Legislature(2007 - 2008)CAPITOL 17
03/23/2007 03:00 PM House LABOR & COMMERCE
| Audio | Topic |
|---|---|
| Start | |
| HB170 | |
| HB162 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 170 | TELECONFERENCED | |
| *+ | HB 162 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
HOUSE LABOR AND COMMERCE STANDING COMMITTEE
March 23, 2007
3:04 p.m.
MEMBERS PRESENT
Representative Kurt Olson, Chair
Representative Mark Neuman, Vice Chair
Representative Carl Gatto
Representative Gabrielle LeDoux
Representative Robert L. "Bob" Buch
Representative Berta Gardner
MEMBERS ABSENT
Representative Jay Ramras
COMMITTEE CALENDAR
HOUSE BILL NO. 170
"An Act relating to annual audit reports by insurers, to
custodians of insurer assets, to writing workers' compensation
insurance by surplus lines insurers, to reports by surplus lines
insurers, to the definition of 'wet marine and transportation
insurance,' to false or misleading financial statements
concerning insurance audits, and to the membership of the Alaska
Life and Health Insurance Guaranty Association; and providing
for an effective date."
- HEARD AND HELD
HOUSE BILL NO. 162
"An Act relating to mortgage lenders, mortgage brokers, mortgage
originators, state agents who collect program administration
fees, and other persons who engage in activities relating to
mortgage lending; relating to mortgage loan activities; relating
to an originator fund; relating to fees for mortgage loan
transactions; and providing for an effective date."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HB 170
SHORT TITLE: INSURANCE
SPONSOR(s): LABOR & COMMERCE BY REQUEST
03/01/07 (H) READ THE FIRST TIME - REFERRALS
03/01/07 (H) L&C, FIN
03/23/07 (H) L&C AT 3:00 PM CAPITOL 17
BILL: HB 162
SHORT TITLE: MORTGAGE LENDING
SPONSOR(s): REPRESENTATIVE(s) LYNN
02/28/07 (H) READ THE FIRST TIME - REFERRALS
02/28/07 (H) L&C, FIN
03/23/07 (H) L&C AT 3:00 PM CAPITOL 17
WITNESS REGISTER
LINDA HALL, Director
Division of Insurance
Department of Commerce, Community, & Economic Development
(DCCED)
Anchorage, Alaska
POSITION STATEMENT: Presented HB 170.
REPRESENTATIVE BOB LYNN
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Presented HB 162.
MARK DAVIS, Director
Division of Banking & Securities
Department of Commerce, Community, & Economic Development
(DCCED)
Juneau, Alaska
POSITION STATEMENT: Answered questions and offered comments
during hearing on HB 162.
ROGER PRINCE, Securities Examiner
Division of Banking & Securities
Department of Commerce, Community, & Economic Development
(DCCED)
Anchorage, Alaska
POSITION STATEMENT: Answered questions and offered comments
during hearing on HB 162.
JOHN CARMAN, President
Home State Mortgage;
Chair
Legislative Committee, Alaska Mortgage Bankers Association
NAOMI LOUVIER, Owner
Prudential Jack White/Vista Real Estate
Anchorage, Alaska
POSITION STATEMENT: Testified during hearing on HB 162.
DANIELLE FAGRE ARLOW, Senior Vice-President
State Government Affairs
American Financial Services Association (AFSA)
Washington, DC
POSITION STATEMENT: Testified during hearing on HB 162
GREG HARSHA, Mortgage Broker
The Mortgage Network, Inc.
Ketchikan, Alaska
POSITION STATEMENT: Testified during hearing on HB 162.
JOHN COURSON, President & Chief Executive Officer (CEO), Central
Pacific Mortgage
Folsom, California
POSITION STATEMENT: Testified during hearing on HB 162.
JOHN MARTIN, Mortgage Banker
Anchorage, Alaska
POSITION STATEMENT: Testified in support of HB 162.
KEVIN BREELAND, Mortgage Banker
Residential Mortgage, LLC
Anchorage, Alaska
POSITION STATEMENT: Testified in support of HB 162.
JOE BRAMMER, Mortgage Loan Originator;
Chair
Legislative Committee, Alaska Association of Mortgage Brokers
(AKAMB)
Anchorage, Alaska
POSITION STATEMENT: Testified in support of HB 162.
ACTION NARRATIVE
CHAIR KURT OLSON called the House Labor and Commerce Standing
Committee meeting to order at 3:04:22 PM. Representatives Buch,
Gardner, Gatto, Neuman, and Olson were present at the call to
order. Representative LeDoux arrived as the meeting was in
progress.
HB 170-INSURANCE
CHAIR OLSON announced that the first order of business would be
HOUSE BILL NO. 170, "An Act relating to annual audit reports by
insurers, to custodians of insurer assets, to writing workers'
compensation insurance by surplus lines insurers, to reports by
surplus lines insurers, to the definition of 'wet marine and
transportation insurance,' to false or misleading financial
statements concerning insurance audits, and to the membership of
the Alaska Life and Health Insurance Guaranty Association; and
providing for an effective date."
3:05:04 PM
LINDA HALL, Director, Division of Insurance ("the Division"),
Department of Commerce, Community, & Economic Development
(DCCED), stated that HB 170 was introduced at the request of the
Division. Sections 1,2, and 3 of the bill address solvency
oversight. The general purpose of these sections is to provide
authorization to adopt in regulation the model financial
reporting regulations of the National Association of Insurance
Commissioners (NAIC). The Division intends to adopt the entire
financial reporting model, which has been in place for several
years. In 2006, several revisions were made, which have been
adopted by the NAIC. She explained that the basic model
regulation is an accreditation standard. The Division is
accredited by the NAIC, which is a mechanism to review each
states financial examinations of the insurance companies for
which it is the primary regulator. States rely on other states
for quality financial reviews and financial oversight. The
accreditation process ensures that the states are doing an
adequate job of the financial review.
MS. HALL went on to say that in August of 2007, the Division
will undergo its accreditation review. A team of three
financial examiners will review the Division's financial exams,
to determine whether or not the Division should maintain its
accreditation. She stressed the importance of recognizing that
the Division's financial exams are "taken to be good, and [are]
accepted by other states." Referring to Sections 1 and 2, she
explained that these deal with annual audited financial reports.
She stated that Section 1 applies to audits that are currently
required, yet are not in statute, adding that AS 21.09.200
includes a statement requirement that the Division is attempting
to codify, adding that this statement requirement is being
removed from the statement instructions. She explained that
this does not change any requirements, and insurance companies
will still be required to have annual audits done by a certified
public accountant (CPA). These audits must still report
significant deficiencies in internal controls, and misstated
financial conditions, in addition to non-compliance with capital
and surplus. She explained that HB 170 codifies these
requirements. HB 170 also allows the director of the Division
to require a report describing internal control over financial
controls. She stated that the Division needs to ensure adequate
internal controls are in place. Additionally, HB 170 requires
the insurer to have an internal audit committee. A CPA must
forward a report of misstatement of financial condition or non-
compliance with capital and surplus requirements, if the insurer
does not. Insurers are also prohibited from making false or
misleading statements to a CPA. This annual report requirement
provides an annual review of financial reports, along with the
reporting of poor internal controls. The Division feels that
the audit committee is a factor in "good corporate management."
She stated that the detailed rules will keep with the NAIC model
regulations, which will be adopted in every state.
3:10:00 PM
MS. HALL went on to discuss Section 3. She explained that this
section is an updated requirement for entities and the custodial
agreements. Current statute has a number of restrictions on
where insurance companies can keep money, and Section 3 restates
this, and specifies that only banks, trust companies, security
firms, or clearing corporations may be used. It requires that
custodial agreements be in writing, properly authorized by the
insurer, and comply with regulatory requirements. She stated
that financial examinations have shown that the custodial
agreements between an insurer and its bank may or may not meet
the Division's requirements. The bank is required to sign an
indemnity agreement, which some banks are not willing to sign.
She explained that part of the financial oversight is being sure
that when a claim is filed, there is money to pay it.
MS. HALL then referred to Sections 4,5, and 6, which deal with
surplus lines. She stated that this area of insurance is not as
highly regulated. Section 4 replaces "directive" with "order."
She said that the Division issues orders as a part of its
process, adding that "directive" is not a term typically used by
the division, and does not have a statutory definition. She
explained that the intention is to ensure that this reflects the
work done by the Division. Section 5 removes the notarization
requirement for monthly surplus lines broker reports. The
Division has found that this is not necessary, and is moving
toward electronic filings. Section 6 changes the definition of
"wet marine and transportation insurance." Ms. Hall went on to
say that Section 7 prohibits any false or misleading statements.
She explained that Sections 8 and 9 apply to the Alaska Life and
Health Insurance Guaranty Association. These sections clarify
that a "member" is an insurer who has the authority to issue a
policy, and does not need to write a policy to help pay the
administration costs of the guaranty association.
3:14:24 PM
REPRESENTATIVE NEUMAN offered his understanding that HB 170
helps to ensure that the companies writing insurance in Alaska
have the funds to pay for claims.
MS. HALL agreed, adding that the bill focuses on solvency
oversight. This section deals with the annual audited
statements. She stated that the Division does statutory
examinations every three years, for those companies that it is
the primary regulator for. These standards keep the state in
line with the rest of the country. In response to an additional
question, she said that some financial statements are public
record, and requests for this information can be made to the
Division.
3:17:05 PM
REPRESENTATIVE BUCH asked if the state has ever had an insurance
company declare insolvency.
MS. HALL replied yes. She noted domestic insolvencies in 1998
and 1988, and more recent insolvencies involving Fremont
Insurance (Fremont) and Reliance Insurance Company (Reliance),
whose primary regulators were out-of-state. In response to an
additional question, she agreed that HB 170 is intended to
protect against insolvency. In response to a question from
Representative Neuman, she clarified that the Division must
approve the financial institutions that are used for deposits.
There are also specific types of instruments that money can be
deposited in. This is addressed in regulation. The types of
assets are also monitored closely. She pointed out that bonds
are the largest class of assets kept by insurance companies.
The Division can send securities to the NAIC Securities
Evaluation Office for evaluation.
REPRESENTATIVE NEUMAN, referring to Page 4, line 21, pointed out
that "and" is changed to "or". He questioned whether the
intention with this change is to create more flexibility for
insurance companies.
MS. HALL explained that this defines a specific type of
insurance. She stated that the word "and" may imply that all
components must be included to be considered. She said that
"wet marine" is defined as "things that are transported on
water." This change clarifies that [all four components do not
need to be present].
REPRESENTATIVE NEUMAN, referring to Section 8, asked if the
Alaska Life and Health Insurance Guaranty Association is
mandatory for all insurance companies in Alaska.
MS. HALL replied that the aforementioned guaranty association is
mandatory for all life and health insurance companies. Property
and casualty insurance companies have a separate guaranty
association, which is also mandatory. She said that this is the
"backstop" for insolvent insurers.
3:21:59 PM
REPRESENTATIVE GARDNER asked for clarification regarding the
changes made by HB 170.
MS. HALL explained that the only new requirement is for all
insurance companies to have an internal audit committee. She
reiterated that the Division intends to adopt the model
regulations from the [NAIC].
3:23:07 PM
REPRESENTATIVE LEDOUX, referring to Page 5, lines 13-14,
inquired as to why the language was changed to "Each member
insurer".
MS. HALL replied that this changes who must pay the
administrative assessment. She explained that each company that
writes insurance in Alaska must pay a portion of the
administrative costs associated with the guaranty fund. If the
company does not issue a policy, it will not pay an insolvency
assessment; however, it would pay a portion of the
administrative fees, which may be up to $250.
REPRESENTATIVE LEDOUX shared her understanding that this would
be all insurers in Alaska, and would not be limited to life and
health insurance companies.
MS. HALL replied no. She clarified that this would only apply
to each member insurer of the Alaska Life and Health Insurance
Guaranty Association. She reiterated that there is a separate
guaranty association for property and casualty insurance
companies.
3:25:01 PM
MS. HALL, in response to questions from Representative Gatto
regarding the language in Section 7(d), explained that the audit
committee hires a CPA, and this section states that no member of
management can coerce or manipulate the CPA. If a member of
management were to manipulate the CPA by providing false
information, he or she would be held accountable to the
Division. She stated that the Division would not hold the CPA
accountable, although the CPA would be registered with the
Division.
3:27:22 PM
REPRESENTATIVE BUCH indicated that he met with Ms. Hall
previously regarding this bill and expressed appreciation for
her efforts to explain the bill.
REPRESENTATIVE NEUMAN inquired as to whether the number of
insurance companies in Alaska has increased or decreased, noting
that previously, legislation was passed in an attempt to create
a better environment for insurance companies in the state.
MS. HALL replied that the insurance industry has grown. In
September of 2006 a new health insurance company began selling
group insurance in Alaska. Additionally, she recently received
official notification from a property and casualty insurer that
is going to begin writing homeowners and auto insurance in
addition to the insurance it currently writes. She stated that
this is a "huge move" in the insurance industry. However, she
recently received notice of an insurance company that is leaving
the state. While this is distressing, she sees this as an
overall gain for the industry. She stated that this is a
"delicate marketplace," and the Division "walks a fine line" to
encourage companies to do business in the state. She opined
that the best consumer protection is consumer choice, and a
competitive marketplace. While she is not sure this will ever
be available to a great extent, there has been improvement.
REPRESENTATIVE GATTO referred to the insolvency of the Fremont
Insurance Company, and asked whether this type of insolvency
could occur again.
MS. HALL replied that it is possible. She then explained that
previously, a series of insolvencies occurred. The Fremont
insolvency affected Alaska a great deal; however, the Reliance
insolvency was the largest. She explained that Reliance
previously wrote a large share of workers' compensation in
Alaska, adding that Reliance is no longer actively writing
insurance, although it is still paying claims. This company has
been in a "runoff state" for three years. While the possibility
for insolvency remains, there is a greater awareness.
REPRESENTATIVE GATTO expressed concern with school districts and
how insurance carriers are chosen. He surmised that because a
school district is a state entity, it may be required to go with
the cheapest rate, which may result in a future insolvency. He
asked whether HB 170 includes a provision that would require
audits to ensure solvency, in order to advise customers. He
questioned whether this is outside of the parameters of the
Division.
MS. HALL replied that this is within the parameters of the
Division. She explained that during the aforementioned
insolvency, the Division examined what financial tools were
needed. She opined that HB 170 is a step toward this goal. In
response to rate concerns, she explained that the Division also
does rate oversight. The Division does market conduct
examinations when it receives information that suggests a
company is writing business at prices that are "less than it
takes to write a risk." She said that in each state, workers'
compensation insurance rates have the most regulation. She
stated that the Division does not want to discourage
competition, adding that the rating standards are set by
statute. Rates must not be excessive, inadequate, or unfairly
discriminatory. She said "I hope - in my lifetime - we don't
see another Fremont."
3:34:34 PM
MS. HALL, in response to a request from Representative Neuman,
explained that Fremont Insurance Company sold workers'
compensation insurance. She stated that at one point, it sold
27 percent of the Alaska workers' compensation market, which was
the largest market share. The company was taken under the
supervision of the State of California [Department of
Insurance], and declared insolvent in July 2003. While there
have been various allegations as to what caused the insolvency,
the actual reason is unknown. The insolvency was declared when
the company's reserves were evaluated. She explained that
insurance companies reserve for losses. She explained that this
is the future cost of claims. When the reserves were
reevaluated, they were placed at twice what had originally been
set. When the reserves are increased, surplus must be available
to pay for the reserves. The company then went to court to be
declared insolvent. Once a company is declared insolvent, it
goes into "receivership," which is similar to a bankruptcy. The
state's chief regulator then becomes the receiver, and the
claims are transferred to a guaranty association, which is the
safety net. She stated that when this occurred, the Alaska
guaranty association failed, as it did not have adequate ability
to raise money to pay for claims. The claims, she said, were
being paid at around $1 million per month, which equates to
around $12 million in a year. The statutory assessment
capability of the guaranty fund only allowed it to raise $4
million. She stated that this was termed a crisis, and the
legislature, the Division, and the administration worked to
prevent this situation from becoming "a true nightmare." There
were over 800 injured workers potentially unable to receive lost
wages and claims payments. Additionally, over 400 employers
with injured workers stood to take on the responsibility of the
aforementioned claims.
3:38:22 PM
REPRESENTATIVE NEUMAN asked whether this is the reason behind
the Division's desire to ensure that the insurance companies
writing claims in Alaska have financially able to cover the
claims.
MS. HALL replied that this is correct.
REPRESENTATIVE LEDOUX asked if the result of the aforementioned
insolvency would have been different if HB 170 had been in
affect.
MS. HALL replied no.
REPRESENTATIVE LEDOUX asked what changes would be necessary in
order to avoid this in the future.
MS. HALL replied that she does not feel additional financial
tools are necessary. She shared her belief that no amount of
regulation can guarantee that a business will not fail. She
opined that Alaska has an "incredibly good" financial
examination department. She stated that HB 170 contains models
that give the Division greater oversight. She explained that
this applies to the annual, CPA audited statements that
insurance companies must file. She stressed the importance of
internal control, adding that it is a matter of how the tools
are used.
REPRESENTATIVE LEDOUX asked whether the regulators in California
"misused their tools."
MS. HALL replied that she does not know. While it has been
suggested that the Division take a closer look at this, she
opined that California likely "has an excellent staff." She
pointed out that reviews are part of the accreditation process.
She surmised that there may have been issues during the
reserving process, which resulted in the lack of funds. She
said that studies are done to discover what causes an
insolvency; however, she opined that it is still too soon to be
certain of the cause.
CHAIR OLSON indicated that HB 170 would be brought up again at a
future committee hearing.
3:41:47 PM
HB 162-MORTGAGE LENDING
CHAIR OLSON announced that the final order of business would be
HOUSE BILL NO. 162, "An Act relating to mortgage lenders,
mortgage brokers, mortgage originators, state agents who collect
program administration fees, and other persons who engage in
activities relating to mortgage lending; relating to mortgage
loan activities; relating to an originator fund; relating to
fees for mortgage loan transactions; and providing for an
effective date."
3:42:01 PM
REPRESENTATIVE BOB LYNN, Alaska State Legislature, sponsor,
began by stating that he is a licensed real estate broker, and
is currently in referral status. He said that for most
individuals, a mortgage loan is the largest loan he or she will
receive. Inability to find the best loan and the best terms can
result in a "very expensive, 30-year mistake." Most home-buyers
are not educated in the inner-workings of these loans, or
federal mortgage laws. He explained that his first step in
selling a mortgage loan would be to take the homebuyer to a
knowledgeable and honest lender. He opined that having a good
lender is more important than finding a buyer the perfect house
and location.
REPRESENTATIVE LYNN stated that he sponsored HB 162 because it
is important to have qualified lenders. HB 162 has the support
of the Alaska Mortgage Bankers Association, Independent Lenders
of Alaska, and various realtors throughout the state. He
pointed out that individuals working in the Alaska mortgage
industry are not licensed, nor are they required to have any
training. Additionally, the aforementioned individuals are not
subject to periodic examination by the Division, or background
checks. He stated that HB 162 changes this. He noted that
state and federal laws concerning mortgage loan origination are
complex, and representatives from the Department of Commerce,
Community, & Economic Development (DCCED), Division of Banking &
Securities and the industry are prepared to explain the bill in
further detail. He said that HB 162 is a consumer protection
bill of great importance, and respectfully requested members'
support.
3:46:11 PM
MARK DAVIS, Director, Division of Banking & Securities ("the
Division"), Department of Commerce, Community, & Economic
Development (DCCED), began by stating that the Division is in
support of HB 162, which is pro-consumer and will create a level
regulatory environment for mortgages in Alaska. He explained
that currently, mortgages issued by a state or federally
chartered bank or other institution are regulated. However,
mortgages offered by "stand alone" mortgage companies or
subsidiaries of financial institutions are not regulated. He
pointed out that Alaska is the only state in the US that does
not license those in the mortgage industry. He theorized that
those in the mortgage industry should be following ten federal
statutes. However, since the state does not examine mortgage
companies, the level of compliance is unknown. He stated that
HB 162 would allow the Division to examine and license mortgage
brokers, lenders, and originators. Additionally, the Division
would be able to take action against prohibited practices, and
enforce compliance with federal mortgage laws. The Division has
a "predatory lending hotline" which receives many complaints
from consumers regarding mortgage practices.
MR. DAVIS went on to say that the Department of Law (DOL) can
enforce consumer protection statutes, and the Federal Bureau of
Investigation (FBI) is currently investigating mortgage fraud.
However, the Division lacks the regulatory authority to ensure
that those in the mortgage lending industry are fully qualified,
or to take action against those who are not. In addition to in-
state lenders, HB 162 would allow the Division to regulate out-
of-state lenders and brokers that are offering mortgages within
the state. He stated that out-of-state companies in particular,
need to be regulated. The goal of HB 162 is to protect Alaskans
when shopping for a home, which he agreed is one of the largest
financial commitments consumers make. He reiterated that this
would give the Division the regulatory authority to investigate,
examine, and prevent consumer complaints.
3:50:16 PM
REPRESENTATIVE GATTO, referring to the fiscal note, pointed out
the $6 examination fee, and questioned whether this is correct.
3:50:46 PM
ROGER PRINCE, Securities Examiner, Division of Banking &
Securities, Department of Commerce, Community, & Economic
Development (DCCED), clarified that the examination fee is
actually $600. In response to additional questions, he agreed
that the Division estimates the need for two examiners and one
business registration examiner, with an additional examiner
added in the third year.
REPRESENTATIVE GATTO noted that the cost for personal services
does not change, and questioned this.
MR. DAVIS explained that the Division was told to assume a
static cost, and agreed that the actual cost will be higher. He
stated that the cost of personnel can go up due to retirement
costs or wage increases.
MR. PRINCE, in response to a question from Representative Gatto,
explained that over time, the goal is for increases in the
number of licensees, examinations conducted, and mortgages
originated in-state, to offset the increased operational fees.
Therefore, the program would remain at a "zero-cost."
REPRESENTATIVE GATTO questioned why $50 thousand is needed for
travel.
MR. PRINCE replied that this includes both in-state and out-of-
state travel. This would allow staff examiners to travel to
conduct compliance examinations for out-of-state internet based
lenders that would need to be licensed, in addition to wholesale
institutional lenders.
3:55:12 PM
MR. DAVIS added that the Division currently examines premium
finance companies and payday lending companies. The Division
has found that, when attempting to determine whether a company
is complying with statutory requirements, it is more useful to
examine the out-of-state home office. Therefore, the Division
is anticipating that it will travel to these offices to ensure
compliance with the law.
REPRESENTATIVE GATTO asked whether travel expenses are added to
the cost [of the examination].
MR. DAVIS replied that this is correct. In response to a
question from Representative Neuman, he stated that the Division
was not involved in drafting HB 162. He explained that while
the Division has looked over drafts of the bill, the request for
regulations came from the industry. In response to additional
questions, he explained that currently, the Division can not
take regulatory action against misrepresentation. He surmised
that the Department of Law (DOL) may be able to respond to
consumer protection concerns, and reiterated that he is unable
to take any action, such as license revocation or other
disciplinary actions, against a person engaged in acts that
should be prohibited or acts that are prohibited under federal
statutes. He pointed out that HB 162 contains a penalty
provision for a fine of up to $10 thousand, in addition to a
provision which preserves the ability of the DOL to enforce the
Consumer Protection Act. In regard to fees, he stated that HB
162 proposes to license mortgage originators. Mortgage
originators begin the process to obtain a mortgage, through a
mortgage lender or a mortgage broker. Currently, Alaska does
not have training requirements for these individuals. He
explained that a mortgage originator working independently would
pay the licensing fee, and if working for a company, the company
may choose to cover this cost. He pointed out that this is
similar to law firms, where the firm may cover dues for the
associates. He opined that a mortgage originator working as a
contractor for a large company will most likely work this out
with the contracting company. The Division has asked those in
the industry whether this fee would deter individuals from
engaging in business. The industry consensus is that the fee is
reasonable, considering the income of mortgage originators in
the state.
REPRESENTATIVE NEUMAN asked for further explanation of the work
done by a mortgage originator.
MR. DAVIS explained that a mortgage originator meets with the
potential borrower and executes the necessary documentation to
apply for a mortgage. The mortgage originator then works with
the mortgage lender or mortgage broker to fund the mortgage.
The realtor often brings the potential borrower to the mortgage
originator. He stated that the public rarely meets with a
mortgage broker, and is likely to never meet with a mortgage
banker. He commented that mortgage originators are similar to
the loan officer at a bank. Mortgage originator is defined in
HB 162 using the terms set in federal statutes, which are well
accepted throughout the industry.
REPRESENTATIVE NEUMAN inquired as to whether a competency test
is required for mortgage originators.
MR. DAVIS reiterated that currently, there are no education
requirements for mortgage originators. However, HB 162 would
require that these individuals pass an examination prior
becoming licensed, in addition to completing continuing
education courses. An educational board would work with the
Department of Commerce, Community, & Economic Development
(DCCED) to set reasonable educational requirements. He said
that many other states have similar requirements.
REPRESENTATIVE NEUMAN asked how this would affect a homeowner
selling his or her own home.
4:04:46 PM
MR. DAVIS replied that the bill contains an exemption for this
situation, adding that HB 162 is directed at commercial mortgage
transactions for residential property. Referring to Section 2,
he explained that AS 06.60.015 contains exemptions for certain
organizations, which are driven by the federal banking laws.
There are two federal regulating entities: The Office of the
Comptroller of the Currency (OCC), and the Office of Thrift
Supervision (OTS). These institutions take the position that if
a bank is regulated by either these entities, the mortgage
department is not subject to state regulations. This position
has been upheld in court. In response to a request from
Representative Neuman, he detailed the exemptions listed in
Section 2, noting that any individual seeking an exemption under
this section would still be required to file a registration for
with the Division, in order to obtain the exemption.
4:07:22 PM
CHAIR OLSON indicated HB 162 would be held for further
consideration.
REPRESENTATIVE LEDOUX shared her understanding that the Division
would need to travel in order to conduct competency
examinations.
MR. DAVIS replied no. He explained that the Division would
travel in order to examine the company's home office to ensure
compliance with statute. He stated that the company would pay
for this via the hourly rate charged for the examiner, along
with the per diem rate and travel costs. In response to
additional questions, he explained that the Division would look
for any complaints against the company, compliance with federal
statutes, whether the company has engaged in prohibited
activities set forth by HB 162, and will examine the company's
records to ensure that all paperwork is in order. This
examination is to ensure that the company should be re-licensed,
and would be similar to those currently done of credit unions,
banks, and premium finance companies.
4:11:08 PM
JOHN CARMAN, President, Home State Mortgage; Chair, Legislative
Committee, Alaska Mortgage Bankers Association, stated that he
has been working on this legislation for seven or eight years,
in an attempt to come up with legislation that regulates the
industry while remaining as non-invasive as possible. He has
been involved in the Alaska banking industry since 1971, and has
seen many changes. He noted that similar legislation was
introduced during the previous legislative session. The
aforementioned legislation proposed a company license, and the
intent was to add an originator license to the bill. He
explained that HB 162 combines company licensing and originator
licensing. Input has been received from the Alaska Association
of Mortgage Brokers (AKAMB), the Alaska Mortgage Bankers
Association (AKMBA), and the Division. He said that the
aforementioned organizations are in agreement that this
legislation is urgent and necessary. He pointed out that all
other industry professionals are regulated. He then shared a
story involving an individual who lost her real estate license,
yet was able to work as a mortgage broker, as mortgage brokers
are not regulated. He offered his understanding that Alaska is
the only state that does not regulate mortgage brokers, pointing
out that mortgage fraud is becoming a common concern throughout
the country. He urged passage of HB 162.
4:14:29 PM
NAOMI LOUVIER, Owner, Prudential Jack White/Vista Real Estate,
began by stating the importance of HB 162. It is not uncommon
for homebuyers to be given a settlement statement that is
different from what they expected. She explained that realtors
attempt to avoid lenders that do this on a regular basis,
although it is not always possible. In response to a question
from Representative Neuman, she shared her belief that realtors
are in support of HB 162, and "will be relieved" to have
regulations in place. She agreed that this is a consumer
protection issue. She stated that in Anchorage, the public is
generally protected, with the exception of "questionable"
lending practices.
4:19:10 PM
DANIELLE FAGRE ARLOW, Senior Vice-President, State Government
Affairs, American Financial Services Association (AFSA), began
by giving a brief description of AFSA and its members. She
stated that there are concerns regarding the unintended
consequences of HB 162. She explained that originally, AFSA had
hoped to amend HB 162 to reflect the bill passed by the Senate
during the previous legislative session, which exempted large,
multi-state entities from individual employee licensing. She
stated that language has been drafted which AFSA believes meets
the objective of enhancing consumer protection, while
maintaining access to credit. This language was included in a
letter recently sent to Representative Lynn, with the hope that
it would be adopted. The AFSA hopes that the debate will
continue with the same spirit of cooperation with which it
began, and move towards eliminating potential problems HB 162
would cause, if enacted in its current form. Ms. Fagre then
stated that while AFSA has a number of concerns with HB 162, she
would be focusing on the requirement for licensing individual
employees and excusive agents of mortgage lenders. This
language, she said, would significantly increase the burden on
lenders, regulators, and consumers. She explained that
licensing individual employees of large, multi-state mortgage
lenders can impose substantial costs and administrative burdens
for lenders and regulators. The lenders pass these costs onto
the borrowers, while the negatively affecting the regulator's
compliance activities. She stated that sensible state licensing
of the lending companies makes it unnecessary to license
individual employees, such as collections personnel, call center
employees, and loan processors. This is the solution proposed
by AFSA, and takes into account the fact that large mortgage
lenders operating in multiple states have policies in place for
pre-employment screening, background checks, and extensive in-
house training programs, among others. The AFSA does not oppose
licensing for loan originators working on behalf of independent
brokers, and is aware that Alaska is the only state that does
not license independent mortgage brokers. The AFSA requests
substitute language that would establish licensing requirements
for mortgage companies, but not for the individual employees.
The AFSA believes that this is the best way to protect consumers
in Alaska from far-reaching and damaging unintended
consequences.
CHAIR OLSON shared his understanding that amendments would be
introduced to address these concerns.
4:24:27 PM
GREG HARSHA, Mortgage Broker, The Mortgage Network, Inc., stated
that he has several concerns with HB 162. Referring to Page 2,
lines 9-16, stated that he does not understand the intent behind
this language.
The committee took an at-ease from 4:26 PM to 4:27 PM.
4:26:48 PM
MR. DAVIS explained that the intent of the aforementioned
language is that both mortgage brokers and mortgage originators
are licensed. However, if an individual performs both of these
functions, he or she would not need to obtain two licenses.
Instead, he or she would simply need to inform the Division that
both activities would be performed. He stated that the language
in Section 2(b)(2) is subject to revision, and the DOL is
working on amending this language.
MR. HARSHA expressed concern with the requirements for a
mortgage license versus an originator license, and pointed out
that a mortgage license does not require fingerprints, while an
originator license does. He stated that an individual that
performs both functions should be subject to all requirements.
He opined that mortgage licenses should be given to individuals,
and companies should not be licensed. He suggested that
revision of this section be considered. He then pointed out
that the mortgage licensee is required to provide written
consent to an investigation, while the mortgage originator
licensee does not. He then expressed concern with the fees and
expenses, as they relate to small businesses versus banks. In
regard to the investigation fee, he suggested that this be
capped at $250. In regard to the competency test, he questioned
how the testing score was chosen, as it is his understanding
that the test has yet to be created. He then pointed out that
there is no delineation between a mortgage broker license versus
a mortgage lender license, and expressed concern with this.
CHAIR OLSON requested that the aforementioned concerns be
submitted in writing to his office.
4:33:55 PM
JOHN COURSON, President & Chief Executive Officer (CEO), Central
Pacific Mortgage, said that he is a former chair of the Mortgage
Bankers Association (MBA). The MBA is the national association
that represents the real estate finance industry. He stated
that the MBA supports the state level corporate licensing that
is proposed by HB 162, adding that it is important for mortgage
banking companies and other mortgage lending entities to be
approved and monitored by the states in which business is done.
He said that state regulation is appropriate for financial
statements, review of operations, recertification of the company
and its principles, and company response to consumer complaints.
Additionally, it is important to have the ability to enforce
federal statutes. However, the MBA does not support the bill as
it relates to licensing mortgage originators. He pointed out
that there are many out-of-state companies that are originating
loans in Alaska, and expressed concern that the provisions in
the bill may discourage new business from coming into the state.
Individuals currently working in the state might make the
decision to exit the state, based upon these provisions.
MR. COURSON went on to say that the individual licensing
requirement included in the bill ignores the accountability of
mortgage banking companies. He explained that these companies
have certain regulatory and capital standards that must be met,
in addition to the responsibility to hire, screen, train, and
manage loan officers. While the MBA supports the AFSA in its
proposed amendment, the MBA feels that this does not fully
address the issue. He stressed the importance of recognizing
that there is a distinct difference between mortgage brokers and
mortgage bankers. He explained that mortgage bankers originate,
underwrite, and lend their own funds, and are subject to capital
requirements from investors and regulators throughout different
regions of the country. Mortgage bankers are corporately
responsible for loans that are originated by employees.
Mortgage brokers, he said, are commissioned sales people, and
are typically independent contractors working with a number of
different mortgage bankers. Mortgage brokers work with the
borrower to find a lender for the mortgage loan.
MR. COURSON stated that the MBA hopes the legislature would take
these differences into consideration, and consider including
exemptions for mortgage bankers that are approved by the Federal
Housing Association (FHA) as direct endorsement lenders, those
approved by Fannie Mae or Freddie Mac, and those maintaining a
minimum net worth of $5 million, or total assets of $25 million.
He explained that the FHA endorsement, as well as Fannie Mae and
Freddie Mac, require a minimum net-worth of $1 million, and are
subject to government auditing standards, are part of the
consolidated audit guide, and internal control practices are
audited on an annual basis. He stated that mortgage bankers
that meet one of the aforementioned criteria are clearly
distinguished from mortgage brokers, adding that the MBA feels
mortgage brokers should be licensed. Amending language has been
sent to the sponsor's office.
4:41:37 PM
MR. COURSON, in response to a question from Representative
Neuman, stated that the MBA supports the licensing of mortgage
lenders. However the bill has two components. The MBA is in
support of licensing mortgage lending entities, but feels
careful consideration should be given to defining which
individual mortgage loan originators should be required to have
an individual mortgage loan originator license.
4:42:38 PM
JOHN MARTIN, Mortgage Broker, stated that he is on the
Legislative Committee for the Alaska Association of Mortgage
Brokers. He agreed that licensing of mortgage brokers is
needed, and expressed concern with the exemptions suggested by
the previous speaker. He opined that the endorsements are
important for lenders to have, but questioned whether this is
helpful if a company "goes belly up." Mr. Martin then
paraphrased from the following written remarks [original
punctuation provided]:
As some of you may remember, there was bill introduced
last year that would have licensed mortgage companies
only. That bill died in the House.
So in the fall of 2006, the Alaska Association of
Mortgage Brokers, the Alaska Mortgage Bankers
Association, and the Division of Banking and
Securities joined forces and decided to get together
and work on a bill that would license mortgage
companies and mortgage originators. The result of
many hours of hard work was the introduction of HB-
162. Thank you, Representative Lynn, for sponsoring
this important bill. We are also working with the
Department of Law on some technical issues on some of
the verbage.
For your information, our state is the last to license
mortgage operations in the country.
One of the most important components of the bill is
the licensing of mortgage originators.
They should be subject to a background check, testing
for competency, and subject to continuing education
requirements. An Originator must also work for a
licensed entity in order to perform their duties.
As far as a client is concerned, the mortgage conduit
looks all the same to them. It makes no difference to
them if they are with a mortgage lender, bank or
broker. They want a loan for their new home. This is
arranged by talking to an originator, usually in
person, sometimes by phone, to get the terms they
want. The mortgage loan business is a "people"
business. The best way to control it is to license
the "people" (originators) involved.
By licensing the industry, we are able to protect the
public from unscrupulous operators. If the originator
is subject to licensure and does not perform legally,
his/her license can be taken away. That affects their
ability to earn a living. That is effective control.
Along with that, the mortgage company they work for
could also lose their license if they do not properly
monitor their originators.
Competency testing ensures that all mortgage
originators have the knowledge to perform their duties
and not injure the borrower. The testing would
establish minimum guidelines for knowledge that all
originators would be required to master in order to
become licensed. Originators should have a basic
knowledge of RESPA*, TILA*, FHA*, Regulation Z*,
title insurance, escrow, and credit issues.
Continuing education required for license renewal
ensures that the public will be dealing with
originators who obtain and maintain current
information regarding the mortgage loan process.
Background checks would protect the residents in the
State of Alaska from bad apples moving to our state
and going into the business.
Just last year it was disclosed that a mortgage
originator for a very large national mortgage company
was indicted on federal charges regarding his business
practices. That person had previously had their
license revoked from the state of Wisconsin in March
of 2002. If our licensing policy been in effect at
the time this person came to Alaska, this person would
never had the opportunity to originate loans in
Alaska, and the public would have been protected.
The residents of this state deserve a bill that will
to protect them from unscrupulous companies and
originators. By having a bill that effectively
addresses those issues, the residents of our state for
the first time will have the protections they deserve
and avenues to pursue if damaged.
4:49:06 PM
KEVIN BREELAND, Partner & Senior Loan Officer, Residential
Mortgage, LLC; President, Alaska Mortgage Bankers Association
(AMBA), paraphrased from the following written remarks:
I thank the committee for holding this hearing and
inviting the Alaska Mortgage Bankers Association to
share its views with this committee on HB 162. My name
is Kevin Breeland and I am Partner and Sr. Loan
Officer with Residential Mortgage, LLC located in
Anchorage, Alaska, President of Alaska Mortgage
Bankers Association (AMBA), and current General
Members Representative of the Real Estate Service
Providers Council, Inc. (RESPRO) representing the 270+
general members nationwide on the RESPRO Board of
Directors. Formerly I was President of Pacific Alaska
Mortgage in Anchorage, Alaska till our merger with
Residential Mortgage in late 2005. I am here today
because AMBA believes the State House must act on this
important piece of legislation know as HB 162.
I have been in the mortgage business for 27 years, 21
years in Anchorage, Alaska. My entire career in Alaska
I have never worked for a company that had to be
licensed. I have seen our industry grow since the
repressed times of the mid 80's and early 90's. During
this time our industry had available for home
mortgages Alaska Housing Finance Corporation, FHA, VA,
and the most common conventional mortgage loans were
sold to Fannie Mae and Freddie Mac however they would
not purchase 95% Loan to Value Loans. During this time
Alaska suffered from an "investor red lining' however,
as with most things in life, time cures all. In the
last ten years we have seen markets open and home loan
opportunities for Alaskan grow uncontrollably. While
Alaskan have benefited from this growth, they have
also suffered as well.
In recent weeks you have heard about the woes of the
Subprime Market. Do not be fooled in believing the
problems of the subprime markets do not exist in
Alaska. They do and here is one example. New Century,
and their woes are widely published, was trading on
the New York Stock Exchange about eight weeks age at
over $40.00 a share. Today that number is under $4.00.
They continue to make headlines, are under
investigation, and continue to do everything they
possibly can to avoid bankruptcy. [Their net worth]
has dwindled to almost nothing. New Century operated
in Alaska and they were very aggressive with their
products and pricing. Most companies speaking today
sold loans to New Century. However, their net worth
will do nothing for any of the customers that might
ultimately be affected by their demise. The same is
true for Freemont Mortgage, Option One (owned by H&R
Block), and countless other companies current with
their own struggles. Alaska Mortgage Bankers
Association does not support the position of the
National Mortgage Bankers Association by allowing net
worth exemptions. We [feel] this does not provide
adequate consumer protection.
Licensing would not have prevented the fall of New
Century or any other company for the matter, but what
it would do is allow the citizens of Alaska ... a
resource of enforcement they currently do not have
available. It affords the State of Alaska a level of
enforcement the State does not have available as well.
The licensing and bonding requirements are not
difficult, expensive, or overaggressive. Licensing is
needed so everyone that wants to operate in the State
of Alaska operates by the same rules. Although in most
cases Mortgage Bankers have FHA, VA, Fannie Mae, and
Freddie Mac approvals these annual audit requirements
do not address enforcement actions for consumer
protection.
My comments today will be posted on AMBA website
www.akmba.org. I will email my comments today to the
members of this committee as well. Again, I thank the
committee for holding this hearing and encourage the
committee to move the bill forward and passage this
session.
4:53:31 PM
JOE BRAMMER, Mortgage Loan Originator; Chair, Legislative
Committee, Alaska Association of Mortgage Brokers (AKAMB),
paraphrased from the following written remarks [original
punctuation provided]:
Thank you, Mr. Chairman and the members of the
committee for affording me the opportunity to present
my public testimony today on House Bill 162.
My name is Joe Brammer and I am a Mortgage Loan
Originator. I also chair the Legislative Committee on
behalf of the Alaska Association of Mortgage Brokers.
I have been working with consumers in Alaska since
1992 by helping them obtain financing for the home of
their dreams. I originated my very first mortgage
loan in 1980.
My purpose before you today is three fold. First I
would like to provide you with a brief amount of
recent history surrounding the development of this
legislation. Secondly, I would like to address the
issue of competency testing, and finally I would like
to share my views on continuing education
requirements.
Nobody likes additional regulations being imposed that
they must abide by.
This is especially true of the mortgage industry as we
currently have no state regulations. As one can pick
up the Anchorage Daily News and easily ascertain, this
lack of regulation has contributed to unscrupulous
operators preying on the consumers of Alaska. Nothing
can be done currently to stop these predators.
Enter House Bill 162.
This piece of consumer protection legislation was
drafter in conjunction with industry representatives
from the Alaska Association of Mortgage Brokers and
the Alaska Mortgage Bankers Association, along with
various state departments.
This consumer protection legislation provides
safeguards for the public and enforceable penalties
for violators.
It requires the licensing of mortgage companies and
more importantly Mortgage Loan Originators.
The way it is right now is that you can be peddling
used cars yesterday and be a mortgage loan originator
today. No training. No education. No
accountability. No competency requirements. I say No
Way!
But it's true. These mortgage loan originators are
the individuals who meet with the consumers, your
constituents, and advise them on the single largest
purchase they will ever make…their family's home.
In addition, they negotiate contracts that commit the
consumer to typically their families' largest monthly
expense…their mortgage payment.
Before a loan originator can be eligible for licensing
under HB 162, they will be required to pass a
competency test as you will see on page 5, line 7 of
this bill under 06.60.040. The passing of a
competency test prior to dealing with the public is a
critical component of protecting the public.
In addition, the Loan Originator will be required to
attend and complete continuing education requirements
as outlines on page 15, line 12. This is a vital
ingredient in this consumer protection legislation as
our industry is under constant change.
If we look at other professions such as insurance
agents, or those individuals offering securities, real
estate brokers or licensees, we find that state
regulations exist for pre-license testing and the
completion of continuing education prior to license
renewal. Mortgage Professionals are no different.
In closing, HB 162 is a consumer protection bill,
designed to level the playing field in the industry,
protect consumers from unscrupulous and predatory
lenders, and provides enforcement mechanisms and
penalties for violators. This bill is absolutely a
step in the right direction. I ask your support for
HB 162.
CHAIR OLSON indicated that HB 162 would not be moved from
committee at this time.
4:57:42 PM
ADJOURNMENT
There being no further business before the committee, the House
Labor and Commerce Standing Committee meeting was adjourned at
4:51 PM.
| Document Name | Date/Time | Subjects |
|---|