Legislature(2015 - 2016)BARNES 124
04/13/2015 03:15 PM LABOR & COMMERCE
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HB 12-MORTGAGE LENDING AND LOAN ORIGINATORS 4:03:38 PM CHAIR OLSON announced that the next order of business would be HOUSE BILL NO. 12, "An Act relating to mortgage lending, mortgage loan originators, depository institutions, nonprofit organizations, and nonprofit organization employees; and providing for an effective date." 4:04:14 PM REPRESENTATIVE TILTON moved to adopt the proposed committee substitute (CS) for HB 12, Version H, labeled 29-LS0089\H, Bannister, 4/10/15, as the working document. There being no objection, Version H was before the committee. 4:04:34 PM REPRESENTATIVE SHELLEY HUGHES, Alaska State Legislature offered that HB 12 would protect the public, update the law, create more level playing field, and simplify the process for mortgage loan originators in Alaska. She referred to the flow chart in members' packets created by the Division of Banking that may be helpful in interpreting the current process as compared to the process under HB 12. Under current statutes, a depository institution or a bank and each of its licensed mortgage loan originator (MLOs) employees are exempt from mortgage lender brokers' licenses since regulation of banks fall under federal regulations. However, if the licensed MLO does not work as a direct employee and instead works as a contractor, that person must not only have a license as MLO, but also obtain a license as a mortgage lender broker. She characterized it as being a double-layer licensing policy. 4:07:02 PM REPRESENTATIVE HUGHES offered her belief that HB 12 would eliminate an unnecessary layer of licensure. Instead of requiring the contractor MLO [mortgage loan originator] to also be licensed as a lender/broker and a mortgage loan originator, the person will simply be licensed as an MLO. In addition, this bill also would give the state supervisory and regulatory authority over banks. For example, HB 12 would allow the state to require banks to submit reports and audits. Currently, if the bank was supervising contractor MLOs, the bank will be solely under federal regulation, but under the bill, the bank will need to register with the state. Essentially, this means the contractor MLOs would no longer be supervising themselves - since previously they were the MLO and the broker. Instead, the bank will have responsibilities for some of the supervision. These changes will allow the state to go to one point - the bank - for information rather than to contact each of the independent contractors throughout the state. 4:08:53 PM REPRESENTATIVE HUGHES directed attention to the flowchart in members' packets entitled, "Comparison between provisions of Federal SAFE Act, the Alaska SAFE Act, and Proposed HB 12 which she briefly reviewed. 4:10:21 PM REPRESENTATIVE HUGHES said that HB 12 would exempt the Alaska Housing Finance Corporation (AHFC) and any government agency from the state Mortgage Lender Broker license requirements. The governmental agencies would be responsible to ensure their MLOs meet the standards with respect to the Federal SAFE Act. 4:11:04 PM KIMBERLY SWIANTEK, Staff, Representative Shelley Hughes, on behalf of the prime sponsor, Representative Shelly Hughes, reviewed the proposed committee substitute (CS) for HB 12, Version H. She said that Section 1 outlines the license requirements for mortgage loan originators and would add language that individuals can be licensed as mortgage loan originators if they work under an exclusive contract for a registered depository institution as stated on page 1, line 11 or are sponsored by a registered depository institution. MS. SWIANTEK directed attention to page 2, line 5, Section 2, which outlines the requirements for a registered depository institution to be eligible to sponsor a mortgage loan originator by adding a registered depository institution (RDI) throughout this chapter creates same requirements for mortgage licensees or brokers. MS. SWIANTEK, referring to page 3, line 8, Section 3, stated that this provision would exempt government agencies. In doing so, the state would recognize them under the SAFE Act effective August 30, 2011. She noted that this was limited to government agencies. By exempting the bona fide nonprofit organizations, the State of Alaska would be in compliance with the SAFE Act effective 8-30-2011, she said. 4:13:45 PM MS. SWIANTEK directed attention to page 3, Section 4-7, which includes registered depository institutions (RDI) and the bonding requirements, which are the same for mortgage licensees. MS. SWIANTEK stated that Section 4, line 12, would require a registered depository applicant to have a surety bond and Section 5, [page 3], line 19, ensures that an RDI does not have file more than one bond if they cover more than one location. Instead of having 15 contractors applying for a bond, only one will be filed, she said. Section 6, [page 3], line 23 required the bond must last for three years Section 7 [page 3], line 27 gives the department the authority to determine if the bond is unsatisfactory. MS. SWIANTEK directed attention to Section 8, page 3, line 31 through page 4, line 13, which would amend the annual reporting requirements by requiring registered depository institutions to follow the same reporting requirements as a mortgage loan originator licensee and be subject to the same penalties if the report is not filed as required. 4:15:24 PM MS. SWIANTEK stated that Section 9-13 on pages 4-5, includes registered depository institutions in the existing requirements for managing mortgage records. She briefly reviewed these, noting Section 9 would apply to business transactions that occur entirely or partially in the state. Section 10 would require accounting records be kept in accordance with generally accepted accounting principles. Section 11 would require the retention of all records pertaining to the loan including electronic correspondence be kept for three years. Section 12 would require that the note and associated documents be kept for three years. MS. SWIANTEK directed attention to Section 13, page 5, line 11, which would require a mortgage loan servicing agent who acts on behalf of the licensee or an RDI maintain adequate records for three years. She clarified that a mortgage loan servicing agent could be an accountant, legal counsel, or a collection agent. 4:16:31 PM MS. SWIANTEK directed attention to Section 14, page 5, line 29, which would requires out-of-state records maintained by an RDI be made available to the state. MS. SWIANTEK referred to Section 15 on page 6, line 10, which would grant the department investigation and examination authority. Section 16 indicates that a "person" and "person subject to this chapter" include a registered depository institution, she said. MS. SWIANTEK referred to Section 17, page 6, line 25, through page 7, line 16 which would allow the department the authorization to censure, suspend, or bar a licensee or depository institution in the same manner as a mortgage licensee. 4:17:27 PM MS. SWIANTEK referred to Section 18, page 7, lines 18-24, which would allow the department to hold administrative hearings and issue disciplinary orders on RDIs. MS. SWIANTEK referred to Section 19, page 7, lines 25-27, which would add definition of a registered depository institution. Finally, Sections 20-22 would allow the Department of Commerce, Community & Economic Development (DCCED) the authority to adopt regulations by January 1, 2016, which is the effective date of the bill. 4:18:17 PM GINGER BLAISDELL, Staff, Representative Shelley Hughes, Alaska State Legislature, on behalf of the prime sponsor, introduced herself. In response to a question, she agreed that in every section in the statutes that pertains to mortgage was modified. 4:18:57 PM REPRESENTATIVE COLVER asked whether the bill was responding to mortgage fraud and national regulation. MS. BLAISDELL answered that the 2008 was a nationwide mortgage lending debacle, which was part of reason the SAFE Act was updated and finalized in 2011. This bill was directed at resolving business plans or models to level the playing field between other mortgage lender brokers and mortgage loan originators (MLOs). 4:20:00 PM REPRESENTATIVE COLVER asked whether this bill was directed more at non-traditional lenders, such as insurance companies. MS. BLAISDELL answered that the "level playing field" was more of an administrative leveler. People who are conducting the same types of business will have the same type of licensure requirement placed on them. She said that if this bill does not pass, any banks in Alaska with independent contractors can still conduct business and issue mortgages. This bill would make the education and license requirements the same as others doing the same kind of business. 4:21:12 PM CHAIR OLSON opened public testimony on HB 12. 4:21:28 PM KRISTIE BABCOCK, Agent, State Farm Insurance, spoke in support of HB 12, stating she works as independent contractor for State Farm Insurance in Kenai. She has been an agent and small business owner in Kenai for the past 15 years and has eight employees. She markets insurance and bank products exclusively on behalf of State Farm Insurance and State Farm Bank, she said. MS. BABCOCK stated that as an originator she handles the initial application. Banks and their employees are exempt from state licensing since they are federally regulated; however, since she serves as an independent contractor, she must be licensed as a mortgage loan originator and broker. The mortgage loan originator (MLO) license requires rigorous state and federal testing, background check, fingerprinting, continuing education, and license renewal. In fact, she has undergone this process to better serve her customers and provide more lending options for Alaska homeowners, many of whom have been longstanding clients. Although she does not contest the MLO licensing requirements nor does this pertain to MLO licensing requirements, HB 12 will address an additional license she currently must possess. Under Alaska law an MLO must sponsored and supervised by a mortgage broker and even though banks are exempt from having a mortgage broker license, she must be licensed as mortgage broker, which means that she must sponsor and supervise herself. This makes no sense, she said, since she must supervise self, plus she does not broker any loans. This requirement causes unnecessary expense, was time consuming, she said, estimating that the extra cost at $2,000 per year for the broker license. In addition, it takes considerable time to file the required quarterly, annual reporting, filing, as well as meeting other reporting requirements. MS. BABCOCK described the bill as a "win-win" solution since it will remove unnecessary costs and burdens for MLOs without reducing any protections associated with broker supervision. She stated that HB 12 would allow the sponsoring bank, in her case State Farm Bank, to step in and register with the state as her supervisor, thereby assuming all the liabilities, responsibilities, and oversight as if the bank was her broker. She offered that this makes more sense since the bank serves as the leader and her business is the originator. In fact, it provides more oversight than if she supervised herself. She reported that 26 other states have licensing requirements similar to the provisions in HB 12. In closing, she emphasized that this bill would not result in any less regulation for MLOs. Although a similar bill was before the legislature in 2014, it did not pass. She asked members to pass out HB 12 today. 4:26:39 PM ROGER BAINBRIDGE, Counsel, State Farm Bank, said he represents State Farm Bank as their in-house counsel. He offered his belief that Ms. Babcock did a fantastic job of explaining the issues. He offered that the Safe Act did not contemplate an independent contractor working on behalf of an exempt depository institution. He echoed that 26 other states have adopted legislation or otherwise provided State Farm Bank the opportunity to register an exempt company solely for the purpose of sponsoring its MLO state licensed agents. He pointed out that State Farm Bank was already regulated by the Office of the Comptroller of the Currency and the Consumer Financial Protection Bureau. He suggested that bringing in the Division of Banking for loans originated by the MLO license agents gives the sense of dual and layered supervision and examination that these loans originated by MLO licensed agents will receive. He asked members to support HB 12. 4:28:33 PM CHAIR OLSON asked whether the 26 states previously mentioned had adopted model legislation to address this issue. MR. BAINBRIDGE answered no. He said that State Farm has been working on these issues with other states and will continue to do so with the remaining states on similar licensing issues. 4:28:58 PM CHAIR OLSON asked whether the legislation that was passed in the other 26 states was the same or if State Farm Bank has "tweaked" the solution. MR. BAINBRIDGE answered that the remedy has varied based on the concerns of the banking department in individual states. Some states wanted their statutes to be very specific to the particular business model and other states preferred to address the issue more broadly so that it doesn't limit the provisions to one insurance company. He characterized the Alaska proposal as one that takes a broad and less specific approach. He suggested that the specific remedy really depends on what the banking division or department will support. He said that State Farm Bank has worked closely with the Alaska Division of Banking for the past several years, noting that approximately 16-17 State Farm licensed agents work in Alaska and they have held several examinations of those offices. He described his relationship with the Division of Banking as being a good working relationship, that the division understands the state's business model, including how agents function, their limited origination activities, and how that transfers to the bank and its employees, who are federally registered to process and close loans. 4:30:41 PM JOHN CARMAN, President, Home State Mortgage, Chair; Legislative Affairs Committee, Alaska Mortgage Bankers Association, stated he has held many conversations with the sponsor and was grateful for the communication. This bill was first introduced last year and he indicated was not totally in favor of this bill nor was he in agreement with the characterization thus far. He related his understanding that other testifiers characterized the bill as creating a level-playing field; however, he suggested the bill as creating a "remodeled" playing field to accommodate the State Farm Bank model. He said that the State Farm Bank has "non-employees" that they are sponsoring. He agreed that when First National Bank has an employee of the bank that separate registration requirements do not apply, but the State Farm Bank model uses independent contractors working primarily as insurance agents who originate a loan. However, he offered his belief that these independent contractors simply refer the loans to State Farm Bank for origination. He acknowledged that under this bank model the bank is very limited and only does conventional loans with a fixed rate with some adjustable rate mortgages and for example, they do not process all the other loans, such as FHA [Federal Housing Administration], VA [US Department of Veterans' Affairs, or [AHFC], Alaska Housing Finance Corporation loans. He said it does concern him that him if the agents don't do those loans or have them available that they may not be giving their clients the best advice in every situation. 4:33:15 PM MR. CARMAN admitted that under the current model [State Farm Bank] forms a brokerage and employ themselves as the only employee of the brokerage. He said he has talked to Ms. Kevin Anselm [Operations Manager, Division of Banking & Securities, Department of Commerce, Community, and Economic Development], who agreed that it would make the division's job to regulate these companies easier by changing to this model; however, he still has a hard time fully supporting the model. He guessed it was an improvement over the existing situation. 4:33:59 PM MICHAEL MARTIN, Executive Vice President, General Counsel, Northrim Bank, stated he has an affiliation with the Alaska Bankers Association. He noted that the Alaska Bankers Association sent a letter dated April 10, 2015 in opposition to HB 12. He has reviewed the recent version [Version H] of HB 12. He very much appreciated the division's exhibits, which were very helpful. He noticed the original version would eliminate the proposed nonprofit entities from the licensing requirement for mortgage loan originators. He said it was one of provisions the Alaska Bankers Association opposed. He appreciated that the language has been removed. 4:35:26 PM MR. MARTIN directed attention to background materials [in members' packets], which better illustrated the regulatory environment if HB 12 were to pass. He admitted that he hasn't fully digested the proposed committee substitute. The Alaska Bankers Association will convene on Friday, he said, and will review the bill. He expressed concern with the original version was the exemption for nonprofits. In addition, the [ABA] was concerned notion of level playing field was difficult to define. He expressed concern that some of the MLOs would be unlicensed and unregulated; however, these materials helped him to understand. This has been characterized as making things simpler, but there is nothing about this statute or the proposed changes in HB 12 that he considered simple. In fact, it will take some time to wade through all of it. 4:37:07 PM KEVIN ANSELM, Director, Division Banking and Securities, Department of Commerce, Community & Economic Development (DCCED), in response to Chair Olson, answered that the department was neutral on HB 12. 4:37:51 PM REPRESENTATIVE HUGHES thanked for work she did to provide the graphic. She directed attention to the fiscal note that mentioned bona fide nonprofit provision which was removed in Version H. She asked whether that was an oversight. MS. ANSELM agreed that the original fiscal note was prepared in January and the fiscal note has not been updated; however, the division does not believe there will be any fiscal impact. 4:39:06 PM MIKE WILKINSON, Agency Field Leader, State Farm Insurance, thanked members for holding this hearing. He expressed support for HB 12 since it allows shifting of responsibility and oversight required of licensed mortgage brokers over its independent contractor mortgage loan originators from individuals agents to State Farm Bank. He offered his belief that the public will be better served if State Farm Bank was allowed to legally assume the assurances, oversight, and reporting requirements for mortgage broker licensing. 4:40:48 PM CHAIR OLSON, after first determining no one wished to testify, closed public testimony on HB 12. [HB 12 was held over.] 4:41:42 PM The committee took an at-ease from 4:41 p.m. to 4:43 p.m.