SB 102-MORTGAGE LENDING  1:36:11 PM CHAIR ELLIS announced SB 102 to be up for consideration and that there was a committee substitute labeled 25-LS0691\C). DANA OWEN, staff to Senator Ellis, stated that he had just received the CS from the sponsor to SB 102 and said that Mark Davis would explain it in greater detail. It is identical to the current House version that passed out of House Labor and Commerce yesterday. The sponsor asked this committee to take up that version of the bill. 1:37:43 PM MARK DAVIS, Director, Division of Banking and Securities, Department of Commerce, Community & Economic Development, said he would first go over the structure of the bill and then the changes in the CS. He explained that this bill proposes to license all components of the industry - mortgage bankers, mortgage brokers and mortgage originators. It states that an originator must work for one of the other licensees and that the mortgage banker and the mortgage broker must work through an originator. The originator is the person in this industry who meets with the consumer, sits down with them and goes over their proposal to get a mortgage. An important component then is continuing education under AS O6.61.060, which hasn't changed in either version, to require originators to be aware of both Alaska law and federal law. The bill has a series of prohibitions in it. For example, AS 06.60.320 prohibits false advertising; it also requires compliance with federal mortgage law. Presently 10 federal statutes apply to mortgages, but there is limited enforcement by the federal agency. Recently, states have been adopting federal standards and then examining for compliance with them. The ones people are more familiar with are the Truth in Lending Act and the Real Estate Settlement Procedures Act of 1974. MR. DAVIS noted on December 8, 2006, the State of Maine commissioned a Predatory Lending Task Force and after several months of investigation, one of its major conclusions was that Maine should enforce or examine for respite the Real Estate Settlement Act. That is also in this bill. 1:40:25 PM He said the idea is that they would examine mortgage brokers, mortgage licensees and originators for compliance not only with the provisions of this statute, but with the federal statutes. CSSB 102, version C, also has certain refinancing prohibitions in section 350. However, it clearly doesn't affect the remedies that are already available to the Attorney General under the Alaska Consumer Protection Act. MR. DAVIS said he had been working with the Department of Law on this bill and the CS reflects changes that it wanted. 1:41:21 PM Essentially the bill says there is a private right of action under the Consumer Protection Act or to the Attorney General which provides for either treble damages or restitution. The consumer protection section of law has done mortgage cases already under that act. MR. DAVIS explained that the CS inserts an exemption for anyone who is already licensed under Alaska's Small Loan Act. The idea is that they are not trying to double up on regulation and if one regulates under another licensing scheme, that is fine. However, he said the federal exemption was modified and he explained that some of the exemptions were designed to allow non-profit housing organizations to help people with their mortgages without being licensed, but also an exemption exists for certain federal subsidiaries of federal banks or the banks themselves or state banks. 1:42:48 PM With regard to state banks, Mr. Davis said his division already examines them and their mortgage activities. The federal government has taken the position that it should examine any federal bank and any subsidiary of a federal bank that does mortgage lending. The U.S. Supreme Court ruled on Tuesday that any subsidiary or operating subsidiary of a federal bank engaged in mortgage lending would not be subject to any state regulation. He said CSSB 102, version C, tracks that decision in that the bill was drafted using the rule of law established in the Ninth Circuit that was essentially affirmed by the U.S. Supreme Court. The only issue open under that case is that the Supreme Court said under the Gramm-Leach-Blighly Act an affiliate of a bank that is engaged in insurance and securities will be subject to state regulation. What it didn't say is whether an affiliate of a bank that engages in banking and other banking activities would be subject to preemption. MR. DAVIS said the bill was changed to deny an originator's license if he previously violated a chapter even if it happened in another state. This situation has already occurred in Alaska. CHAIR ELLIS asked how this bill protects consumers in that respect. MR. DAVIS replied that it allows for a background check of licensees along with their licensing status. This bill brings the state more in line with securities law. The CS also says that the mortgage bankers would be responsible for things they know or should know about the conduct of the originators - like appraisals that are way above what the property is worth or statements of income of the potential borrower, which are more than they make. He said a criminal provision was inserted making certain violations Class A misdemeanors, which give the statute teeth. "Escrowed" is defined as having written instructions. He said there over 100 mainly technical changes - mainly lawyers using different drafting styles. CHAIR ELLIS asked Mr. Owen if the sectional analysis relates to the CS. He answered yes. 1:46:02 PM SENATOR BUNDE said he has heard some complaints, specifically about mortgage originators with substantial criminal records and he asked if anyone opposed tightening up these regulations. MR. DAVIS replied the American Financial Services Association (AFSA) wants a partial exemption for their originators, which are companies that either operated in Alaska or through call centers like Countrywide and Primera. In this case the parent company would get a license and be responsible for the originators. Since this is not an administration bill, but an industry bill, he deferred to industry for their ideas. He related that he had been told that AARP also has concerns about restitution, but those provisions are already in the bill. He explained that the surety fund is not an exclusive remedy and that one can still sue with private counsel. He believed it would be much like real estate. If it's a major case and the person you are suing has money, you'd pursue your remedies. If it's not, you might go to the realty surety fund to do the best you could. The surety fund is designed to be a stop-gap thing to make sure somebody gets some money out of a bad situation. Making mortgage brokers and mortgage bankers liable for conduct of their originators provides people with a deep pocket which didn't exist before, a good reform. It's like a lawyer being responsible for the conduct of his paralegal. MR. DAVIS reported the other issue AARP had was wondering why the bill included a referral to the attorney general. And the reason he wanted to adopt that is based on Minnesota law that says if it didn't have the right of referral, his division would be stuck with only the remedies in the law. He wanted the ability if someone was not a standard case to refer it to the attorney general who has the full powers of the Consumer Protection Act and/or restitution. 1:49:05 PM SENATOR STEVENS asked what escrow language they were tightening. MR. DAVIS replied there were questions on whether there are written instructions in every escrow agreement that will say how the money is given to a third party who would disperse it when certain events occur. He wanted to make sure a consumer had written instructions to refer to. SENATOR STEVENS asked if this would impact Internet mortgages and out-of-state lenders. 1:50:16 PM MR. DAVIS replied this bill proposes covering those. Two years ago an act was passed that regulates payday loans or deferred deposit companies. It had a provision for licensing interstate companies, which has been done successfully. He has been able to collect $700,000 in restitution from many Internet lenders for some of Alaska's poorest consumers through the provisions in that act. This bill is patterned on that law and follows the same language. CHAIR ELLIS asked his position on partial licensing of state mortgagers like Countrywide. MR. DAVIS said he would have to think about that, but he would focus on making sure consumers are protected. 1:52:20 PM MARIE DARLIN, Volunteer Coordinator, AARP Capital City Task Force, reference its letter with several concerns in it regarding the original bill. She had not seen the CS, but it sounded like some of their concerns were addressed in it. AARP has the consumer's point of view and she was concerned with pointing out omissions related to consumer protection. Only a two-year statute of limitations was one concern. CHAIR ELLIS said he would consider reasonable ways to improve consumer protection and asked her to look over the CS and comment at a later date. MR. DAVIS added that his division and AARP are conducting seminars around the state. He explained that he looked at CSSB 102, version C, as a licensing law, but AARP is looking at it as a predatory lending law. He thought predatory lending should be dealt with in another bill. He mentioned that reverse mortgages are also questionable. CHAIR ELLIS said if there are reasonable pro-consumer changes he would like to see them and would consider putting them in this bill. 1:57:55 PM MR. DAVIS said he had agreed with the Department of Law to put a restitution order provision in Section 870. That is one way he would respond to AARP. SENATOR STEVENS asked if this is the proper place to cap civil penalties. MR. DAVIS replied these are licensing violations and the $10,000 fine is very similar to what is in the Uniform Securities Act. The idea in this bill is if something is more than a licensing issue, like the one that is currently under federal investigation, it would be referred to the attorney general. CHAIR ELLIS asked if things come out of this discussion that aren't appropriate to be included in this bill, would he bring them up to the committee along with suggestions on how to "tune up" other state statutes. MR. DAVIS replied that he would be very happy to do that and related that two years ago he set up the Predatory Lending Task Force and hotline and his division had developed a database about what the current scams and problems are. 2:00:01 PM DANIELLE FAGRE ARLO, Senior Vice President, State Government Affairs, American Financial Services Association (AFSA), supported the CS to CSSB 102, version C, and thanked everyone for helping them work on the language, especially Mr. Davis and his division. They still have concerns, but hope to continue work on resolving them. She said AFSA is a national trade association based in Washington, D.C. Its members come from financial services firms that provide credit for consumers in small businesses; it has 350 members. Her primary concern related to licensing individual employees and exclusive agents of large multi-state mortgage companies. This language will significantly increase the burden on lenders, regulators and consumers. Their cost will be passed on to the borrowers in the form of fees. In the case of regulators, it could have a negative effect on compliance activities. Covering collections personnel, call center employees, loan processors, underwriters and others who speak to customers in the process of completing a loan is unnecessary, she said. Regulators can also be negatively affected by the administrative burden. MS. ARLO said that large mortgage lenders and licensed entities already have programs and policies in place for pre employment screening, background checks, in-house training, education and compliance to meet state requirements for their employees and exclusive representatives. These programs and policies help prevent fraud or other criminal activity and facilitate enforcement capability by the department. She explained: Large mortgage lenders do not oppose licensing for loan originators who work on behalf of independent mortgage brokers to find and negotiate loans for borrowers. A mortgage broker is generally considered to be an independent person or specialty company who shops loans to different lenders for the borrower. A mortgage lender underwrites and/or funds the loan and is responsible for the credit risk of the loans. Large mortgage lenders are very different from independent mortgage brokers in various ways. For example, they typically operate as licensed entities in multiple states, have large numbers of employees who interact with customers from many states on a daily basis. They are very well capitalized; they carry huge reputational risks associated with employee misconduct and they may be affiliated with or a subsidiary of an entity regulated by the Federal Reserve Board. Sensible state licensing of lending companies themselves render the need to license individual employees unnecessary and it is our proposed solution in the substitution language we have prepared and will continue to work with the department on until they are satisfied. 2:04:39 PM JOHN CARMAN, Chairman, Legislative Affairs, Alaska Mortgage Bankers Association, said CSSB 102, version C, is not perfect in anyone's mind. Last year it went through 27 revisions before it passed in the Senate 19 to 1 and died at the last minute in the House. Last year's bill only called for company licensing without a provision for individual licensing, but it was always their intention to pursue individual licensing this year and add it to the bill. Since the bill was delayed, they are now adding it at the request of their members. He thought the Division of Banking and Securities would like the provision and the fact that they have gotten as far as they have with all the diverse groups in Alaska from small mortgage brokers to major mortgage lenders is significant. MR. CARMAN said he thought the people who were still "working on" on the bill were really trying to kill it. They fall into one of two categories - the well-intentioned people that are late to the process and do not realize how many times every word in this bill has been debated and that adding more words just adds more arguing and debate over exactly what the provision means. He said there are only three weeks left in the session and currently the state has zero regulation. They need to get a bill in place that would fund the division so it could hire more people to enforce existing laws. The other group is people who are bad-intentioned and that might have a criminal record or for some other reason find it difficult to do business under this new bill. The purchase of a home is huge and everyone else is licensed, he said, but today a number of convicted felons are doing mortgages. He knew of a realtor who lost her license for life for falsifying a tax return for a customer who was applying for a loan. She is now a lender because there is no restriction on her activities in lending. Recently an individual was working for a large bank and was convicted in the federal courts for banking fraud. This person had already had his license pulled in another state. If this law would have been in place, this person would not have been able to practice in Alaska. There is no doubt, he said, that this bill gives the Division of Banking and Securities enforcement ability in an area in which it currently has none. Enforcement of the act will be self- funded with fees paid by licensees and a $10 loan fee for each residential transaction borrower. It will be applicable to out- of-state lenders that have been a major source of complaints to the division as well as Internet lenders; it will not be onerous to implement. 2:10:00 PM JOHN MARTIN, Anchorage, said he has been a resident of Alaska since 1959. Since 1977 he has been involved in the real estate industry as broker, investor and developer. For the last 20 years he has been in the mortgage loan business - as a mortgage loan originator, manager in charge of production of one of Alaska's largest lenders as well as the manager in charge of all their branch offices. He is a member of the Predatory Lending Task Force in Anchorage representing the Alaska Association of Mortgage Brokers (AAMB). Presently he is the owner of a small mortgage company and has two originators working with him. He is the founding member and past president of the AAMB and presently is a member of the Legislative Committee. He is president-elect of the Western Regional Mortgage Broker Lenders' Conference, an organization of 14 western states that puts on an educational program each year for people in the mortgage loan industry who receive education, get up-to-date information from national leading experts and have a face-to-face expo with the nation's top mortgage lenders. MR. MARTIN said Alaska is the last state to license mortgage operations and recent news stories illustrate that our state is not exempt from unscrupulous operators. Licensure would put everyone on an even playing field, he said, and "background checks, competency testing, continuing education will go a long way towards serving the public." Because these would be administered by the state, they would be equal and not subject to a company-wide interpretation of what is a good background check and what isn't. CSSB 102, version C, would give the state the ability to revoke a license if necessary and that's true accountability. It's important to realize they are only licensing originators. This has nothing to do with underwriters, shippers, processors, clerks or anyone else. It's important to license originators because if they get fired from one company and try to go to another, the state will know and have a hammer. He said the Mat- Su Homebuilders Association, Home Inspectors of Alaska, Independent Brokers Association of Real Estate Brokers in Alaska, and the American Land Title Association, Alaska Chapter, all support this legislation. He recommended adopting the new CS. 2:16:07 PM JOE BRAMMER, Chairman, Legislative Committee, Alaska Association of Mortgage Brokers, said he is a mortgage loan originator and had a three-fold purpose before them today. First he wanted to relate a brief history of this legislation, second he wanted to address competency testing and finally, he wanted to speak about continuing education requirements. He related that the mortgage industry currently has no regulations. This lack of regulation has contributed to unscrupulous operators preying on the consumers of Alaska and nothing can be done currently to stop them. CSSB 102, version C, was drafted in conjunction with industry representatives from the Alaska Association of Mortgage Brokers and the Alaska Mortgage Bankers Association along with various state departments. It provides safeguards for the public and enforceable penalties for violators. It requires the licensing of mortgage companies and, more importantly, mortgage loan originators. Right now a person could pedal used cars one day and be a mortgage loan originator the next - with no training or education. Before a loan originator can be eligible for licensing under CSSB 102, version C,, on page 5, line 24, he will be required to pass a competency test prior to dealing with the public. In addition, he will be required to attend and complete continuing education requirements as outlined on page 15, line 19. This is important for consumer protection because the industry is constantly changing. He pointed out that state regulations exist for pre-licensing testing and continuing education prior to license renewal for insurance agents, real estate brokers and others. He concluded saying that CSSB 102, version C, is a consumer protection bill designed to level the playing field in the industry that provides enforcement mechanisms and penalties for violators. 2:21:23 PM CHAIR ELLIS said the committee had responded to the request of the sponsor to schedule and delay this bill and would take the time to do a good job on it. He said there is plenty of time for it to pass this legislature. He said CS for SB 102, version C, would be back before the committee on Tuesday.