Legislative Committee
Real Estate Finance Committee

September 15, 2008

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. do, if anything, to implement the new federal requirement for states to set up a licensing and regulatory program for mortgage loan originators?

Action:
Optional

Options:
1. Sponsor legislation to “fine-tune” SB 1053/SB1240, Machado, so that the real estate license will comply with the federal mandate. This option would not create policy regarding approaches by other loan originators.
2. Oppose state implementation. This option would rely on the requirement that HUD set up a federal license for mortgage loan originators, and would require opposition to implementation bills sponsored by other mortgage lending groups (if any).
3. Do nothing. This option would result in neutrality on implementation legislation of others, which might include a separate license.
4. 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 an institutional lender are required to be (annually) licensed and regulated at the state level in addition to joining the national registry. Because of C.A.R. amendments, if SB 1240, Machado, had become law in California it would require only relatively minor legislative "tweaking" in order to allow DRE licensees to comply with the federal mandate. At press time, the Governor announced a veto of SB 1240. State regulators (Departments of Real Estate, Corporations and Financial Institutions) will be directed to work together to help craft a new statute in order to comply with federal law.

Discussion:

The 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 recommended to the Board that C.A.R. sponsor legislation to create a new disclosure obligation for brokers that attempt to represent a buyer on both the sale and the loan in a transaction. This recommendation became part of SB 1054/SB 1737, Machado, and passed the legislature and is awaiting action by the Governor.

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.

SB 1053, Machado. In response to legislative concern about a lack of effective, targeted, regulation of mortgage loan brokerage, Senator Machado introduced legislation to create an enhanced program within DRE, modeled after the so-called "threshold broker" law. The bill was eventually passed as
SB 1240, Machado, and contained a registration/notice to DRE, an annual reporting requirement of business activity, a CPA review of compliance procedures and enhanced audit powers for DRE investigators. C.A.R. has supported the bill because of its enhanced enforcement functions, and manages to do so without a special license or endorsement. UPDATE: Just as committee materials are being posted, the Governor announced a VETO of SB 1240 and said that Administration entities would be working on compliance legislation.

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 may 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.

Tweaking SB 1240.
[See Update above] At time of publication, SB 1240 has just been vetoed. However, even if it is folded into 2009 legislation and eventually becomes law, the statute enacted by SB 1240 would require some relatively minor changes in order to comply with SAFE. At a minimum, the federal registry requirement (and collection of the associated fee) would have to be added to DRE’s authority. In addition, DRE would have to be empowered to require proof of continuing education by registered brokers on an annual basis as part of their registration, even though California's license has a 4-year renewal cycle. Finally, general findings that the DRE is empowered to modify regulations as needed to implement SAFE would have to be added to the real estate law.

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 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. The biggest potential negative aspect of action by one or more of these entities is that they will logically create a solution that includes a separate license for mortgage loan brokerage - a policy position that was rejected (as part of the report of the C.A.R. task force) by the Board of Directors. There is, of course, no assurance that C.A.R. could keep control of the separate license issue even if it does decide to sponsor its own legislation, because the federal mandate clearly contemplates a new license.

Relying on the Federal Loan Originator License.
SAFE requires the states to have regulatory system in place by August of 2009. If a state is making a "good faith effort" to enact a complying system, the Treasury Secretary may extend the deadline by up to 24 months.

If a state does not implement the Act, HUD is empowered to create its own system to license, register and regulate loan originators. California thus has the option of taking no action and defaulting to the backup license set up by HUD.

It is unclear what effect a federal requirement would have on the DRE license, but all loan originators would be required to seek federal registration or licensing in order to stay in business after 2009. While this seems to preserve the DRE license as an umbrella license that still covers mortgage brokerage, the structure of regulation would be pre-empted even if the letter of the state law is preserved.

There would be reluctance within California state government to give over authority to the federal government to regulate the area. However, given the dire fiscal situation of California, the opportunity to transfer a significant amount (certainly tens of millions) of program costs over to the federal agencies may become attractive. A HUD-administered license might cost individual licensees more than they would pay under a California program, but it would cost the state nothing and might even reduce state costs.

What position should C.A.R. take on a transfer of mortgage regulation to the federal regulators?

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