Legislature(2005 - 2006)BELTZ 211
03/30/2006 01:30 PM Senate LABOR & COMMERCE
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* first hearing in first committee of referral
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SB 272-MORTGAGE LENDING CHAIR CON BUNDE announced SB 272 to be up for consideration. SENATOR RALPH SEEKINS moved to adopt CSSB 272, version C, as the working document. There were no objections and it was so ordered. AMY SEITZ, staff to Senator Wagoner, sponsor of SB 272, reviewed changes in the CSSB 272, version C, at length. She said that page 1 had a new Section 1 that added mortgage lenders and mortgage brokers into the definition of financial institution and that licensing requirement language was added on page 2 clarifying that this covered persons doing business from out of state. Section 06.60.020. Exemptions, exempts a person from getting a license for six or fewer loans every 12 months, although he is not exempt from the business duties and restrictions under this chapter. Language was moved from subsection 3 into subsection 2 that subjects a person to general supervision, regulations and examination. References to audit were deleted in both subsections. The word "kickback" on page 3 in subsection 7 was deleted. Subsections 10 and 11 under exemptions were deleted, but their ideas were put into new Section 06.60.025 that deals with employees and independent contractors and clarifies that even though they are not required to get their own separate licenses, they are still required to follow the rules under this chapter. The licensee would be responsible for any breaking of the rules. MS. SEITZ said on page 4 new language was inserted in Section 06.60.030 (6) that clarifies what other information the department may be requiring for the application and in Section 06.60.040. Investigation: "license" was changed to "application fee". On page 5, Section 06.60.050, language was changed to say that persons applying for a dual license didn't have to pay a dual fee. Section 06.60.060. Bonding: language was changed in subsection (b) to say that either the department or a person could collect fees. Section 06.60.070 (a) language clarified that a complete application, the required bond, any fees or assessments had to be turned into the department before a license was granted or denied. "Disapproved" was changed to "deny an applicant to license" in subsection (b) on page 6 and several places throughout the bill. MS. SEITZ continued saying that "approved" was changed to "granting" in Section 06.60.080 and that subsection (1) now included investigative costs so the applicant would have to pay all the required fees and the investigative costs. Subsection (2) added "or other principals" to the list of what the financial responsibility would be. Subsection (3) changed language from "disapprove" to "deny". Also on page 6, in Section 06.60.090 "disapprove" was changed to "denial". On page 7, she said the language was changed in Section 06.60.110 on how long the license would be in effect. 2:41:10 PM CHAIR BUNDE interrupted to ask if everyone had received the CS. MS. SEITZ replied that she had sent a copy to everyone she had a fax number for. She continued saying that language was clarified saying the department could not accept a transfer without the provisions in subsection (b) of Section 06.60.110. Section 06.60.210 changed an "application fee" to an "annual license fee" because the license is being discussed, not the application. Section 06.60.240 conformed with previous language to include "control of licensee" in the title. The change has to be written notice and 30 days instead of 10 days. This section also has a new subsection (b). She said that Section 06.60.250. Records of licensee: had significant changes and added subsections (b) through (e). Section 06.60.260 (2) was rewritten to read more smoothly with the reference to the statute at the beginning instead of the end. Section 06.60.270. Disqualified persons added a member and a sole proprietor to the list of people who this paragraph deals with. In subsection (c) language was changed from "an officer, director, or other person" to "a person". Under (1) - what a disqualified person means - was changed to just reference "if a person is convicted of" because the Department of Law felt that would cover a better variety of people than previous language. It also added a new subsection, (c). MS. SEITZ continued her review saying on page 10, Section 06.60.280 on minimum net worth had inadvertently been left in and that was deleted completely. 2:45:05 PM at ease 2:45:47 PM CHAIR BUNDE announced that he needed to go to another meeting and he would turned the gavel to Vice Chair Seekins who would continue going through the new CS, but because of the new information, the bill would not move today. MS. SEITZ continued her explanation of the CS saying on page 12, Section 06.60.340. Revocation and suspension of a license: had clarifying language in the beginning paragraph (A) and (C). It now reads "Investigation and examination." instead of "Examination of licensee." Subsection (a) also had some clarifying language, although the content wasn't changed. Going to page 13, Ms. Seitz said, subsection (b) was added to Section 06.60.350, the false information section. On page 14, Subsection (6) was added under compliance with federal requirements in Section 06.60.410 that states "any other federal law or regulation" to cover everyone. On page 17, Section 06.60.500. Cease and desist orders: was shortened to one sentence. The old Section 06.60.510 was deleted and renumbered. Section 06.60.520. Responsibility of licensee for violations: and Section 06.60.540. Civil penalty for violations: were new. On the same page under "additional enforcement provisions, actions, and rights," subsection (c) was added. Section 06.60.600, Authorization of program administration fee: was new and dealt with which applications would apply to the $10-dollar application fee; the old Section 06.60.600 became Section 06.60.610. Section 06.60.700. Application to Internet activities: clarifies that this chapter also applies to Internet businesses. On page 22, new Section 4 added a new subsection to AS 45.50.481. She concluded saying those were all the changes. 2:51:16 PM SENATOR SEEKINS said he had a question about page 19 on Section 06.60.610 that said the department can contract with an agent to collect a fee, but it appeared to him (b) said if the agent collects the fee and doesn't turn them in, the effect is the same as if they hadn't been collected. 2:52:23 PM MARK DAVIS, Division of Banking and Securities, Department of Commerce, Community & Economic Development (DCCED), explained that the state didn't want to be liable if an agent didn't turn in the fees and the sovereign immunity of the state could be used in this instance. SENATOR SEEKINS said he thought it violated the age-old principal of "I am responsible for my agent." He said he would feel more comfortable having the state collect the fees, itself. MR. DAVIS agreed with his concern in a regular business context, but explained that this is the same process used by the Alaska Department of Fish and Game (ADF&G) that collects fees by using agents. SENATOR SEEKINS remarked that maybe they would have to go back and fix that, too. MR. DAVIS said if he had a complaint that someone was not collecting fees, the bill is worded so that the department would investigate that complaint and then it would move to cease and desist on the license immediately. SENATOR SEEKINS asked if he had any other comments. MR. DAVIS replied first by thanking all the staff who had worked on the legislation. He thought it was the same bill in spirit, but now it was tightened up. He said it still allows for a variety of mortgage companies and supports the inclusion of mortgage companies as financial institutions, to make sure all the banking authority that his division has could be applied if necessary to these companies. Because Alaska has never regulated mortgage companies, there would be a bit of a learning curve, as it had with payday lending last year. He said that Alaska is the last state to not have any regulation and this gives it the ability to enforce federal law, a positive aspect. The exemptions are there because of federal law and regulation. However, if he found a violation from an exempt institution that was supervised by the office that controlled the currency, once the bill passes, he would be able to make a complaint to the Office of the Comptroller of the Currency (OCC) and right now he does not have that authority. SENATOR SEEKINS asked if he didn't have the ability to forward a complaint now. MR. DAVIS replied that he routinely forwards complaints to the OCC, but he couldn't say someone was in violation of any state law. The Government Accountability Office (GAO) this week issued a report saying the OCC consumer complaint process was improving, but more was needed. The GAO wanted to see more cooperation between the OCC and state banks and commissioners; he was assuming that would occur and this bill would help. 2:57:15 PM SENATOR SEEKINS said he heard that Mr. Davis received around 20 complaints a year on mortgage lending and he asked if that was correct. MR. DAVIS replied that the numbers were a little larger than that and they concerned national banks, independent mortgage companies and some state chartered institutions. SENATOR SEEKINS looked at Section 06.60.020. Exemptions: on page 2 and asked how many exceptions had been the subject of complaints. MR. DAVIS said he couldn't really guess, but he thought a substantial portion had complaints. He was not trying to endorse the exemptions. He explained that he and the Attorney General signed the amicus briefs opposing the OCC regulations in the Wachovia Connecticut case, but that lost in court. SENATOR SEEKINS said he was worried about how many people would slip through the loopholes in this bill. MR. DAVIS added that his division has a lack of direct supervision over a national bank that would run a mortgage company as a subsidiary or is an affiliate of a national bank holding company. However, once the bill is in place, if he received a legitimate complaint against such an entity, he could say it violates this law and that could be forwarded to the OCC. SENATOR SEEKINS said he looked back to 2004 when Household Finance settled with 48 different state attorneys general for close to $500 million and in January 2006, when Ameriquest settled with 49 state attorneys general for around $3.25 million. MR. DAVIS added that he participated in that last settlement, but it was difficult because Alaska doesn't have a mortgage statute. SENATOR SEEKINS asked if Alaska participated in the Household Finance lawsuit. MR. DAVIS replied that he didn't know. SENATOR SEEKINS asked if these companies have independent contractors working with them. MR. DAVIS replied that some companies operate by using independent contractors; a change he was pleased to see in the imputed liability section declares that once you are a licensee subject to this bill, you are talking about contractor licensing on page 4 and you would agree to have that employer or contractor accept liability for his actions much in the same way that a lawyer is responsible for the actions of a paralegal in his or her office. SENATOR SEEKINS asked if those independent contractors could slip through the exemption statute. MR. DAVIS replied that he didn't think they would, but that might be litigated. SENATOR SEEKINS thanked him for his testimony and said he would hear further testimony from offnet. 3:01:42 PM KEVIN BREELAND, President, Alaska Mortgage Bankers Association (AMBA), said he is a minority partner in Residential Mortgage in Anchorage. He said AMBA supported SB 272, but he noted that he was not working from the CS and AMBA had expressed the same concerns regarding the exceptions. The bill was not perfect, but it was a good start. 3:04:00 PM JOHN CARMAN, Chair, Legislative Committee, Alaska Mortgage Bankers Association, said he is also a partner in Home State Mortgage. He believed that this bill was a very positive first step and was very needed in the mortgage industry. He prepared his first mortgage loan in Alaska in 1972 and he had seen the landscape change dramatically from one where 90 percent of the loans were done by regulated banks to one where 90 percent of the loans are prepared by unregulated entities. He also pointed out that Alaska now has no mortgage statute. The strongest point of this bill is having some enforcement agency, in this case the Division of Banking, that will have the authority to look at lenders where 90 percent of the loans are done. His biggest fear for the bill is that it will be delayed and it was needed years ago, not years from now. 3:07:20 PM DOUG ISAACSON, President, Gold Coast Mortgage, said he is also President of the Alaska Association of Mortgage Brokers, and that he appreciated the amount of work that had gone into the rewriting of this bill, but he still has issues. He shared exemption concerns with the chair and Mr. Breeland. He thought some had identified this bill as a positive first step, but that was misleading if it wasn't done right. As the last state to take up licensing, Alaska has plenty of models to look at to see how they have performed in other states. If the statute is not done right the first time, he was concerned that the small brokers would be put out of business because of the costs incurred in the bill. For instance, a small broker like himself who closes under 10 loans a month still must pay the cost for the division to come to an outlying area such as Fairbanks and that can become very expensive. He also took exception with the idea that 90 percent of the loans are done by unregulated agencies. In the Lower 48, his information states that it's only 70 percent, but in Alaska, the number is reversed and "It's the regulated agencies that do most of the loans in Alaska." They need to make sure there is opportunity for redress by the public. MR. ISAACSON said the Alaska Association of Mortgage Brokers has been in favor of reasonable licensing that protects the public, provides proper oversight, and enhances professionalism of the industry. However, certain questions still arise; for example, when a small segment in Alaska is penalized with a $10-fee. In Fairbanks most loans are closed through financially regulated institutions and they would not be charged this fee, but the small broker would be. That difference could be used by other realtors as a reason to not use his company. MR. ISAACSON also pointed out that government loans do comprise a bulk of the mortgage process and it has restrictions on what fees can be paid for by the buyer. He wondered if there should be a discussion with the government agencies to see if that would even be allowed. If it's not allowed, he asked if that would remove that loan option from some borrowers putting them in a discriminatory situation - contradicting the purpose of this bill, which is to protect the public. He asked why appraisers are elevated and others, like title companies, are third parties or why home inspectors and surveyors are disregarded and he asked why the state is becoming the collecting agent. He actually suggested deleting the fee collection section. MR. ISAACSON also asked what happens if the appraiser doesn't provide a competent report and a new one has to be ordered and why would it take 90 days for the division to make a determination if a background check, including FBI records, could be made on the Internet in 72 hours. He thought 30 days was a more reasonable timeframe. 3:14:21 PM One last issue Mr. Isaacson questioned was what authority the state has to monitor compliance with federal regulations and if it has the authority, would it need more than the projected two to three people the division is saying it needs. Would it have to supply proper training, supervision and competency for monitoring the federal requirements. So, he was concerned that this bill was not truly revenue neutral. He concluded that this bill was going in the right direction, but he asked the committee to consider it along with his testimony. 3:16:03 PM LAURIE HOLTE, officer of Residential Lending Mortgage Operations, Alaska Housing Finance Corporation (AHFC), supported the concept of the proposed legislation. She said that AHFC is not a direct source of residential loans, but it offers a variety of loan programs that are aimed at increasing home ownership primarily for low-to-moderate income individuals and families. The programs are made available to Alaskan residents through 19 approved lenders statewide. She said: Alaska is the only remaining state in the Union that does not require licensing of the mortgage lending community. A recent review of the deed of trust recording statistics indicate that not counting the many recognized lenders that do operate under supervision, regulation, or examination by state or federal regulatory body or agency, over 125 lenders representing over $1.4 billion in loan activity for calendar year '05 are operating in the state without supervision. A significant number are Internet lenders. The $1.4 billion is considered substantial in comparison to total estimated activity of approximately $4.4 billion. AHFC applauds the efforts of the mortgage lending community in its efforts to provide needed protection for Alaska's home-buying public and regulatory oversight of its lenders. Thank you very much; that ends my comments. 3:18:22 PM BARBARA WORLEY, Director of Lending, Anchorage Neighborhood Housing Services (ANHS), said it is a private non-profit organization that provides outreach services to the underserved public - to people who most likely would not be able to realize home ownership without its assistance. She said the trend is for non-profits to be highly scrutinized especially under the Sarbanes-Oxley Act that requires better accounting and control for non-profits. Because of its funding sources, ANHS is already subject to monitoring and audits by the Department of Treasury, HUD, Alaska Housing, Neighbor Works America, the IRS, the Municipality of Anchorage, and it is required to have an annual independent audit and single audits on federal and state grants. She felt that ANHS is already regulated enough as its financials are also open to public scrutiny based on public funding sources and certifications it holds as a non-profit. She informed them that ANHS is also sits on the "Don't Borrow Trouble Alaska Anti- Predatory Lending Campaign" board, which is seeing a steady increase in complaints about out-of-state and a few local lenders. MS. WORLEY said she was concerned about the exemptions section (b) on page 2 that states a qualified individual means an individual whose income is 60 percent or less of the median income in the United State, who is over 60 years of age, or who has a disability. But she said ANHS also serves Alaskans who are more than 60 percent up to 115 percent of the area's median income and Native Corporations or housing authorities serve Native folks who are eligible to receive their Native housing funds. She was concerned about that 60 percent. In closing she stated: I am in favor of responsible legislation that would require mortgage licensing without limiting the access to affordable loan programs to the underserved segment of the public and feel that we're already regulated and by adding an additional layer of regulation, it would cause less services to be provided with more funding spent on regulation and which could result in an additional barrier to affordable housing. 3:24:07 PM KEN GAIN, Secretary Treasurer and Legislative Chairman, Independent Lenders of Alaska, said he is also president of Cash Now Financial. He said he has already testified and sent a lengthy letter to the committee responding to some of the issues raised. He wanted to be available for questions to that letter and to make some minor points. He believed that Doug Isaacson was incorrect in how the $10 application fee would be applied and said he thought the fee would be charged on all residential loans whether or not the entity was licensed. MR. GAIN said in his letter of March 15 that he was a small company that had experienced examinations by the division and felt if your records are in reasonable order and you're not committing fraud, it doesn't take them very long to do one. He calculated the license fee, bond, and the loss of one or two days per year for an examination would cost about $1,500 a year and he didn't think that was excessive. He said no one has testified that there shouldn't be a bill. This is a good bill and it is supported by several of the organizations that will be regulated by it, as well as the Division of Banking and Securities that will have to administer it. People keep raising questions, and while they may be well-meaning, it may have the effect of delaying the bill so there won't be any tools to address the problem for several years. 3:27:45 PM JOHN MARTIN, Alaska Mortgage Solutions, Anchorage, said he is a small lender and broker and was a member of several other mortgage organizations. He said he just got the recent changes to the bill and he wanted the chance to review them and come back to the committee with his comments. 3:29:25 PM SENATOR SEEKINS thanked him for his comments and indicated that there was no further testimony and that SB 272 would be held in committee. There being no further business to come before the committee, he adjourned the meeting at 3:31:07 PM.