California Amends its Residential Mortgage Lending Act
On September 29, 2016, California Governor Jerry Brown signed into law a bill, Senate Bill 657 (SB 657), that revises the California Residential Mortgage Lending Act (“CRMLA”). Existing law provides that no person may engage in the business of making or servicing residential mortgage loans in California without first obtaining a license as a mortgage lender or mortgage servicer under the CRMLA. This bill amends the definition of “lender” under the CRMLA to include a person who engages in the activities of a loan processor or underwriter for residential mortgage loans, but does not solicit loan applicants, originate mortgage loans, or fund mortgage loans. This bill would also authorize the California Commissioner of Business Oversight to require a licensee who is engaged in the processing or underwriting of residential mortgage loans to continuously maintain a minimum tangible net worth in an amount that is greater than $250,000, but that does not exceed the net worth required of an approved lender under FHA.
This bill is intended to mitigate the unintended consequences in California of a policy change adopted by HUD in September 2015. The CRMLA requires residential mortgage loan processors and underwriter to hold licenses in California because the CRMLA’s definition of “making a residential mortgage loan” includes the activities of loan processing and loan underwriting. Until September 2015, several of these third parties met the definition of “lender” under the CRMLA because these third parties were approved as “non-supervised mortgagees” by FHA, and the CRMLA definition of a lender includes entities that are approved by one or more specified federal housing agencies or government-sponsored enterprises.
However, in September 2015, HUD changed the definition of non-supervised lenders and mortgagees in its Single Family Housing Policy Handbook 4000.1 (SF Handbook). Instead of referring to these entities as “financial entities,” FHA began referring to them as “lending institutions.” This change had the effect of excluding third party processors and underwriters from the definition of non-supervised lenders and mortgagees because these third parties do not originate or fund loans. The change to HUD’s SF Handbook created a “Catch-22” in California by creating a category of entities that are required to have CRMLA licenses, but no longer meet the CRMLA’s definition of entities that are eligible to obtain those licenses. This bill revises the definition of “lender” under the CRMLA to enable these loan processors and underwriters to be eligible to obtain and maintain CRMLA licenses.
The changes made by SB 657 will go into effect on January 1, 2017.
The full text of SB 657 can be found at: http://www.leginfo.ca.gov/pub/15-16/bill/sen/sb_0651-0700/sb_657_bill_20160929_chaptered.pdf.
