What CA loan brokers and agents need to know: the ramifications of recent mortgage loan legislation
New loan broker requirements imposed by California’s legislature will profoundly change the business activities of all real estate brokers and agents who arrange RESPA-type consumer loans secured by one-to-four residential units, called mortgage loan originators, and to a very limited extent, mortgage loan brokers arranging business, investment or agricultural loans secured by one-to-four residential units.
On or before January 31, 2010, or 30 days after they begin first acting as a loan broker or agent, real estate brokers and agents arranging loans for any purpose secured by a one-to-four unit residential property must notify the DRE of their loan origination activities. [Calif. Business and Professions Code §10166.07]
Also, on or before December 1, 2010, those real estate brokers and their agents licensed by the California Department of Real Estate (DRE) who originate consumer purpose loans, but not business or investment purpose loans, secured by one-to-four unit residential property will be required to obtain a license endorsement from the DRE. To obtain and maintain this endorsement, they will also need to register with a federal agency, take additional and different continuing education and make annual reports to the DRE. The license endorsement must be renewed every year by December 31. Those who fail to renew will be subject to fines of up to $100 per day, and may have their licenses revoked. [Bus & P C §10166.02]
This “Real Estate Settlement Procedures Act” (RESPA)-type license endorsement is California’s response to the federal government’s newly established supervision of brokers and agents who are “consumer mortgage loan originators”–arrangers of purchase-assist home loans or home equity loans for consumer purposes. All this comes in the wake of disastrous real estate consequences recently brought about by irresponsible lending. Much of the DRE’s oversight will be accomplished in collaboration with the Nationwide Mortgage Licensing System and Registry, here called the Nationwide Registry. This federally-created agency is responsible for monitoring consumer mortgage loan origination activities throughout the United States.
By increasing the education requirements of consumer loan brokers/agents and increasing its own knowledge and oversight of their activities, the government hopes to improve responsibility and accountability among mortgage lenders, and increase its own understanding of what has become an opaque and unregulated business. However, the government’s objective in imposing these registration requirements is to control the loan brokers and mortgage bankers, not the lenders who allowed, and in most cases encouraged, the relaxed lending conditions.
California’s RESPA-related oversight of real estate licensees is managed by the DRE. DRE-licensed brokers and agents who arrange consumer purpose loans secured by one-to-four unit residential property, now called consumer mortgage loan originators, are required to apply for endorsement from the DRE and an ID number from the Nationwide Registry. The national component of the prequalifying exam is currently available to be taken online with the Nationwide Registry.
For the state component, the DRE requires agents and brokers who act as mortgage loan originators to fill out and submit DRE Form RE 866, the Mortgage Loan Activity Notification. This form, available at the DRE’s website, is not an application for endorsement, but rather serves the purpose of notifying the DRE of any loan origination activities. Agents and brokers who fail to fill out this form will be subject to fines and possible license suspension. The DRE has not yet created its application form or set clear prerequisites for license endorsement. These materials should be available in late February, 2010 (look to first tuesday to alert you when this form is available).
Also, applicants to the DRE for the license endorsement will be required to successfully complete a minimum of 20 hours of education, including education on federal and state law related to fraud, fair lending and consumer protection and training in lending standards for nontraditional mortgages as a requisite for receipt of the RESPA loan origination endorsement and registration. [Bus and P C §§10166.06, 10166.09 and 10166.10]
Brokers and agents who apply for an endorsement and have successfully completed the endorsement education will also be required to pass a written exam, prepared and administered by the Nationwide Registry, on ethics, loan origination law and laws related to fraud, consumer protection and fair lending issues. If the licensee fails the registration exam three times, they will be required to wait a minimum of six months before making another attempt. Applicants will also be required to submit to background checks of their criminal history, civil and administrative records, credit history and other information.
Once endorsed by the DRE, the endorsement must be renewed annually. Renewal requirements involve still more education: eight hours of ethics, federal law, and nontraditional mortgage standards to be completed yearly. All qualifying courses must be approved by both the DRE and Nationwide registry. The registered loan broker or agent may not take the same course more than once every two years.
To improve public recognition of endorsed loan brokers and agents, these individuals will be required to include their nationwide Registry ID number and their DRE identification number on any advertising intended to be the first point of contact with customers. This includes all purchase agreements for which the endorsed licensee, while acting as the buyer’s loan broker, also acts as a transaction agent – the listing or selling agent. [Bus & P C §10140.6]
To some extent, improvements in the public’s well being are likely to result from all this endorsement, registration, background investigation, net worth requirements and education. In the meantime, however, brokers and agents arranging consumer purpose loans secured by one-to-four residential units will find themselves subject to a variety of new and arduous licensing requirements which are most likely to drive the majority of them out of the market entirely, expecially those that arranged purchase-assist loans for buyers of SFR properties.
In contrast, consider a seller who carries back a note and trust deed on the sale of a one-to-four unit residential property to a buyer who will occupy the property as his principal residence. The sale is an installment sale, and thus no new loan is involved (although an assumption of an existing loan is possible). In this situation, are the listing and selling agents arranging the carryback financing effectively “loan originators”? That is to say, are they required to be endorsed by the DRE and registered with the Nationwide Registry and complete the corresponding education requirements, background checks, etc. in order to arrange this financing and collect their sales fee?
No! RESPA and DRE license endorsements and registration are for consumer purpose loans on one-to-four units and are limited exclusively to loans, not extensions of credit, except for the carryback sale of homes by a builder. State law has always distinguished money loans from extensions of credit on the sale of real estate. [Boerner v. Colwell (1978) 21 CA3d 37]
So which DRE brokers and agents need to undergo this arduous endorsement hurdle, and who is exempt? These requirements do not apply to mortgage loan brokers (MLBs) who solicit, arrange or service investment, agricultural or business loans, regardless of whether those loans are secured by one-to-four residential units, or any loans secured by other than one-to-four unit residential property. These brokers are required to continue to report their activities to the DRE as they have in the past, but they will not need a separate DRE endorsement or federal registration. Also exempt from the endorsement and registration requirement are those service providers affiliated with real estate transactions, such as escrow officers and title companies, who receive and collect information to be used in arranging or processing loans but do not actually arrange or make the loans themselves.
The immediate results of this legislation are not difficult to predict. Institutional lenders have always preferred to lend directly to the homebuyer or homeowner. Direct lending allows them to avoid the expense of paying a loan broker and losing the interest rate spread from par to the note rate they charge. Thus they fulfill their objectives of increasing profits and avoiding competition, another extension of the deregulation of lenders which began with a vengence in 1982. The arduous requirements of endorsement and registration will effectively push all brokers and agents out of the business of placing purchase-assist home loans sought by homebuyers with the most competitive lender.
The mortgage loan broker who was formerly accustomed to acting as an intermediary between the homebuyer and mortgage lender will now be forced to reconsider whether their work is really worth the aggravating endorsement, registration, educational requirements, background checks, increased oversight and compensation disclosures. Some will not be able to meet the creditworthiness scoring standards or the net worth requirements to become endorsed. Lenders, on the other hand, will now be able to limit their loan solicitations to the “transaction agents” – selling agents – who represent homebuyers, although they will not solicit them for the purpose of making loans through those agents or paying a kickback as they did during the 2005-2006 period to get the loan business. Instead, the selling agents will be used for the purpose of bypassing all real estate licensees, dealing directly with the homebuyer once referred.
Save some uncommon cases, consisting probably of a few of the very largest real estate brokerage offices who establish a controlled financial business, we have seen the last days of the omnipresent residential mortgage loan broker. Lenders will now package their own loans, their way, exclusively. The buyer’s selling agent will control which lender now gets the loan, but will not be paid by the lender for making that decision – unless endorsed by the DRE, Registered with the National Registry, and fully compliant.
Source of text: Firsttuesday Newsletter
To get more information you can visit them at www.firsttuesday.us
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