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California Amends Finance Lenders Law and Residential Mortgage Lending Act
The California legislature amended the California Finance Lenders Law (CFLL) allowing persons to make one commercial loan in a 12-month period without obtaining a license. This change effectively reenacts a de minimis exemption that was repealed in 2014, and is effective January 1, 2017 through January 1, 2022.
Effective September 28, 2016, the implementing regulations to the CFLL and California Residential Mortgage Lending Act (CRMLA) were amended such that subsidiaries and affiliates of exempt institutions are no longer exempt, by nature of this association, from the licensing requirements with respect to consumer and residential mortgage loans. The Department of Business Oversight filed the action to reverse through regulation previous Commissioner opinions that interpreted licensing exemptions under the CFLL and CRMLA to apply broadly to include subsidiaries of exempt financial institutions.
The definition of a lender under the CRMLA was also amended and now includes a person, other than a natural person, and a natural person who is also an independent contractor, 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. Further, the Commissioner may 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 the Federal Housing Administration.
State Regulatory Registry Proposes Policy Change Related to NMLS Public Comment Procedures
On August 30, the State Regulatory Registry LLC (SRR), a subsidiary of the Conference of State Bank Supervisors (CSBS) and the entity that operates the Nationwide Multistate Licensing System and Registry (NMLS), requested public comment on a proposal to adopt a formal policy that would govern procedures and processes for requesting comments on NMLS-related updates that impact outside parties. Proposed matters warranting public comment would include (i) major NMLS functionality updates; (ii) call report updates; (iii) impacts to NMLS usability; (iv) Uniform Form changes; and (v) fee changes. SRR proposes that the comment period for NMLS-related updates last for at least 60 days but no longer than 180 days unless, as determined by the SRR Senior Vice President of Policy, there is good cause for extending the comment period. Comments on SRR’s proposed policy change, which defines the roles and responsibilities of various persons and working groups that would be involved in considering proposed NMLS updates, are due by October 31, 2016.
NYDFS Issues Virtual Currency License to XRP II, LLC
On June 13, the NYDFS announced that it approved XRP II, LLC’s application for a virtual currency license. Before approving the company’s August 2015 application, NYDFS conducted a “rigorous review” of the company’s anti-money laundering, capitalization, consumer protection, and cybersecurity standards. To date, NYDFS has received 26 BitLicense applications; two companies, including this one, have been approved for BitLicenses and two have received state trust charters. NYDFS further noted that it recently denied two applications for a virtual currency license; the companies in receipt of the denial letters were ordered to stop any New York operations.
CSBS Names Charles Cooper Chairman of Board of Directors; Calls for Regulatory Collaboration
On May 24, the Conference of State Bank Supervisors (CSBS) announced several new officers, including Charles G. Cooper, Commissioner of the Texas Department of Banking, who will serve as the chairman of the CSBS Board of Directors. In his new role, Cooper delivered remarks at the State-Federal Supervisors Forum on May 26, addressing the following current issues facing the banking industry: (i) community banking; (ii) cybersecurity; and (iii) financial services provided by non-depository institutions, commenting on the expansion of the Nationwide Multistate Licensing System & Registry to include check cashers, debt collectors, and money service businesses. Cooper emphasized the significance of community banks, stating, “[t]heir role in providing credit and banking services is just as important as that of the largest financial intuitions.” Observing the decline in the number of community banks, Cooper called on Congress to implement “right-size regulation through legislation,” and stressed that regulators “need to continue to right-size [their] regulatory and supervisory processes.” Regarding cybersecurity, Cooper mentioned the CSBS Executive Leadership on Cyber Security (ELOC) program, which is intended to “bring [the] cyber issue out of the backroom and into the Board room.” Finally, Cooper concluded by calling on state and federal regulators, including the newer CFPB and FinCEN agencies, to “commit to working better together.”
California Department of Business Oversight Issues Interpretive Guidance on SB 197
On April 27, the California Department of Business Oversight (Department) responded to a December 2, 2015 letter from the Equipment Leasing and Finance Association (ELFA) requesting interpretive guidance regarding the implementation of SB 197 (an Act to amend the California Finance Lender Law (CFLL) by adding Sections 22602, 22603, and 22604 to the California Financial Code). SB 197 authorizes licensed finance lenders to compensate unlicensed persons in connection with the referral of one or more prospective borrowers to the licensee for commercial loans if certain conditions are met such as interest rate limitations and ability to repay requirements. SB 197 expressly prohibits certain acts by an unlicensed person receiving compensation from a licensed lender in connection with commercial loans.
The Department’s April 27 letter sets forth the following guidance regarding SB 197 and the administration of the CFLL:
- Scope of SB 197: The Department advised that a licensed lender compensating a licensed broker for referrals is not an activity subject to SB 197. Furthermore, the Department confirmed that SB 197 does not apply to unlicensed brokers or other unlicensed persons who are not compensated for the referral of borrowers to a licensed finance lender. The Department, however, left open the possibility that there may exist circumstances where “lender referral fees or brokerage commissions are being included in the sale of equipment,” which would bring such compensation within the scope of SB 197.
- Jurisdiction/Scope of Licensing: ELFA asked several questions regarding the licensing of certain entities under the CFLL based on different scenarios. Although the Department declined to determine whether the hypothetical scenarios triggered licensure, the Department advised:
Lending to California citizens, or brokering loans on behalf of California citizens, are facts suggesting the lending or brokering activity is occurring in this state. We would look at other factors, such as whether a lender or broker solicits borrowers in California (directly or indirectly), and whether brokering on behalf of California borrowers is of a continuous nature. If the lender or broker's business activity has sufficient contact with California, then licensure would be required.
- Brokers and Exempt Lenders: The Department also advised that if a broker is not brokering loans made by a CFLL licensed lender, then the CFLL does not apply. In other words, if the lender is subject to CFLL licensure, then the broker would also be subject to the CFLL. Conversely, if the lender is exempt from the CFLL, such as a bank, then the lender would not be making CFLL loans and the broker would not be subject to the CFLL or need a CFLL license. This means, as noted above, SB 197 would not apply to referral arrangements utilized by either a lender or broker that is not subject to the CFLL. In determining whether a broker is required to be licensed, the Department noted that while a CFLL licensee is responsible for ensuring it is in compliance with the CFLL, a licensee may nonetheless rely on the broker’s written representations with respect to meeting certain exemptions (g., brokering five or fewer commercial loans in a 12-month period) from licensure because the Department recognized that the CFLL licensee may not have any practical means of verifying this information.
While the Department focused on ELFA’s questions regarding SB 197, which related to the commercial equipment lease finance sector, it appears the Department’s guidance may be broadly applied to all lenders engaging in business in California, including CFLL licensees, exempt entities, and unlicensed persons.
Mississippi Revises State Mortgage Licensing Law
On April 6, Mississippi Governor Phil Bryant signed into law SB 2504, which reenacts and amends the Mississippi S.A.F.E. Mortgage Act. Among other things, the legislation (i) revises licensure and continuing education requirements for mortgage loan originators; (ii) modifies books, accounts, and records storage and filing requirements; (iii) ensures timely and accurate mortgage licensee reporting in the Nationwide Mortgage Licensing System and Registry (NMLS); and (iv) specifically provides that “[f]ailure to file accurate, timely, and complete reports on the [NMLS] may result in a violation of this chapter, resulting in a civil penalty.”
CSBS Announcement: Arizona Department of Financial Institutions Becomes Latest State Agency to Adopt National SAFE MLO Test
On July 29, the Conference of State Bank Supervisors (CSBS) announced that the Arizona Department of Financial Institutions began using the National SAFE Mortgage Loan Originator (MLO) Test, making it the 47th state banking agency to adopt the SAFE MLO Test containing Uniform State Content. Combining both the national and state testing requirements of the SAFE Act and the CSBS/AARMR model state law, the test with Uniform State Content was first made available to state banking agencies on April 1, 2013 to help streamline the application process for MLOs seeking to obtain licensure in more than one state. Since April 1, 2013, according to the CSBS, over 58,000 MLOs have taken the National SAFE MLO Test with Uniform State Content. Notably, applicants who take the test on or after October 3, 2015, will be expected to understand requirements of the TRID Rule as promulgated by the CFPB.
Oregon Amends Mortgage Licensing Rules
On September 16, the Oregon Department of Consumer and Business Services Division of Finance and Corporate Securities adopted a rule amending several sections of the Oregon Administrative Rules related to the licensing of mortgage loan originators. The amendment makes minor changes to sections related to (i) definitions; (ii) the license application process; (iii) criminal records check requirements; (iv) significant event and financial reporting requirements; (v) bonding calculations; and (vi) retention of advertising samples. In addition, the rulemaking added a new section that designates the filing of a report containing false or incorrect information as a practice subject to denial, suspension, or revocation of licensure. The amendment also clarifies the manner in which deposits into or withdrawals from a trust account of borrower funds must be documented. Finally, the amendment adjusts the amount of pre-licensing and continuing education required to obtain and maintain licensure. The amendments become effective on January 1, 2015.
Rhode Island Adds Loan Servicer Licensing, Other Requirements
On July 8, Rhode Island Governor Lincoln Chafee signed HB 7997, which extends the state’s licensing requirements to include companies servicing a loan, directly or indirectly, as a third-party loan servicer. Under the existing state statute, the term “loan” means any advance of money or credit, including mortgage loans, educational loans, and other consumer loans. The new law adds new definitions for servicing and third-party loan servicer, establishes for such servicers a $1,100 annual licensing fee, and requires licensed servicers to: (i) maintain at least $100,000 capital; (ii) obtain a bond; (iii) maintain segregated borrower accounts; and (iv) maintain certain records. The law also establishes prohibited acts and practices for third-party servicers, including, among others: (i) knowingly misapplying loan payments to the outstanding balance of a loan or to escrow accounts; (ii) requiring unnecessary forced placement of insurance; (iii) failing to provide loan payoff information as required; (iv) collecting private mortgage insurance beyond the date required; (v) failing to timely respond to consumer complaints; and (vi) charging excessive or unreasonable fees to provide loan payoff information. The law exempts depository institutions and licensed lenders and other licensed entities. The new rules and requirements take effect July 1, 2015.
New York Proposes First Virtual Currency Licensing Framework
On July 17, the New York DFS announced a proposal to establish a licensing regime for virtual currency businesses, the first by any state. In January, the DFS held a two-day hearing on developing a regulatory framework for virtual currency firms, and subsequently sought applications for virtual currency exchanges pending completion of the regulations. The proposed regulations define virtual currency as “any type of digital unit that is used as a medium of exchange or a form of digitally stored value or that is incorporated into payment system technology.” This would include digital units of exchange that: (i) have a centralized repository or administrator; (ii) are decentralized and have no centralized repository or administrator; or (iii) may be created or obtained by computing or manufacturing effort. It would exclude digital units that are used solely within online gaming platforms or that are used exclusively as part of a customer affinity or rewards program.
Under the proposal, the state would require companies engaged in the following activities to obtain a so-called BitLicense: (i) receiving or transmitting virtual currency on behalf of consumers; (ii) securing, storing, or maintaining custody or control of such virtual currency on the behalf of customers; (iii) performing retail conversion services; (iv) buying and selling virtual currency as a customer business (as distinct from personal use); or (v) controlling, administering, or issuing a virtual currency. To obtain a license, a business would be required to, among other things: (i) hold virtual currency of the same type and amount as any virtual currency owed or obligated to a third party; (ii) provide transaction receipts with certain required information; (iii) comply with AML rules; (iv) maintain a cyber security program; and (v) establish business continuity and disaster recovery policies. Licensed entities would be subject to DFS supervision, with examinations taking place no less than once every two calendar years. The proposal will be published in the New York State Register’s July 23, 2014 edition, which begins a 45-day public comment period.