CS FOR HOUSE BILL NO. 162(L&C) "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; making certain violations unfair trade practices; relating to persons who are licensed under the Alaska Small Loans Act; and providing for an effective date." This was the third hearing for this bill in the Senate Finance Committee. Co-Chair Stedman acknowledged the significant amount of testimony this bill has generated. The Committee has worked with the bill's sponsor Representative Bob Lynn, and the Division of Banking and Securities in the Department of Commerce, Community and Economic Development as well as Senator Elton's office to develop a new committee substitute. The committee substitute primarily corrects drafting errors as opposed to making substantive changes. Senator Huggins moved to adopt Finance committee substitute Version 25-LS0070\T, Bannister, dated May 11, 2007, as the working document. There being no objection, the Version "T" committee substitute was ADOPTED as the working document. 10:21:14 AM JESSE KIEHL, Staff to Senator Kim Elton, advised that Senator Elton's office had worked with the Division of Banking and Securities in the Department of Commerce, Community and Economic Development to make technical and stylist revisions to the bill. This would include such things as removing extraneous, duplicative provisions and provisions not required under current law as well as conforming language in the bill to the Legislative drafting manual. Mr. Kiehl affirmed that no substantive policy changes were made in the Version "T" committee substitute. [NOTE: Amendment #1 was not offered.] Amendment #2: This amendment makes the following additions and deletions to the bill. The phrase "and licensee under AS06.60; in this paragraph, 'licensee under AS 06.60' has the meaning given to 'licensee' in AS 06.60.990" in Section 1, AS 06.01.050(3) on page 1 line 13 through page 2 line 2 is deleted and replaced with the following language. "a licensee under AS 06.60, a small mortgage lender under AS 06.60, and an originator under AS 06.60 who is employed by or works under exclusive contract for a small mortgage lender; in this paragraph, (A) "licensee under AS 06.60" has the meaning given to "licensee" in AS 06.60.990; (B) "originator under AS 06.60" has the meaning given to "originator" in AS 06.60.990; (C) "small mortgage lender under AS 06.60" has the meaning given to "small mortgage lender" in AS 06.60.990;" Language on page 2 line 10 of subsection (b) of Section 06.60.010. License required. in Article 1. Licensing., added to Section 2 by the addition of a new chapter, Chapter 60. Mortgage Lending Regulation Act., is revised to read as follows. (b) Except as provided by AS 06.60.017, a person may not operate as an originator in this state unless the person is a natural person who is A new section is also added to Article 1 of Section 2, as amended by the addition a Chapter 60, following line 30 on page 3, as follows. "Sec. 06.60.017. Small mortgage lenders and originators. (a) Notwithstanding AS 06.60.010, the department may register (1) a person to operate as a small mortgage lender; (2) a natural person to operate as an originator for a small mortgage lender if the person is an employee of, or working under exclusive contract for, the small mortgage lender. (b) To qualify for registration as a small mortgage lender, a person shall (1) submit an application on a form established by the department; (2) pay a fee of $150; (3) certify that all money used in the operation of the person's business as a small mortgage lender belongs to the person and is not borrowed or received from another person; and (4) be approved by the department under (d) of this section. (c) To qualify for registration as an originator under this section, a person shall (1) submit an application on a form established by the department; (2) pay a fee of $75; (3) be approved by the department under (d) of this section. (d) Before approving an application of a person under this section, the department shall determine that (1) if the person is applying for registration as a small mortgage lender, the financial responsibility, experience, character, and general fitness of the person, and of the person's directors, officers, members, owners, and other principals, and the organization and operation of the applicant indicate that the business will be operated efficiently and fairly, in the public interest, and under the law; and (2) the person has not (A) been enjoined by a court of competent jurisdiction from engaging in an aspect of the business of providing financial services to the public; and (B) within the previous seven years, (i) been prohibited by a federal or state regulatory agency from engaging in, participating in, or controlling a finance- related activity that involves providing financial services to the public; (ii) been convicted, including a conviction based on a guilty plea or a plea of nolo contendere, of a felony or a misdemeanor involving fraud, misrepresentation, or dishonesty; (iii) committed an act, made an omission, or engaged in a practice that constitutes a breach of a fiduciary duty; (iv) made a false material statement on an application submitted under this chapter; or (v) violated a provision of this chapter, a regulation adopted under this chapter, or an order of the department under this chapter. (e) A registration issued under this chapter remains in effect for two years after the registration is issued. (f) A small mortgage lender may renew a registration by submitting to the department 30 days before the expiration of the registration (1) a renewal application in the form and manner established by the department; (2) a biennial registration fee of $150; and (3) a report identifying any changes in the information provided under (b) of this section. (g) An originator may renew a registration as an originator by submitting to the department 30 days before the expiration of the licensee's registration (1) a renewal application in the form and manner established by the department; (2) a biennial registration fee of $75; and (3) a report identifying any changes in the information provided under (c) of this section. (h) An application under this section is considered granted unless, within 30 days after the department determines it has received a complete application, the department notifies the applicant that the department has denied the application because of the applicant's noncompliance with this section. (i) The department may adopt regulations to implement this section (j) In this section, (1) "registration" means registration under this section; (2) "small mortgage lender" means a person who is registered under this section. Changes made to Article 4. Discipline and Investigation., added to Section 2 by the addition of Chapter 60, are as follows. The language "or a registration under AS 06.60.017" is inserted following "license" in subsection (a) of Section 06.60.200. Disciplinary action., page 16 line 22 and "or small mortgage lender" is inserted following "licensee" on page 16, line 23. The phrase "or small mortgage lender" is inserted following "licensee" in Section 06.60.200 subsection (a)(2) on page 17, line 4 and in subsection (a)(2)(C) on page 17, line 8. The language "or a registration under AS 06.60.017" is inserted following "license" in Section 06.60.200 subsection (a)(2)(E) of on page 17 line 10. Furthermore, the words "or the registration under AS 06.60.017" are added following "license" in Section 06.60.200 subsection (a)(2)(F), page 17 line 13. Also on lines 14 and 15 of subsection (F), the phrase "is not fit to engage in the activities for which that licensee was licensed" is deleted and replaced with "or small mortgage lender is not fit to engage in the activities for which the licensee was licenses or small mortgage lender was registered". In addition, the phrase "or the small mortgage lender's business" is inserted following "business" in Section 06.60.200 subsection (a)(2)(G) on page 17, lines 18 and 19. The phrase "or the registration under AS 06.60.017" is inserted following "license" in Section 06.60.200, subsection (a)(3) page 17, line 22. The language ", or the registration of a small mortgage lender," is inserted following "licensee" on page 17, line 24 of Section 06.60.200, subsection (b). Also in subsection (b), the language ". A person whose license" is deleted and replaced with "or registered under AS 06.60.017. A person whose license or registration under AS 06.60.017" on page 17, line 27. Furthermore, the words "or another registration under AS 06.60.017" are inserted following "license" in subsection (b) on page 17, line 28. The words "or a registration of a small mortgage lender" are inserted following "license" in Section 06.60.230. Divestment. of Article 4, page 18 line 11. Also in Section 06.60.230, the phrase "or the small mortgage lender" is inserted following "licensee" on page 18, line 12 and the words "or small mortgage lender" are inserted following "licensee" on page 18, line 13. The words "of revoked license" are deleted from the title of Section 06.60.240. Reinstatement of revoked license" on page 18 line 15 of Article 4. The revised heading would therefore read Section 06.60.240. Reinstatement. Also in Section 06.60.240, the words "if the licensee" on page 18, line 16 are deleted and the words "or registration under AS 06.60.017 if the licensee or small mortgage lender" are inserted. On page 18 line 18 of that same section the words ", the licensee" are deleted and replaced with "or registration under AS 06.60.017, the licensee or small mortgage lender". The words "or a small mortgage lender" are inserted following "chapter" in subsection (a) of Section 06.60.250. Investigation and examination. of Article 4, page 18, line 22. That same language is inserted in that same subsection following "licensee" on page 18, line 27. Furthermore, the words "or small mortgage" are inserted following "licensee" in Section 06.60.250., subsection (b)(1) on page 18, line 31 and in subsection (b)(2) on page 19, line 1. A new paragraph is added following language on page 17, line 3 of Article 4 as follows. "(2) the small mortgage lender has violated a provision of this chapter applicable to the small mortgage lender;" Changes to Article 5. Business Duties and Restrictions., added to Section 2 by the addition of Chapter 60, are as follow. The phrase ", including a small mortgage lender," is inserted following "person" on page 20, line 9 in Section 06.60.320. False, misleading, or deceptive advertising prohibited. Also added to Section 06.60.320 is the phrase ", including a small mortgage lender," following "person" on page 20, line 13. Added to Section 06.60.340. Prohibited activities. of Article 5 on page 20, line 26 following the word "chapter," is the language "a person who is a small mortgage lender,". In addition, the word "registration," is inserted following "license," on page 22, line 10, of Section 06.60.340 subsection (10). The phrase "or small mortgage lender" is inserted following "licensee," on page 24, line 1 in subsection (a) of Section 06.60.370. Criminal liability of licensee. Also, in subsection (b) of Section 06.60.370, the words ", including a small mortgage lender," are inserted following "person" on page 24, line 5. Furthermore, in subsection (c) of Section 06.60.370, the words ", person who is a small mortgage lender," are inserted following "licensee" on page 24, line 7. In subsection (d) of Section 06.60.370, the words "or a small mortgage lender" are inserted following "licensee" on page 24, line 11. Finally, in subsection (e) of Section 06.60.370, the words " or without being registered under AS 06.60.017," are inserted following "license" on page 24, line 14. Changes made to Article 6. Enforcement., added to Section 2 by the addition of Chapter 60, are as follows. The words ", including a small mortgage lender," are inserted following "person" in Section 06.60.400. Cease and desist orders. on page 24, line 21. In subsection (a) of Section 06.60.410. Censure, suspension, or bar. of Article 6, the phrase "suspend the registration of a small mortgage lender for a period not to exceed 12 months," is inserted following "months," on page 24, line 25. In addition, the words "or a small mortgage lender" are inserted following "licensee" on page 24, line 26. The words ", to the small mortgage lender," are inserted following "licensee" in subsection (a)(3) of Section 06.60.410 on page 24, line 30 In subsection (b) of Section 06.60.410, the phrase "or registration as a small mortgage lender" is inserted following "license" on page 25, line 3. Furthermore, in subsection (c) of Section 06.60.410, the words "or a small mortgage lender" are added following "licensee" on page 25, line 6. Also in subsection (c), the words "licensee is conducting the licensee's business" are deleted and replaced with "licensee or small mortgage lender is conducting the licensee's or small mortgage lender's business", on page 25 line 7. Finally in subsection (c) the words "or a small mortgage lender" are inserted following "licensee" on page 25, line 9. Language in subsection (a) of Section 06.60.420. Civil penalty for violations. of Article 6 is also changed. The words ", including a small mortgage lender," is added following "person" on page 25, line 10. Language in subsection (a) of Section 06.60.430. Additional enforcement provisions, actions, and rights. of Article 6 is also changed. The words "or a small mortgage lender" are inserted following "licensee" on page 25, line 17. Also in subsection (c) of Section 06.60.430, the words ", a small mortgage lender," are inserted following "licensee" on page 25, line 21. In addition, "or small mortgage lender" is inserted following "licensee" on page 25, line 22. A new section is inserted into Article 6 following line 30, page 25 as follows. "Sec. 06.60.440. Definition. In AS 06.60.400 - 06.60.440, "small mortgage lender" includes a natural person who is an employee of, or working under exclusive contract for, a small mortgage lender." Changes made to Article 10. Miscellaneous Provisions., added to Section 2 by the addition of Chapter 60 are as follows. The phrase ", including a small mortgage lender," is inserted following the first occurrence of "person" in Section 06.60.890. Application to Internet activities. on page 32, line 23. In addition, the words ", including a small mortgage lender to the extent this chapter applies to a small mortgage lender," are added following "person" in Section 06.60.905. Untrue, misleading, or false statements. on page 33 line 3. Finally, the last change made by the amendment is to Article 11. General Provisions., added to Section 2 by Chapter 60, is the insertion of the phrase "(26) "small mortgage lender" means a person registered under AS 06.60.017" following "purposes" following line 7 on page 37. Senator Huggins moved Amendment #2. Co-Chair Stedman objected for discussion. 10:22:39 AM MARK DAVIS, Director, Division of Banking & Securities, Department of Commerce, Community and Economic Development explained that this amendment would, in essence, establish an exemption for persons who make six or less mortgage loans a year. "This is essentially a private banking exemption." Mr. Davis clarified however, that the person would still be subject to the examination and enforcement provisions specified in the bill. This is important because activities in the private banking category are currently unregulated. Mr. Davis considered the exemption provided by the amendment to be "a workable solution" in regards to these individuals. While this limited exemption would allow these persons to continue their commercial and residential lending activities, it would now require them to meet both federal and State regulations, be subject to examinations, and to be held liable for civil penalties if they violate the Act. This would prevent predatory lending activities from occurring. 10:24:17 AM Senator Thomas asked the definition of "person" in this case. Mr. Davis clarified that the reference to "person" would apply to "either a legal entity or a natural person". Senator Thomas understood therefore that this exemption could apply to an entity other than a person. Mr. Davis affirmed. For instance, it could apply to a limited liability company provided certain terms were met. The entity being exempted must be putting its "own money at risk", not money that had been borrowed. This is a very important element in the amendment. 10:25:06 AM Senator Thomas understood that the maximum number of transactions that could occur would be six. Mr. Davis responded that the requirement of "six or less" was deemed appropriate. Co-Chair Stedman asked whether the Department was in support of the amendment. Mr. Davis responded in the affirmative. 10:25:25 AM Senator Olson asked whether anyone from the industry was available to address the amendment as the nine page amendment appeared to be a complicated one. 10:26:04 AM Co-Chair Stedman asked whether anyone from the industry wished to testify to the amendment. No one came forward. Senator Olson considered that to indicate there was no industry concern to the amendment. Co-Chair Stedman removed his objection. Without further objection, Amendment #2 was ADOPTED. 10:27:27 AM Amendment #3: The amendment deletes the entirety of language in subsection (8)(B) of Section 06.60.340. Prohibited activities. under Article 5. Business Duties and Restrictions, on page 21, line 30 through page 22, line 1, added to Section 2 of the bill by Chapter 60. Mortgage Lending Regulation Act. The language being deleted reads as follows. (B) the person funds the loan at the rate, terms, and costs state in the good faith estimate provided to the borrower at the time the prequalification letter was issued or the loan commitment was made; The amendment also allows for technical changes in subsection (8) resulting from the removal of subsection (B). Senator Elton moved Amendment #3. Co-Chair Stedman objected for discussion. AT EASE: 10:27:51 AM / 10:29:09 AM Mr. Davis explained that this amendment would remove language that allowed a person to provide a "cure" for a falsehood they made in a commitment letter. The Division supported the amendment. Co-Chair Stedman removed his objection. There being no further objection, Amendment #3 was ADOPTED. 10:29:54 AM CHRIS SKINNER, Owner, Kelstar Alaska Mortgage Company and President, Alaska Association of Mortgage Brokers, testified via teleconference from Mat-Su and informed the Committee that she had provided written testimony [copy not on file] in support of the bill provided it did not contain any language recommended by the American Financial Services Association (AFSA). 10:31:01 AM Senator Thomas asked what was referred to under Alaska Statute (AS) 06.20, as referenced in the definition of a "covered person" on page 24 line 16 of the bill. Mr. Davis stated that AS 06.20 referred to the State's Small Loan Act. Senator Thomas acknowledged. 10:32:05 AM Co-Chair Hoffman moved to report Senate Finance committee substitute for HB 162, Version 25-LS0070\T from Committee with individual recommendations and accompanying fiscal notes. [NOTE: The motion did not include a reference to the two amendments adopted by the Committee; however, that was the Committee intent.] There being no objection, SCS CS HB 162(FIN) was REPORTED from Committee with three previous fiscal notes: zero fiscal note #1 from the Department of Law, indeterminate fiscal note #2 from the Department of Administration, and $377,500 fiscal note #3 from the Department of Commerce, Community and Economic Development. AT EASE 10:32:37 AM / 10:34:40 AM