HBA-MPA, TYH C.S.S.B. 1074 76(R)BILL ANALYSIS Office of House Bill AnalysisC.S.S.B. 1074 By: Carona Financial Institutions 5/13/1999 Committee Report (Substituted) BACKGROUND AND PURPOSE Currently, a mortgage broker and a loan officer may operate in the state without licensing. This lack of regulation permits some brokers and officers to arrange a client's financing without a sufficient background or knowledge of the mortgage business. As a result, some customers do not receive quality representation from the mortgage industry. C.S.S.B. 1074 requires the savings and loan commissioner to license mortgage brokers and loan officers, creates a mortgage broker advisory committee, and provides fines and penalties. RULEMAKING AUTHORITY It is the opinion of the Office of House Bill Analysis that rulemaking authority is expressly delegated to the savings and loan commissioner in SECTION 2 (Sections 156.004, 156.102, 156.206, 156.208, and 156.210, Finance Code) of this bill. SECTION BY SECTION ANALYSIS SECTION 1. Amends Subchapter D, Chapter 11, Finance Code, by adding Section 11.306, as follows: Sec. 11.306. MORTGAGE BROKERS. Authorizes the Finance Commission of Texas (commission) to review any rule or action adopted by the savings and loan commissioner (commissioner) under Chapter 156 (Mortgage Brokers), and to direct the savings and loan commissioner to adopt, repeal, or amend any rule or other action that the commissioner may take under Chapter 156. SECTION 2. Amends Subtitle E, Title 3, Finance Code by adding Chapter 156, as follows: CHAPTER 156. MORTGAGE BROKERS SUBCHAPTER A. GENERAL PROVISIONS Sec. 156.001. SHORT TITLE. Authorizes this chapter to be cited as the Mortgage Broker License Act. Sec. 156.002. DEFINITIONS. Defines "commissioner," "disciplinary action," "finance commission," "fund," "loan officer," "loan processor," "mortgage applicant," "mortgage banker," "mortgage broker," and "mortgage loan." Sec. 156.003. SECONDARY MARKET TRANSACTIONS. Provides that this chapter does not prohibit a mortgage broker (broker) from receiving compensation from certain parties. Sec. 156.004. DISCLOSURE TO APPLICANT. Requires the broker, at the time an applicant submits an application to a broker, to provide to the applicant a disclosure specifying the nature of the relationship between applicant and broker. Requires the commissioner, by rule, to promulgate a standard disclosure form to be used by the broker. Sec. 156.005. AFFILIATED BUSINESS ARRANGEMENTS. Prohibits this chapter from being construed to prevent affiliated or controlled business arrangements or loan origination services by or between brokers and other professionals, if the broker complies with all applicable laws, unless prohibited by federal law. SUBCHAPTER B. ADMINISTRATION PROVISIONS Sec. 156.101. ADMINISTRATION OF CHAPTER. Requires the commissioner to administer this chapter. Authorizes the commissioner to hire necessary employees, including a general counsel, attorneys, investigators, and other support staff to administer this chapter. Requires the salaries of the staff to be set by the commissioner in amounts equal or less than the amounts set by the General Appropriations Act. Sec. 156.102. RULEMAKING AUTHORITY. Authorizes the commissioner to adopt and enforce rules necessary for the intent of or to ensure compliance with this chapter, to adopt rules to prohibit false, misleading, or deceptive practices by brokers and loan officers (officers), and to adopt rules regarding books and records that a person must keep. Prohibits the commissioner from adopting specified rules to restrict competitive bidding or advertising by brokers or officers. Requires the commissioner to consult with the mortgage broker advisory committee when proposing and adopting rules. Sec. 156.103. POWERS OF COMMISSIONER. Authorizes the commissioner to institute an action to enjoin a violation of this chapter or a rule adopted under this chapter. Provides that to sustain an action filed under this subsection, it is not necessary to allege or prove that an adequate remedy at law does not exist or that substantial or irreparable damage would result from a continued violation. Provides that the commissioner is not required to provide an appeal bond in any action or proceeding to enforce this chapter. Authorizes the commissioner to authorize specific employees to conduct hearings and make recommendations for final decisions in contested cases. Sec. 156.104. MORTGAGE BROKER ADVISORY COMMITTEE. Creates the mortgage broker advisory committee (committee). Sets forth conditions for the composition of the committee and the term of service by the members. Requires appointments to the committee to be made without regard to the sex, race, color, age, disability, religion, or national origin of the appointees. Requires the committee to meet at least twice per year at the call of the commissioner. Authorizes the commissioner to remove a committee member under certain conditions. Requires the appointing entity to fill an unexpired vacancy for the duration of the vacancy. Sets forth the advising duties of the committee. Entitles each member to certain per diem allowances and travel reimbursements. SUBCHAPTER C. MORTGAGE BROKER LICENSE AND LOAN OFFICER LICENSE Sec. 156.201. LICENSES REQUIRED. Prohibits an individual from acting as a broker unless the individual holds an active broker license or is exempt under Section 156.202. Prohibits an individual from acting as an officer unless that individual is sponsored by a licensed broker, except under certain conditions. Provides that each broker is responsible to the commissioner and members of the public for all acts and conduct performed by the broker or officer associated with the broker. Sec. 156.202 EXEMPTIONS. Provides that this chapter does not apply to: (1) the following entities or an employee of the entities acting for the benefit of the employer: (A) a bank, savings bank, or savings and loan, or a subsidiary or affiliate thereof; (B) a state or federal credit union; (C) a licensed or authorized insurance company; (D) a mortgage banker; or (E) a tax-exempt organization under 26 U.S.C. 501(c)(3) (Exemption from Tax on Corporations, Certain Trusts, Etc.); (2) an individual who makes a mortgage loan from private funds to a spouse, former spouse or relative; (3) an owner of real property who makes a mortgage loan to a purchaser; (4) an individual who makes a mortgage loan from private funds, is not an authorized lender under Chapter 342 (Certain Cash Advance Loans), Finance Code, and does not regularly engage in the business of making or brokering mortgage loans. Sec. 156.203. APPLICATION FOR A LICENSE; FEES. Requires applications to be in writing, under oath, on a prescribed form, and accompanied by certain fees depending on the license. Provides that application fees are not refundable. Sec. 156.204. QUALIFICATIONS. (a) Provides that a person must meet the specified qualifications to be eligible to be licensed as a broker. (b) Authorizes the broker to conduct business under a corporate structure, partnership, or any other business form or as an independent contractor for such an entity. Provides that the broker must notify the commissioner, in writing, of the name or any change in name under, through, or for which the broker conducts business activities. Provides that the corporation, partnership, or another business under, through, or for which the mortgage broker conducts business is not required to be licensed as a broker if all individuals who do so are licensed as mortgage brokers or loan officers. Requires the commissioner to require proof of compliance with this section at the time of application or renewal for license. (c) Provides that to be eligible to be licensed as a loan officer a person must: (1) be at least 18 years old; (2) be a U.S. citizen or legal alien; (3) designate in the application a sponsoring mortgage broker; (4) provide evidence of satisfying one of the following: (A) the person has met specified educational, experience, or licensing requirements; (B) the person has completed 15 hours of approved education course; (C) the person has 18 months of experience as a loan officer; or (D) for applications received prior to January 1, 2000 the mortgage broker that will sponsor the applicant provides certification under oath that the applicant has satisfied all applicable standards; and (5) not have been convicted of a criminal offense determined to be related to being a loan officer. Sec. 156.205. FINANCIAL REQUIREMENTS FOR A MORTGAGE BROKER. Defines "net assets." Provides that a broker must maintain net assets of at least $25,000 or a surety bond in the amount of at least $50,000. Requires the bond term to coincide with the term of the current license period. Requires the commissioner to require proof of compliance with this section at the time of the application or renewal for a license. Sec. 156.206. CRIMINAL BACKGROUND CHECK. Requires the commissioner to conduct a criminal background check upon receiving an application. Requires the commissioner to obtain criminal history record information on the applicant from the Department of Public Safety. Authorizes the commissioner, by rule, to require the applicant to submit information and fingerprints to obtain background information from the Federal Bureau of Investigation. Authorizes the commissioner to obtain criminal history information from any court or any local, state, or national governmental agencies. Requires the commissioner to keep the obtained criminal background information confidential, and prohibits the commissioner from disclosing the information except under certain circumstances. Sec. 156.207. ISSUANCE OF LICENSE CERTIFICATE; PROVISIONAL LICENSE. Requires the commissioner to issue a license certificate for a broker license or to an applicant who meets all the conditions for application or to the sponsor of the loan officer. Authorizes the commissioner to issue a provisional license to an applicant who will experience delay in processing the application. Authorizes the commissioner to revoke the license on specified grounds. Sec. 156.208. RENEWALS. Provides that the broker license and the officer license are valid for two years and are authorized to be renewed if certain conditions are met. Authorizes the commissioner to require brokers and officers to submit requests for renewals on a prescribed form. Authorizes the commissioner to conduct a background check under Section 156.206 for a license renewal. Provides that a renewal fee is not refundable. Authorizes the commissioner to adopt, by rule, a system for licenses expiring on a date or dates other than December 31. Sets forth methods for adjusting expiration dates on licenses according to the rules set by the commissioner. Requires the commissioner to adopt rules related to the approval of courses for continuing education credit related to specified topics and acceptable to other licensing agencies. Sec. 156.209. DENIAL OF APPLICATIONS AND RENEWALS. Requires the commissioner to promptly give written notice of a refusal to issue a license to the applicant for the license or the renewing applicant. Provides that before the applicant may appeal to a district court, the applicant must file with the commissioner, within 10 days of receiving the notice, an appeal of the ruling and request a time and place for hearing before a hearings officer designated by the commissioner. Requires the hearings officer to set certain logistics for the hearing. Authorizes a continuance with the consent of the applicant. Requires the commissioner, after the hearing, to enter an order from the findings of fact, conclusions of law, and recommendations of the hearings officer. Provides that the commissioner's ruling is final if the applicant does not appeal for a hearing by a certain date. Provides that a hearing is governed by Chapter 2001 (Administrative Procedure), Government Code. Authorizes an appeal of a final order to be made in accordance with Section 156.401. Sec. 156.210. PROBATIONARY LICENSE. Authorizes the commissioner to issue a probationary license. Requires the commissioner to adopt, by rule, terms and conditions for a probationary license. Sec. 156.211. CHANGE OF ADDRESS OR SPONSORSHIP; MODIFICATION OF LICENSE. Requires a broker, before 10 days prior to the effective date of the new address, to notify the commissioner in writing of the new address accompanied by a $25 fee. Provides that the broker must obtain a new license certificate before conducting business at the new location. Authorizes a loan officer to act only for the sponsoring mortgage broker. Authorizes the officer to be sponsored only by one broker at a time. Requires the officer and the broker to notify the commissioner that the association is terminated, and requires the broker to return the officer's license to the commissioner. Provides that the officer's license then becomes inactive. Authorizes the license to be reactivated if a broker files a request with a $25 fee notifying the commissioner of the new association and the broker's responsibility for the actions of the loan officer, before the license expires. Provides that the fee is nonrefundable. Sec. 156.212. MAINTENANCE AND LOCATION OF OFFICES; DISPLAY OF LICENSE CERTIFICATES. Requires each licensed broker to maintain a physical office in the state. Requires the address of the office to be designated on the license. Requires a broker to apply for additional branch office licenses, one for each additional site, if the broker maintains more than one place of business. Requires the broker's license, branch office license, and loan officer's license to be prominently displayed in the place of business. SUBCHAPTER D. LICENSE REVOCATION AND SUSPENSION AND OTHER ACTIONS AGAINST LICENSE HOLDER Sec. 156.301. COMPLAINTS AND INVESTIGATIONS. Requires the commissioner to investigate certain actions of a person licensed under this chapter, if a person submits a signed written complaint. Requires the commissioner to send the broker or office a notice of the complaint and the commissioner's intention to investigate, before commencing the investigation. Prohibits the commissioner from investigating or initiating other actions on the basis of an anonymous complaint. Authorizes the commissioner to conduct an undercover or covert investigation when necessary. Permits the commissioner to authorize an employee of the commissioner to file a complaint against a licensee and to conduct certain investigations if specified conditions exist. Sec. 156.302. ADMINISTRATIVE PENALTY. Authorizes the commissioner to impose an administrative penalty on a licensed person who violates this chapter. Prohibits the amount of the penalty from exceeding $2,500. Authorizes certain continuous violations to be considered separate offenses. Requires the penalty amount to be based on the specified guidelines. Authorizes the enforcement to be stayed during a judicial review, if the person pays the penalty to the clerk or files a supersedeas bond. Authorizes a person unable to pay the bond to stay the enforcement by filing an affidavit in the specified manner. Authorizes the attorney general to sue to collect the penalty. Provides that a proceeding to impose the penalty is considered a contested case under Chapter 2001, Government Code. Sec. 156.303. DISCIPLINARY ACTION; CEASE AND DESIST ORDER. (a) Authorizes the commissioner to order disciplinary action against a licensed broker or licensed officer, if the commissioner makes certain determinations about the broker or officer. (b) Authorizes the commissioner, if the commissioner has reasonable cause to believe that a person licensed under this chapter has or is about to violate this section, to issue an order without notice and hearing to cease and desist from an action that is a violation of this section. (c) Provides that an order must contain a reasonably detailed statement of the facts on which the order is made. Requires the commissioner to give and set notice of a hearing governed by Chapter 2001, Government Code, if the person requests the hearing. Authorizes the commissioner by order to find a violation has occurred or not occurred. (d) Provides that if a hearing is not requested within 30 days of the date on which an order is made, the order is considered final and not appealable. (e) Authorizes the commissioner, after giving notice, to impose against a person who violates a cease and desist order an administrative penalty not to exceed $1,000 for each day of violation. Authorizes the commissioner to institute an injunctive relief and collect the administrative penalty. Provides that bond is not required with respect to the injunctive relief. Requires the penalty to be deposited in the mortgage broker recovery fund (fund) established in Section 156.501. Sec. 156.304. FEE ASSESSMENT AND DISCLOSURE. Authorizes the broker, before the completion of all services to be performed, to charge and receive certain fees for services in assisting a mortgage applicant to obtain a mortgage. Prohibits the broker or officer from charging and receiving certain fees for locking in an interest rate unless specified circumstances exist. SUBCHAPTER E. HEARINGS; JUDICIAL REVIEW; CIVIL ACTIONS; UNLICENSED ACTIVITY Sec. 156.401. HEARINGS AND JUDICIAL REVIEW. Authorizes the commissioner to employ an enforcement staff to investigate and prosecute complaints made against persons licensed under this chapter. Authorizes the commissioner to employ a hearings officer to conduct hearings under this section. Entitles a person who was denied a license or renewal license or had a license revoked to a hearing before the commissioner or a hearings officer. Requires the commissioner or hearings officer to prescribe the time and place of the hearing, which is governed by Chapter 2001, Government Code. Authorizes the commissioner or the hearings officer to issue subpoenas for the hearing. Authorizes the process issued by the commissioner or the hearing officer to extend throughout the state and to be served by any designated person. Grants to an individual aggrieved by the results of the hearing the right to appeal to a district court in the county of the hearing. Subjects the appeal to Chapter 2001, Government Code. Sec. 156.402. CIVIL ACTIONS AND INJUNCTIVE RELIEF. Authorizes a mortgage applicant injured by a violation in this article to bring action for recovery of actual monetary damages and reasonable attorney's fees and court costs. Authorizes the commissioner, the attorney general, or a mortgage applicant to bring an action to enjoin a violation of this chapter. Provides that a remedy of this section is in addition to any other remedy of law. Sec. 156.403. BURDEN OF PROOF TO ESTABLISH AN EXEMPTION. Provides that the person claiming an exemption has the burden of proving the exemption in a proceeding or action brought under this chapter. Sec. 156.404. RELIANCE ON WRITTEN NOTICES FROM COMMISSIONER. Provides that a person does not violate, with respect to an action taken or omission made in reliance on a written notice, written interpretation, or written report from the commissioner, unless there is a subsequent amendment. Sec. 156.405. COMPLETION OF MORTGAGE BROKER SERVICES. Provides that the broker and officer who assisted a mortgage applicant obtain a mortgage loan are considered to have completed the broker's and officer's services for the applicant and owes no additional duties or obligations to the applicant with respect to the loan, upon disbursement of mortgage proceeds to or on behalf of the mortgage applicant. Provides that this section does not limit or preclude the liability of the broker or officer for certain failures and violations by the broker or officer. Sec. 156.406. UNLICENSED ACTIVITY. (a) Provides that a person who acts as a broker or officer without first obtaining the required license commits a Class B misdemeanor, except that a subsequent conviction is a Class A misdemeanor. (b) Provides that an individual violating this chapter is liable for damages in an amount that is not less than the amount of the fee or profit received and not to exceed three times the amount of the fee or profit received. Authorizes an aggrieved person to recover damages in a court. (c) Authorizes the commissioner, if the commissioner has reasonable cause to believe that a person licensed under this chapter has or is about to violate this chapter, to issue an order without notice and hearing to cease and desist from an action that is a violation of this chapter. Requires an order to contain a reasonably detailed statement of the facts on which the order is made. Requires the commissioner to give and set notice of a hearing governed by Chapter 2001, Government Code, if the person requests the hearing. Authorizes the commissioner by order to find a violation has occurred or not occurred. (d) Provides that if a hearing is not requested within 30 days of the date on which an order is made, the order is considered final and not appealable. Authorizes the commissioner, after giving notice, to impose against a person who violates a cease and desist order an administrative penalty not to exceed $1,000 for each day of violation. Authorizes the commissioner to institute an injunctive relief and collect the administrative penalty. Provides that bond is not required with respect to the injunctive relief. Requires the penalty to be deposited in the fund. SUBCHAPTER F. MORTGAGE BROKER RECOVERY FUND Sec. 156. 501. MORTGAGE BROKER RECOVERY FUND. Requires the commissioner to establish and maintain a mortgage broker recovery fund. Requires the deposits to be held in trust for carrying out the purposes of the fund. Requires the fund to be issued to benefit aggrieved individuals who suffer actual damages by certain acts committed by a person who was a licensed broker or officer. Authorizes the fund to be invested and reinvested as funds of the Texas State Employees Retirement System are invested, and the interest is required to be deposited in the fund. Prohibits the investments from being made if it will impair liquidity for a judgment under this subchapter. Sec. 156.502. FUNDING. Requires the applicant to pay, in addition to paying the original application fee, a renewal fee of $20 to be deposited in the fund. Requires an additional fee of $10 or a pro rata share needed to bring the fund to $1 million, whichever is less, to be paid on the next renewal of a license, if the fund contains less than $500,000 at the end of the year 2010. Requires the additional fee to be deposited in the fund. Requires a balance in the fund in excess of $3.5 million or the total amount of claims paid from the fund during the preceding four years, whichever is greater, to be transferred to the general revenue fund. Sec. 156.503. STATUTE OF LIMITATIONS. Prohibits an action for a judgment that subsequently results in an order for collection from the fund from being instituted after the second anniversary of the date on which the cause of action accrues. Sec. 156.504. PROCEDURE FOR RECOVERY. Authorizes an aggrieved person to file a verified claim in a court granting a judgment and to apply to the court for an order directing payment from the fund, subject to Section 156.503. Provides that on the hearing on the application, the aggrieved person is required to show certain facts and meet other criteria. Requires a recovery on the judgment against a single defendant made before payment from the fund to be applied first by the creditor to actual damages. Requires the court to order the commissioner to make a payment the court deems suitable from the fund, if the court is satisfied that the required criteria were met. Authorizes the commissioner to notify the attorney general of the commissioner's desire to conduct specified legal activities. Requires the commissioner and attorney general to act only to protect the fund from spurious or unjust claims or to ensure compliance with the requirements for recovery. Authorizes the commissioner to relitigate any issue material and relevant in the hearing. Requires the court to reduce proportionately the aggregate amount that the court finds payable on the claim against a licensed broker or officer, if the amount exceeds the limits in Section 156.505. Sec. 156.505. RECOVERY LIMITS. Entitles a person who receives payment out of the fund to reasonable attorney's fees and other costs, subject to limitations. Authorizes a payment only pursuant to a court order and only for the specified payments. Sec. 156.506. REVOCATION OF LICENSE FOR PAYMENT FROM FUND. Authorizes the commissioner to revoke the license of a broker or officer on proof that a payment was made from the fund to satisfy a judgment against the licensee. Authorizes the commissioner to probate an order revoking a license. Provides that no person whose account payment was made from the fund is eligible to receive a new license under this chapter, until the amount is repaid in full, plus interest at the current legal rate. Provides that this section does not limit the commissioner's authority to take disciplinary action against the broker or officer for violation of this chapter or a rule of the commissioner. Provides that repayment by the broker or officer does not nullify or modify the effect of any other disciplinary proceeding under this chapter. Sec. 156.507. SUBROGATION. Provides that when the commissioner has paid a judgment creditor an amount from the fund as directed by the court, the commissioner is subrogated to all rights of the judgment creditor to the extent of the paid amount. Requires the judgment creditor to assign all of the creditor's right, title, and interest in the judgment to the amount paid by the commissioner, and that amount has priority for repayment from any subsequent recovery. Requires any amount and interest recovered by the commissioner to be deposited to the fund. Sec. 156.508. FAILURE TO COMPLY WITH SUBCHAPTER. Provides that an aggrieved person's failure to comply with this subchapter constitutes a waiver of any rights under this subchapter. SECTION 3. Amends Section 393.002(a), Finance Code, to provide that this chapter (Credit Services Organizations) does not apply to a mortgage broker or loan officer licensed under Chapter 156, Finance Code, who is acting within the course and scope of that license. SECTION 4. Amends Section 232.002, Family Code, to provide that the Texas Board of Professional Engineers, rather than State Board of Registration for Professional Engineers, and the savings and loan commissioner are licensing authorities subject to this chapter (Suspension of License for Failure to Pay Child Support or Comply with Subpoena). Deletes reference to state agencies. Makes a conforming change. SECTION 5.Effective date: September 1, 1999. Provides that a person is not required to be licensed under Chapter 156, Finance Code, as added by this Act, before January 1, 2000. SECTION 6.Emergency clause. COMPARISON OF ORIGINAL TO SUBSTITUTE C.S.S.B. 1074 differs from the original bill in SECTION 2, as follows: The substitute, in proposed Section 156.202, Finance Code, differs from the original bill by specifying that the listed exception apply to the entities listed, as well as the employees of those entities, and by adding to a list of those exempted from this chapter: _a tax-exempt organization under 26 U.S.C. 501(c)(3), and; _an individual who makes a mortgage loan from private funds is not an authorized lender under Chapter 342 (Certain Cash Advance Loans), Finance Code, and does not regularly engage in the business of making or brokering mortgage loans. The substitute, in proposed Section 156.204(b), Finance Code, differs from the original by specifying that a mortgage broker may conduct business as an independent contractor for a corporation, partnership, or any other business entity, and that activities under, through, or for such entities are covered. The substitute requires all individuals who perform mortgage broker activities to be licensed as a mortgage broker or a loan officer, but not the entities that they conduct the activity under, through or for, and removes the provision in the original bill that a designated individual, who is a Texas resident, must manage locations where this business is transacted and be licensed as a mortgage broker. The substitute, in proposed Section 156.204(c)(4)(D), Finance Code, adds the condition that a mortgage broker will sponsor an applicant, as a means for the applicant to be eligible to be licensed as a loan officer. The substitute adds proposed Section 156.208(g), requiring the commissioner to adopt rules related to the approval of courses for continuing education credit related to specified topics and acceptable to other licensing agencies.