate loans had to go to DOC to get a separate license rather than just an endorsement on his or her real estate license, it will probably be more expensive for the individual licensee to have the two licenses. The DRE and the large majority of non-lending licensees will realize a savings; the individual  licensee that has to get the second license will see a higher cost. Because of the relatively small numbers of dual licensees compared to the rest of the licensees, the dual license holders will very likely see an individual cost increase that is larger than the savings seen by their "regular" DRE licensed colleagues.

Where should the cost of the new regulatory program fall?

What action, if any, should C.A.R. take in response to the new federal requirement?