This Legislative Watch reviews Senate Bill (SB) 36, which subjects residential loan originators to additional regulation by the DRE.  For a total list of all the real-estate laws digested by first tuesday for the 2009 legislative session, click here.

New regulations from the California legislature will profoundly change the business activities of all real estate agents who act as mortgage loan originators. Any licensed real estate agent or broker who originates consumer loans (not business or investment loans) on 1-4 unit residential property will soon be required to take additional continuing education, and to receive a separate license endorsement from the California Department of Real Estate (DRE). As of December 1, 2010, the following regulations will become a part of the daily life of many agents and brokers. Note that these requirements do not apply to mortgage loan brokers (MLBs) who solicit, arrange, or service only investment, agricultural or business loans, or any loans secured by non 1-4 unit residential property. These brokers will be required to report their activities to the DRE, but will not need a separate license endorsement. Review the following regulations for a detailed look at what loan originators can expect in the near future.

 

Restrictions on suspending a loan originator’s license endorsement
Business and Professions Code § 10100
Amended by S.B. 36
Effective: Immediately

 

To act as a mortgage loan originator, a California real estate sales agent or broker must apply to the DRE for an endorsement to their agent’s or broker’s license. To suspend or revoke a license endorsement, the DRE will proceed in the same manner as when suspending or revoking an agent’s or broker’s license.

 

 

Loan originators to follow new licensing and reporting requirements
Business and Professions Code §10131.8
Repealed by S.B. 36
Effective: Immediately

 

A broker who acts as a loan originator (by accepting loan applications or negotiating the terms of a residential mortgage loan) is no longer required to notify the DRE of his status as an approved lender with any lending institution. Instead, he must maintain a mortgage loan origination endorsement.

 

ID number to be disclosed on advertising
Business and Professions Code §10140.6
Amended by S.B. 36
Effective: Immediately

A real estate agent or broker with an endorsement to act as a mortgage loan originator will be granted an ID number from the Nationwide Mortgage Licensing System and Registry (The Nationwide Registry), a national institution charged with licensing and registering mortgage loan originators.

In addition to his license number, the licensee must disclose his Nationwide Registry identification number on all advertisements intended to be the first point of contact with customers, and on all purchase agreements in which the licensee acts as an agent. The DRE may enact further rules regulating the situations in which a mortgage loan originator must disclose his ID number.

 

Requirements for license endorsement from the DRE
Business and Professions Code §§10150, 10151
Amended by S.B. 36
Effective: Immediately

The DRE may set out specific requirements to be followed in applications for a license endorsement. These requirements will meet the minimum prerequisites which apply to non-brokers who wish to obtain a mortgage loan originator’s license from the Department of Corporations (DOC).

 

Exempt from license endorsement or licensing as a loan originator
Business and Professions Code §10166.01
Added by S.B. 36
Effective: Immediately

 

A mortgage loan originator’s license endorsement from the DRE is required for anyone who:

  • accepts mortgage loan applications for one-to-four unit residential property; or
  • offers or negotiates terms for residential mortgage loans on one-to-four unit residential property.

This does not include a person who:

  • only receives, collects and distributes information to be used in issuing of mortgage loans;
  • acts solely as a real estate broker, unless they receive compensation from a lender or other mortgage loan originator;
  • renegotiates the terms for an existing mortgage loan but does not play a role in the creation of new loans, unless the Department of Housing and Urban Development (HUD) declares otherwise;
  • is only involved in extending credit for timeshare plans; or
  • has a separate mortgage loan originator’s license with the DOC or is licensed through the Nationwide Registry according to national mortgage origination regulations.

 

Brokers who originate loans must have a license endorsement
Business and Professions Code §10166.02
Added by S.B. 36
Effective: Immediately

A real estate broker who makes, arranges or services loans secured by one-to-four unit residential property must notify the DRE of his mortgage loan origination activities by the later of:

  • January 31, 2010; or
  • within the thirty days following the commencement of his mortgage loan origination activity.

A broker may not act as a mortgage loan originator without first:

  • having a real estate license; and
  • obtaining an endorsement to that license from the DRE qualifying the licensee as a mortgage loan originator.

License endorsements will expire yearly on December 31, unless renewed.

The DRE may work with the Nationwide Registry, or its affiliates, to keep records and process any fees related to real estate mortgage loan originator endorsements.

Any broker who does not notify the DRE of his activities as a mortgage loan originator and obtain a license endorsement permitting him to act as a mortgage loan originator will be fined $50 for each day he acts as a loan originator until the DRE is notified, and $50 per day until license endorsement is received. If more than 30 days, pass, the fee will rise to a penalty of $100 per day, up to a total of $10,000. The DRE may revoke a broker’s license if he refuses to pay this penalty.

 

Processors and underwriters exempt from endorsement
Business and Professions Code §10166.03;
Added by S.B. 36
Effective: Immediately

A loan processor or underwriter is not required to obtain a mortgage originator endorsement from the DRE unless he advertises to the public that he can act as a mortgage loan originator.

A person who only acts as a loan processor or underwriter may not advertise that he can act as a loan originator.

Any independent contractor employed by a mortgage loan originator to act as a loan processor or underwriter for a residential mortgage loan must have a mortgage loan originator endorsement.

 

Background information from applicants
Business and Professions Code §10166.04
Added by S.B. 36
Effective: Immediately

When applying for an endorsement or license to act as a mortgage loan originator, an applicant must provide:

  • fingerprints, to be used in a background check; and
  • personal history and experience, on a form to be provided by the Nationwide Registry. This personal history will authorize the DRE to obtain:
    • an independent credit report; and
    • information on any administrative, civil or criminal activity.

The DRE may ask the Nationwide Registry to obtain a state criminal history background check on all applicants for endorsement. If it does so, and the Nationwide Registry submits the fingerprints and related information electronically to the Department of Justice (DOJ) to obtain information about the applicant’s criminal history, then the DOJ will provide an electronic response to both the Nationwide Registry and the.

The Nationwide Registry may request arrest notification service from the DOJ. If it does, the DOJ will provide an electronic response to the Nationwide Registry and the DRE.

The Department of Justice will charge a reasonable fee for this service.

 

Prerequisites for endorsement and licensing
Business and Professions Code §10166.05
Added by S.B. 36
Effective: Immediately

The DRE will not issue an endorsement to act as a mortgage loan originator unless the applicant demonstrates that he:

  • has never had a mortgage loan originator’s license or endorsement revoked;
  • has never committed a felony involving fraud, breach of trust, dishonesty or money laundering;
  • has not committed a felony of any kind in the preceding seven years;
  • possesses the qualities of responsibility, good character and trustworthiness; and
  • is in compliance with all education and testing requirements.

 

Education requirements for licensing or endorsement
Business and Professions Code §10166.06
Added by S.B. 36
Effective: Immediately

All applicants for license endorsement from the DRE must complete a minimum of 20 hours of education, including:

  • three hours of federal law and regulations;
  • three hours of ethics, including instruction on fraud, consumer protection and fair lending issues; and
  • two hours of training related to lending standards for nontraditional mortgages.

Education courses must be reviewed and approved by the Nationwide Registry. Approved courses completed outside of California are valid for this requirement.

Before receiving a license endorsement, applicants must pass a written exam approved by the Nationwide Registry. This exam must test the applicant’s knowledge of:

  • ethics;
  • all laws regulating mortgage loan origination; and
  • all laws regulating fraud, consumer protection and fair lending issues.

The exam must be administered by a test administrator approved by the Nationwide Registry. The administrator may provide the test at the applicant’s home or place of employment.

To pass the exam, the applicant must get a score of at least 75%. If the applicant fails, he may retake the exam up to two times, with a minimum wait period of 30 days between each attempt. If he fails the exam three times, the applicant must wait a minimum of six months before making another attempt.

If a mortgage loan originator does not maintain his endorsement for a minimum of five years, or does not register with the state of California as a loan originator, then he must retake the written exam.

 

Yearly report to be filed with DRE
Business and Professions Code §10166.07
Added by S.B. 36
Effective: Immediately

A real estate broker who makes, arranges or services loans secured by one-to-four unit residential property must file a yearly business activities report within the first 90 days following the end of the fiscal year, or later if permitted by the DRE. This report must contain the following information for the preceding fiscal year:

  • the name and license number of the supervising broker, and any brokers and salespersons under his supervision;
  • a list of all real estate related activities undertaken by the broker, including:
    • the arranging, originating or servicing of mortgage loans;
    • all other activities performed under the broker’s or sales agent’s license; and
    • any related activities, such as services undertaken as a financial lender or finance broker.
  • a list of all forms of media used by the broker and agents for advertising;
  • all of the following information pertaining to fixed rate loans filed by the broker over the past year:
    • the total number, aggregate principal amount, lowest interest rate, highest interest rate and a list of all institutional lenders of record. If any loan was funded by a non-institutional lender, the broker must categorize it as privately funded;
    • the total number and aggregate principal amount of all covered loans; and
    • the total number and aggregate principal of all nontraditional mortgage loans.
  • for all loans made, brokered or serviced, the total number and aggregate principal of the loans funded by institutional lenders, and the total number and aggregate principal of loans funded by private lenders;
  • the total number and aggregate principal of loans that included a prepayment penalty, the minimum prepayment penalty length, and the maximum penalty length;
  • the total number of loans with prepayment penalties whose length was greater than the time period before the borrower’s loan payment amount could increase;
  • the total compensation received by the broker on all loans brokered, including yield spread premiums, commissions and rebates. This does not include compensation used to pay for third-party services on behalf of borrowers;
  • the total number of loans for which a mortgage loan disclosure statement was provided in any language other than English, and the number of forms provided in each non-English language; and
  • the total amount of funds advanced to be applied toward a payment to protect the security of any mortgage loans serviced.

Qualifying brokers may submit this report in combination with their annual business activities reports.

If a broker fails to file his annual report on time, the DRE may examine the broker and create such a report. The DRE may charge the broker one and a half times the cost of making this examination and report. This cost will be determined by the estimated hourly cost for all department audit staff performing audits on real estate brokers. If the broker fails to pay the DRE’s cost within 60 days of notification, the DRE may suspend the broker’s license or refuse to renew that license. This suspension or denial will remain in effect until the broker pays the billed amount or the license expires. The DRE may sue to recover the billed amount from the broker.

This annual business report is exempt from public disclosure.

The DRE may waive the requirement to submit any information here required on the annual business activities report if this information is already required by the Nationwide Registry.

 

Reports to the Nationwide Registry
Business and Professions Code §10166.08
Added by S.B. 36
Effective: Immediately

All mortgage loan originators must submit annual reports to the Nationwide Registry, as required in the regulations of the Registry.

 

Continuing education for loan originators
Business and Professions Code §§10166.09 and 10166.10
Added by S.B. 36
Effective: Immediately

To keep their endorsement, mortgage loan originators must continue to meet minimum licensing/endorsement standards, pay the yearly renewal fee and complete a minimum of eight hours of continuing education annually. This education must include:

  • three hours of federal law and regulations;
  • two hours of ethics (including instruction on fraud, consumer protection and fair lending issues); and
  • two hours on lending standards for nontraditional mortgages.

All continuing education courses must be approved by the DRE and the Nationwide Registry. The DRE may substitute any of the above courses with qualified agent and broker license renewal courses, so long as the substituted courses are substantially equivalent to those listed above.

Continuing education may be offered in a classroom, online or in any other format approved by the DRE and the Nationwide Registry.

Credit for continuing education courses may only be granted for the year in which the course is taken.

Mortgage loan originators may not take the same course more than once every two years to meet the continuing education requirement.

If a loan originator instructs a continuing education course, he may receive credit for that course at the rate of two credit-hours for every one hour taught.

Approved courses remain valid if completed outside of the state of California.

If a loan originator’s license endorsement expires, or is suspended or revoked, the originator must complete the applicable continuing education requirements for the last year that the license was held before the endorsement can be reinstated.

 

Brokers to keep records
Business and Professions Code §§10166.11 and 10166.13
Added by S.B. 36
Effective: Immediately

Any active real estate broker who makes, arranges or services loans secured by one-to-four unit residential property must keep records which show that the broker’s loan origination activities comply with regulations. The broker must disclose these documents to the DRE upon request.

The DRE also has the right to audit all brokers and their agents after giving reasonable notice. The broker or salesperson must allow the DRE to inspect and copy any business documents and records upon DRE request. If a broker or agent fails to allow this, their license may be suspended or revoked.

Reports made by the DRE upon audit or examination of a broker or agent are not considered public records.

 

Brokers must submit to DRE examination
Business and Professions Code §10166.12
Added by S.B. 36
Effective: Immediately

The DRE may examine the activities of any real estate broker who acts a mortgage loan originator. These examinations will include a review of all agents and brokers acting under the broker’s supervision. Examinations will be conducted in cooperation with other state or federal government agencies, or substituted by examinations conducted by these agencies.

The DRE may impose a fine upon real estate brokers or agents based upon the findings of an examination. Failure to pay such a fine may result in the suspension or revocation of their license. The DRE may file an action in court to collect payment of the fine.

All findings of any examination are the property of the DRE, and will not be disclosed to anyone other than the examined broker, law enforcement officials or government regulatory agencies.

 

Reports as a former loan originator
Business and Professions Code §10166.14
Added by S.B. 36
Effective: Immediately

If a broker ceases to act as a loan originator, he must notify the DRE. If he has already reported his activities to the DRE in the same year, he must continue to make reports until the end of the year, but will no longer be subject to DRE regulation as a loan originator after the end of the year.

 

DRE reports to Nationwide Registry
Business and Professions Code §10166.15
Added by S.B. 36
Effective: Immediately

The DRE will report all violations of California law regulating mortgage loan originators to the Nationwide Registry.

The DRE will also establish a process for mortgage loan originators operating under a DRE license endorsement to challenge information entered into the Nationwide Registry.

The DRE is authorized to publish the recordkeeping requirements for loan originators and the penalties that apply to those who fail to meet DRE recordkeeping requirements.

 

Confidential information reported to the Nationwide Registry
Business and Professions Code §10166.16
Added by S.B. 36
Effective: Immediately

All material provided to the Nationwide Registry by the DRE may also be shared with state and federal regulatory officials overseeing the mortgage industry.

The DRE may enter into agreements to share information and documents with other governmental agencies and associations.

Information and documents that are considered privileged or confidential will not be subject to:

  • disclosure to the public under state or federal law; or
  • subpoena, discovery or admission into evidence of any private civil action or administrative process (unless the privileged status of the information is overruled by the rights of the Nationwide Registry or a person waives the privileged status of the information pertaining to him).

Information related to a loan originator’s employment history and publicly adjudicated enforcement proceedings is not considered confidential, and will be available to the public in the Nationwide Registry.

 

Background checks required for licensing with Nationwide Registry
Business and Professions Code §10166.17
Added by S.B. 36
Effective: Immediately

The DRE will require loan originators to be licensed and registered through the Nationwide Registry. To accomplish this, it may require applicants for a license or endorsement to submit to background checks for:

  • criminal history;
  • civil and administrative records;
  • credit history; and
  • any other information deemed necessary by the Nationwide Registry.

The DRE may also reset endorsement renewal and broker reporting deadlines as necessary. The DRE has the authority to change any other licensing requirements in order to participate in the Nationwide Registry. Loan originators may be required to pay fees to apply for or renew their licenses through the Nationwide Registry.

License and ID disclosure requirements
Business and Professions Code §§10235.5 and 10236.4
Amended by S.B. 36
Effective: Immediately

Mortgage loan originators must disclose their DRE license number and Nationwide Registry ID number on all advertisements for borrowers.

 

Final regulations and effective dates
Health and Safety Code §18034
Added by S.B. 36
Effective: Immediately

 

An individual and his employees who sell homes, or interests in homes, are not required to be licensed as mortgage loan originators if they perform only administrative or clerical tasks on behalf of a licensed loan originator, and if they do not accept compensation from a lender or loan originator.

Acceptable administrative and clerical tasks include receiving, collecting and distributing information to process or underwrite a loan.

All personal and sensitive business information that submitted to the DRE and DOC in connection with mortgage loan originators and the mortgage lending process will be protected as confidential information.

Every person required to hold a license endorsement under Real Estate Law must have that endorsement by December 31, 2010. A mortgage loan originator’s license endorsement will not be required for anybody before December 1, 2010.