Fiscal Note & Local Impact Statement

126 th General Assembly of Ohio

Ohio Legislative Service Commission

77 South High Street, 9th Floor, Columbus, OH 43215-6136 ˛ Phone: (614) 466-3615

˛ Internet Web Site: http://www.lsc.state.oh.us/

BILL:

Sub. S.B. 185

DATE:

March 29, 2006

STATUS:

As Reported by House Financial Institutions

SPONSOR:

Sen. Padgett

LOCAL IMPACT STATEMENT REQUIRED:

No —

Minimal cost

 


CONTENTS:

Establishes several new consumer protections relative to certain mortgage loans; generally prohibits the appraisal of real estate for a mortgage loan without state certification or licensure; requires that a national criminal background check be conducted on all applicants for a mortgage broker certificate of registration, loan officer license or real estate appraiser certificate or license; establishes the Consumer Financial Education Board, modifies the Mortgage Broker/Loan Officer Law with respect to disclosure of information, fiduciary duties, prohibited acts, record keeping, and pre-licensure examination; and makes other changes relative to mortgage lending

 

State Fiscal Highlights

 

STATE FUND

FY 2007

FY 2008

FUTURE YEARS

General Revenue Fund

     Revenues

Potential minimal gain from state court costs

Potential minimal gain from state court costs

Potential minimal gain from state court costs

     Expenditures

Potential increase for additional legal expenses

Potential increase for additional legal expenses

Potential increase for additional legal expenses

Consumer Protection Enforcement Fund (Fund 631) – Attorney General

     Revenues

Potential gain from civil penalties

Potential gain from civil penalties

Potential gain from civil penalties

     Expenditures

Potential increase for additional legal expenses

Potential increase for additional legal expenses

Potential increase for additional legal expenses

General Reimbursement Fund (Fund 106) – Attorney General

     Revenues

Corresponding gain from records check fees

Corresponding gain from records check fees

Corresponding gain from records check fees

     Expenditures

Increase to conduct additional records checks

Increase to conduct additional records checks

Increase to conduct
additional records checks

Real Estate Appraiser Operating Fund (Fund 6A4) – Department of Commerce

     Revenues

Potential gain from new licenses issued

Potential gain from new licenses issued

Potential gain from new licenses issued

     Expenditures

Minimal increase in administrative costs to license appraisers

Minimal increase in administrative costs to license appraisers

Minimal increase in administrative costs to
license appraisers

 


 

Consumer Finance Fund (Fund 553) – Department of Commerce

     Revenues

- 0 -

- 0 -

- 0 -

     Expenditures

Increase for development of database, Consumer Financial Education Board expenses and grants

Increase for development of database, Consumer Financial Education Board expenses and grants

Increase for development of database, Consumer Financial Education Board expenses and grants

Financial Institutions Fund (Fund 4X2) – Department of Commerce

     Revenues

- 0 -

- 0 -

- 0 -

     Expenditures

Potential increase for legal expenses

Potential increase for legal expenses

Potential increase for legal expenses

Victims of Crime/Reparations Fund (Fund 402)

     Revenues

Potential minimal gain from state court costs

Potential minimal gain from state court costs

Potential minimal gain from state court costs

     Expenditures

- 0 -

- 0 -

- 0 -

Note:  The state fiscal year is July 1 through June 30.  For example, FY 2006 is July 1, 2005 – June 30, 2006.

 

·         Office of the Attorney General.  This bill enacts a separate definition of "consumer transaction" from that which is in the Consumer Sales Practices Act (CSPA) that applies only to transactions between certain mortgage brokers, loan officers, and non-bank mortgage lenders and their customers.  The bill also adds a twenty-one point definition of unfair or deceptive acts that apply only to loan officers, mortgage brokers, and non-bank mortgage lenders.  The Attorney General has all the powers given under the CSPA to investigate violations and enforce the bill's provisions.  As a result, the number of transactions handled by the Office of the Attorney General’s Consumer Protection Section, funded out of the GRF and the Consumer Protection Enforcement Fund (Fund 631) is likely to increase.  However, the number and magnitude of related complaints filed, investigations performed, and enforcement actions that would be taken as a result of the bill is unknown.  Thus, whether the bill will create additional ongoing operating expenses to the Consumer Protection Section, as well as the amount of those potential costs, is uncertain.  It is uncertain how much civil penalty revenue may be collected annually from persons in violation of the bill's transaction prohibitions and subsequently deposited to the credit of the Consumer Protection Enforcement Fund (Fund 631).

·        Consumer Financial Education Board.  This bill creates the Consumer Financial Education Board in the Department of Commerce.  The Board is comprised of 13 members who are compensated and paid actual and necessary expenses.  While it is difficult to estimate compensation expenses, actual and necessary expenses may be estimated at $10,400 per year.  The Board may also require office supplies and equipment.  The Board is authorized to provide grants for various financial education programs.  All of the above expenses would likely be paid out of the Consumer Finance Fund (Fund 553).

·        Criminal Background Checks.  This bill requires criminal background checks to be conducted on mortgage brokers, loan officers, and real estate appraisers.  Applicants would be required to pay the associated fees.  The Bureau of Criminal Identification and Investigation (BCII) charges $15 and $24 for state and national background checks, respectively.  The Attorney General's General Reimbursement Fund (Fund 106) may realize a gain in revenue corresponding to the number of background checks conducted in order to offset the additional costs such additional background checks would present for BCII.

·        Licensure of Real Estate Appraisers.  Under current statute, nothing precludes a person who is not licensed or certified under the Division of Real Estate and Professional Licensing from appraising real estate for compensation.  This bill would prohibit a person from performing a real estate appraisal for a mortgage loan if the person is not licensed or certified.  It is uncertain how many unlicensed or uncertified real estate appraisers perform appraisals for mortgage loans in Ohio.  The additional revenue and costs to the Real Estate Appraisers Operating Fund (Fund 6A4) that such applications and renewals would generate are dependent on how many new appraisers would be licensed. 

·        New Database.  This bill requires the Department of Commerce to establish and maintain an electronic database that contains information on various public record enforcement actions taken by the Superintendent of Financial Institutions and the Attorney General as well as certain judgments by courts of this state related to violations of the Mortgage Brokers/Loan Officers Law and the CSPA.  The Department of Commerce is uncertain how much it will cost the Consumer Finance Fund (Fund 553) to implement this database.

·        Additional Legal Expenses.  Current law provides the Superintendent of Financial Institutions, the Attorney General, or a buyer to bring a civil action to enjoin a violation of the Mortgage Brokers/Loan Officers Law.  The bill gives the Superintendent of Financial Institutions and the Attorney General direct enforcement authority for the Mortgage Brokers/Loan Officers Law and other related laws and includes additional requirements.  Therefore, it may be that more civil cases are filed in county and municipal courts statewide.  However, it is uncertain how many such cases might be filed.  As such, it is possible that legal expenses for the Division of Financial Institutions and the Attorney General may increase if court action is initiated.

·        State Court Cost Revenue.  As a result of this bill, it is possible that some persons, who may not have been prosecuted and convicted under existing law, will be prosecuted and convicted.  This creates the possibility that the state may gain locally collected court cost revenues that are deposited to the credit of the GRF and the Victims of Crime/Reparations Fund (Fund 402).

Local Fiscal Highlights

 

LOCAL GOVERNMENT

FY 2006

FY 2007

FUTURE YEARS

Counties and Municipalities

     Revenues

Potential gain from court costs, filing fees, and fines

Potential gain from court costs, filing fees, and fines

Potential gain from court costs, filing fees, and fines

     Expenditures

Potential increase from new civil and criminal cases; unknown increase in database reporting costs

Potential increase from new civil and criminal cases; unknown increase in database reporting costs

Potential increase from new civil and criminal cases; unknown increase in
database reporting costs

Note:  For most local governments, the fiscal year is the calendar year.  The school district fiscal year is July 1 through June 30.

 

·        Local Criminal Justice System Revenues and Expenditures.  As a result of the new penalties this bill contains, some persons, who may not have been successfully prosecuted and convicted under existing law, could be prosecuted and sanctioned.  These effects could in turn increase local criminal justice expenditures related to investigating, prosecuting, adjudicating, and sanctioning offenders who violate the provisions of the bill.  It is uncertain how many new cases will result from these penalties, but the bill creates the potential for additional court cost, filing fee, and fine revenues to be collected by county and municipal criminal justice systems statewide, which may offset some of the additional cost.

·        Consumer Transaction Remedies – Civil Actions.  This bill enacts a separate definition of "consumer transaction" from that which is in the Consumer Sales Practices Act (CSPA) that applies only to transactions between certain mortgage brokers, loan officers, and non-bank mortgage lenders and their customers and adds a twenty-one-point definition of unfair or deceptive acts that apply only to loan officers, mortgage brokers, and non-bank mortgage lenders.  The Attorney General and consumers are both afforded all of the powers given under the CSPA to seek remedies to violations.  It is uncertain how many new cases the Attorney General and consumers would bring to county or municipal courts in pursuit of civil remedies.  However, it is unlikely that the bill will generate a costly new burden for the applicable courts in the form of a large number of civil cases requiring adjudication.  Depending upon the civil remedy that the Attorney General might bring, a portion of the fine that could be assessed against a violator by the court might go to the treasury of the county where the case took place.

 


 

Detailed Fiscal Analysis

Overview

 

This bill makes many changes to the laws regarding consumer sales practices, real estate appraisers, mortgage brokers and loan officers, and mortgage lending.  Specifically, the bill enacts a separate definition of "consumer transaction" from that which is in the Consumer Sales Practices Act (CSPA) that applies only to transactions between certain mortgage brokers, loan officers, and non-bank mortgage lenders and their customers, adds a twenty-one point definition for an unfair or deceptive act or practice which applies only to mortgage brokers, loan officers, and non-bank mortgage lenders and their customers, prohibits a person from performing a real estate appraisal for a mortgage loan if the person is not licensed or certified, requires that national criminal background checks be conducted on all mortgage broker, loan officer, or real estate appraiser applicants, modifies the Mortgage Broker/Loan Officer Law and makes other changes relative to mortgage lending.

 

            New Consumer Protections

 

This bill enacts a separate definition of "consumer transaction" in Chapter 1349. of the Revised Code from that which is in the Consumer Sales Practices Act (CSPA).  This definition specifically applies to a loan transaction between loan officers, mortgage brokers, and non-bank mortgage lenders and their customers.

 

The bill also adds a twenty-one point definition for an unfair or deceptive act or practice which applies only to mortgage brokers, loan officers, and non-bank mortgage lenders and their customers.  Further, the bill authorizes the Superintendent of Financial Institutions to adopt rules to further define the practices that will violate the list of unfair or deceptive practices.  The bill authorizes the Attorney General to promulgate rules to create and publish a "Home Buyers Bill of Rights" based on the list of unfair or deceptive acts noted above.  This document is to be presented to the consumer of a home mortgage with the good faith estimate or loan application. 

 

The bill gives the Attorney General all powers that the Attorney General is provided under the CSPA to investigate violations of the bill's sections regarding what is an unfair or deceptive practice in a consumer transaction under Chapter 1349. of the Revised Code.  The Attorney General also may bring any actions related to those violations and impose penalties as provided under the CSPA.  Furthermore, a consumer who is harmed by a violation of these new sections has all the rights, actions, and remedies available to consumers under the CSPA.

 

Civil Remedies Available

 

Under the CSPA, there are two civil remedies available for handling violations of the Consumer Sales Practices Act:  one civil remedy would be available to the Attorney General’s Office, who can investigate violations, seek a declaratory judgment, an injunction or other equitable relief, or organize and bring a class action, and the other civil remedy would be available to consumers. 

 

The Attorney General’s Office may pursue civil remedies and its Consumer Protection Section, funded by both the GRF and the Consumer Protection Enforcement Fund (Fund 531), would handle the associated legal work.  However, it seems likely that the Attorney General’s Office would try to settle the issues surrounding violations of these new prohibitions prior to initiating any formal legal action.  For example, the violators could simply agree to cease their conduct, and assuming they do so, the Attorney General’s Office would stop incurring any related legal expenses.  Similar to the procedures taken in existing Consumer Sales Practices Law cases, the Attorney General’s Office would seek court action against a person as a last resort if they perceive that the person is receiving a pattern of consumer complaints.  Assuming a less formal negotiating strategy does not work, the Attorney General’s Office could request that a court of common pleas issue a declaratory judgment, a temporary restraining order, or an injunction in order to persuade violators to cease their offending behavior.  

 

If, on the other hand, the Attorney General’s Office successfully pursues a civil remedy under preexisting Consumer Sales Practice Law, the court adjudicating the matter can award the Attorney General all costs and expenses associated with its investigation, in addition to reasonable attorney’s fees.  The court may also order civil penalties up to $25,000.  Three-quarters of this civil penalty (as much as $18,750 if the maximum $25,000 possible fine is assessed), as well as the investigation costs and attorney’s fees would be credited to the state’s Consumer Protection Enforcement Fund (Fund 631).  The remaining one-quarter of the civil penalty that violators could be ordered to pay would go to the treasury of the county where the case took place (as much as $6,250 if the $25,000 maximum possible fine is assessed).

 

            Potential for New Civil Cases

 

As noted, the bill essentially expands the types of transactions that are subject to the Attorney General’s existing investigative and enforcement authority.  As a result of the bill, the number of transactions handled by the Consumer Protection Section is likely to increase.  However, the actual number of cases filed in county courts would most likely be relatively small as, under its current practice, the Attorney General’s Office would seek to use every means available to resolve the complaint before filing in court.  The number and magnitude of related complaints filed, investigations performed, and enforcement actions that would be taken as a result of the bill are unknown.  Thus, whether the bill will create additional ongoing operating expenses to the Consumer Protection Section, as well as the amount of those potential costs, is uncertain.

 

A consumer injured by a violation of the new sections dealing with loan transactions by a loan officer, mortgage broker, or non-bank mortgage lender would also be able to pursue civil remedies, which means that additional civil suits could be filed.  The filing of such civil suits would likely generate some additional filing fee and court cost revenue for counties and municipalities and place some additional burdens on the courts that will have to adjudicate these matters.  It is uncertain how many consumers will elect to pursue a civil remedy without the assistance of the Attorney General, but the number is assumed to be small as injured persons would, most likely, report a complaint to the Attorney General’s Office initially and then allow the Consumer Protection Division to seek a resolution to the complaint. 

 

Direct Enforcement Authority

 

Mortgage Broker Loan Officer Law

 

Currently, the Superintendent of Financial Institutions, the Attorney General, or a buyer may bring an action to enjoin a violation of the Mortgage Brokers/Loan Officers Law.  The bill permits the prosecuting attorney of the county in which the action may be brought to bring an action to enjoin a violation only if the prosecuting attorney first presents evidence of the violation to the Attorney General and, within a reasonable period of time, the Attorney General has not agreed to bring the action.  

 

With respect to criminal proceedings, the Superintendent is currently authorized to initiate such proceedings by presenting evidence of criminal violations to the prosecuting attorney of the county in which the offense may be prosecuted.  If the prosecuting attorney does not prosecute the violations, or at the prosecuting attorney's request, the Superintendent is required to present the evidence to the Attorney General, who may proceed with all the rights, privileges, and powers conferred by law on prosecuting attorneys.

 

The bill permits the prosecuting attorney to directly initiate criminal proceedings and permits to the Attorney General to initiate criminal proceedings only if the Attorney General first presents evidence of criminal violations to the prosecuting attorney and, within a reasonable period of time, the prosecuting attorney has not agreed to prosecute the violations.

 

The bill requires the clerk of court, when a judgment becomes final, to mail a copy of the judgment, including supporting opinions, to the Superintendent.

 

Second Mortgage Loan Law

 

The bill authorizes the Attorney General to directly bring an action to enjoin a violation of the Second Mortgage Loan Law, which generally regulates business practices of registrants and the terms and conditions of second mortgage laws and other loans made by registrants.  The prosecuting attorney of the county in which the action may be brought is authorized to bring an action to enjoin a violation of the Law only if the prosecuting attorney first presents evidence of the violation to the Attorney General and, within a reasonable period of time, the Attorney General has not agreed to bring the action.

 

For criminal proceedings, the bill authorizes the prosecuting attorney to directly initiate such proceedings.  It also permits the Attorney General to initiate criminal proceedings only if the Attorney General first presents evidence of criminal violations to the prosecuting attorney and, within a reasonable period of time, the prosecuting attorney has not agreed to prosecute the violations.

 

Consumer Credit Mortgage Loan Law

 

The bill authorizes the Superintendent of Financial Institutions or the Attorney General to directly bring an action to enjoin a violation of the Consumer Credit Mortgage Loan Law, which provides disclosure requirements and prohibits creditors from engaging in certain practices in relation to certain "high cost" mortgage loans.  The prosecuting attorney of the county in which the action may be brought is permitted to bring an action to enjoin a violation only if the prosecuting attorney first presents evidence of the violation to the Attorney General and, within a reasonable period of time, the Attorney General has not agreed to bring the action. 

 

For criminal proceedings, the Superintendent is currently authorized to initiate such proceedings by presenting evidence of criminal violations to the prosecuting attorney of the county in which the offense may be prosecuted.  If the prosecuting attorney does not prosecute the violations, or at the prosecuting attorney's request, the Superintendent is required to present the evidence to the Attorney General, who may proceed with all the rights, privileges, and powers conferred by law on prosecuting attorneys.

 

The bill permits the prosecuting attorney to directly initiate criminal proceedings and permits to the Attorney General to initiate criminal proceedings only if the Attorney General first presents evidence of criminal violations to the prosecuting attorney and, within a reasonable period of time, the prosecuting attorney has not agreed to prosecute the violations.

 

Fiscal Effects Uncertain

 

It is uncertain how providing direct enforcement authority will affect the Attorney General's workload and related operating costs or those costs that may be incurred by counties in bringing a civil action or initiating criminal proceedings.  Presumably, any increase in adjudication costs for county and municipal courts would be offset through court cost, filing fee, or fine revenue.

 

Department of Commerce

 

Consumer Financial Education Board

 

This bill creates the Consumer Financial Education Board, consisting of 13 members.  Each member is to be compensated in an amount fixed pursuant to Revised Code section 124.15(J) for each day employed in the discharge of the member's official duties as well as the member's actual and necessary expenses incurred in the discharge of those duties.  The Board is required to meet at least once per calendar quarter to conduct its business. 

 

According to the Department of Commerce, the entry pay level for board and commission members is generally $16.23 per hour.  Assuming each board member attends all four required meetings and is reimbursed approximately $200 for actual and necessary expenses for each meeting, it can be estimated that board and commission members may be reimbursed approximately $10,400 annually. 

 

It appears that the Board would have extensive duties in regard to formulating policy recommendations, providing consultation, providing resources and assistance to state agencies, and designing pilot programs and plans for financial education.  Therefore, estimating the number of days each member would perform those duties and the consequent compensation that would be paid to the board members is difficult.  Additionally, it may be that the Board would require meeting space, office supplies, and equipment to carry out its duties, all of which would add to the Board's expenses.  While the bill does not specifically state where these expenses would be paid from, it may be that the Consumer Finance Fund (Fund 553) would be used for those purposes.

 

The Board is also authorized to provide grants funded through reserves in the Consumer Finance Fund (Fund 553) to design, develop, and implement various financial education programs.  As of this writing, the current cash balance in the Consumer Finance Fund (Fund 553) is approximately $9 million.  The Department stated in testimony that there is cash available in this fund for various financial education pilot programs, but that the cash available for such programs would not be able to sustain ongoing programs.

 

Background Checks

 

The bill requires that the Division of Financial Institutions and the Division of Real Estate and Professional Licensing request that the Superintendent of the Bureau of Criminal Identification and Investigation (BCII) conduct criminal records checks of mortgage broker, loan officer, and real estate appraiser applicants to determine whether applicants have been convicted of or plead guilty to a violation of an existing or former law of this state, any other state, or the United States that is substantially related to criminal offenses involving theft, receiving stolen property, embezzlement, forgery, fraud, passing bad checks, money laundering, drug trafficking, or any criminal offense involving money or securities.  The Division of Financial Institutions and the Division of Real Estate and Professional Licensing are to forward any of the required forms and fingerprint impression sheets to BCII along with any fees required.  The bill also requires national criminal record information to be obtained from the FBI as part of any criminal records check.  However, the bill stipulates that applicants for the mortgage broker, loan officer, and real estate appraiser licenses or certifications are responsible to pay the required fees for the background checks.  The bill also permits the applicant to obtain a background check from alternative vendors approved by BCII.  Thus, there is no net fiscal effect on the Department of Commerce resulting from this provision.

 

New Database and Reporting Requirements

 

This bill requires the Department of Commerce to establish and maintain an electronic database accessible through the Internet that contains information on public record (1) enforcement actions taken by the Superintendent of Financial Institutions for violations in regard to the Mortgage Brokers/Loan Officer Law upon final disposition of the action, (2) enforcement actions taken by the Attorney General under the CSPA against certain loan officers, mortgage brokers, and non-bank mortgage lenders upon final disposition of the action, and (3) all judgments by courts of this state, concerning which appellate remedies have been exhausted or lost by the expiration of the time for appeal finding either a violation of the Mortgage Broker/Loan Officer Law or violation of the CSPA from specific acts or practices by a loan officer, mortgage broker, or non-bank mortgage lender.  The Attorney General is required to submit to the Department of Commerce on a quarterly basis a list of all enforcement actions and judgments related to items (2) and (3) above.  The Department of Commerce is uncertain how much it will cost the Consumer Finance Fund (Fund 553) to implement this database. 

 

The bill also requires the Superintendent of Financial Institutions to report semi-annually to the Governor and the General Assembly about actions instituted by the superintendent for violations of the Mortgage Brokers/Loan Officers Law, suspensions, revocations, or refusals to issue or renew certificates of registration and licenses under that same law and outreach efforts of the Office of Consumer Affairs to provide education regarding predatory lending, borrowing, and related financial topics.  It is likely that compiling this report will represent only a minimal additional financial burden on the Division of Financial Institutions.

 

Real Estate Appraiser and Loan Officer Requirements

 

Under current statute, nothing precludes a person who is not licensed or certified under the Division of Real Estate and Professional Licensing from appraising real estate for compensation.  This bill would prohibit a person from performing a real estate appraisal for a mortgage loan if the person is not licensed or certified.  It is uncertain how many unlicensed or uncertified real estate appraisers currently perform appraisals for mortgage loans in Ohio.  The additional revenue and costs to the Real Estate Appraisers Operating Fund (Fund 6A4) that any new applications and renewals would generate are dependent on how many new appraisers would be licensed.  The fees for real estate appraisers vary between $125 and $150 per year, depending on the type of license or certificate. 

 

The bill requires licensed real estate appraisers, when appraising property for a mortgage loan application, to provide a copy of the appraisal to the person applying for the mortgage, and to include a copy of the current appraisal of real property as done by the auditor of the county where the property is located.  The bill also prohibits any person from knowingly bribing, coercing, or extorting a person for the purpose of improperly influencing the independent judgment of a real estate appraiser.

 

Under current law, each loan officer licensee has 90 days after the issuance of his or her loan officer license to successfully complete an exam approved by the Superintendent of Financial Institutions.  This bill would require an applicant for the loan officer license to submit to an examination approved by the Superintendent before license issuance.  It appears that this provision will not have a direct fiscal effect on the Division of Financial Institutions.

 

Pre-Licensing Education for Mortgage Brokers and Loan Officers

 

In addition to the changes regarding real estate appraiser licenses and loan officer examinations, the bill requires any person who applies for a mortgage broker certificate or loan officer license on or after January 1, 2007 to meet certain qualifying education requirements, which, among others, include classes in real estate finance, Ohio real estate law, new case law on foreclosures, methods of eliminating the effects of predatory lending, and real estate appraisal.  The bill specifies that these classes must have been successfully completed at an approved institution of higher education within the preceding ten years.  Thus, it appears that individual mortgage brokers and loan officers will be responsible for paying the costs of these classes and that, consequently, there is no direct fiscal effect from this new education requirement.

 

Modified Confidentiality Laws

 

Current law allows the Division of Financial Institutions to release information relating to registrants and licensees to the Attorney General.  However, the information released is to be privileged and confidential.  Several provisions within the bill provide for the Superintendents of Financial Institutions and Real Estate, for purposes of administration, to share confidential information relating to mortgage brokers and loan officers, real estate brokers and salespersons, and real estate appraisers with each other, the Superintendent of Insurance, the Attorney General, local law enforcement agencies, and local prosecutors.  The bill maintains the current law requirement that such information remains confidential.  There appears to be no direct fiscal effect resulting from these provisions.

 

Additional Disclosure Requirements and Prohibitions

 

            Mortgage Loan Origination Disclosure Statements (MLODS)

 

Current law requires registered mortgage brokers to maintain records pertaining to business transacted for the last four years.  This bill would stipulate that these records must include copies of all mortgage loan origination disclosure statements.  Additionally, the bill would require that the mortgage loan origination disclosure statements contain a good faith estimate of the amount of the fee to be paid by the buyer to the mortgage broker.  If the loan applied for will exceed 90% of the value of the real property, the mortgage loan origination disclosure statement must include a statement, in boldface and at least 16-point type, warning the buyer that borrowing 90% of the home's value may make it difficult to refinance the loan and, when selling a home, the owner might owe more money on the loan than is received from the sale.  To verify the receipt of the disclosure statement, the bill also requires the signature of the buyer. 

 

The bill also requires a mortgage broker to deliver immediately a copy of any credit score and report obtained regarding the buyer by the mortgage broker for the purpose of the mortgage loan application.  A registered mortgage broker is also to deliver, at the same time the mortgage loan origination disclosure statement is delivered, to the buyer a good faith estimate statement disclosing the amount of or range of charges for the specific settlement services the buyer is likely to incur in connection with the mortgage loan.  This statement must meet federal Real Estate Settlement Procedures Act (RESPA) requirements and include a notice to the buyer describing the relationship between the mortgage broker and the buyer and termination terms of the agreement.

 

Other Disclosures

 

            In addition to the mortgage loan origination disclosure form, the bill would require a registered mortgage broker to provide the buyer with a written disclosure at least 24 hours before the loan is closed that sets out whether property taxes and insurance will be escrowed, a description of what is covered by the regular monthly payment in regard to principal, interest, taxes, and insurance.  The bill also requires a registered mortgage broker to timely inform the buyer of any material change in the terms of the loan and if any fees payable to the broker or lender increase by more than 10% or $100, whichever is greater. 

 

            New Prohibitions

 

            The bill prohibits (1) a registered mortgage broker from promising to refinance a loan in the future at a lower interest rate or with more favorable terms, unless the promise is set forth in writing and is initialed by the buyer and (2) knowingly bribing, coercing, or extorting a mortgage broker or loan officer to influence the mortgage broker's or loan officer's judgment.  Also, from the effective date of the bill on, no registered mortgage broker or any member of the registrant's immediate family, may own or control a majority interest in a residential real estate appraisal company.  However, the bill grandfathers a registered mortgage broker or any member of the broker's immediate family who currently owns or controls a majority interest in an appraisal company, subject to certain requirements.  Furthermore, the bill prohibits a registered mortgage broker or licensed loan officer from referring a buyer to a residential real estate appraisal company if there is an ownership or investment interest in the title insurance or appraisal company or any type of compensation arrangement.  The bill permits mortgage brokers and loan officers to refer buyers to any settlement service, including any title insurance company, if the buyer is provided with a written notice disclosing any business relationship or ownership interest.

 

            Fiduciary Duty

 

            The bill specifies that both registered mortgage brokers and licensed loan officers have a fiduciary duty with respect to any funds received from or on behalf of the buyer and must follow the reasonable and lawful instructions of the buyer, act with reasonable care, skill, and diligence, and make reasonable efforts with lenders with whom the mortgage broker or loan officer regularly does business to secure a loan that is reasonably advantageous to the borrower considering all the circumstances, including the rates, charges, repayment terms, and loan options which the borrower qualifies for with those lenders.  Additionally, if a buyer is approved for more than one loan product or by more than one lender, the mortgage broker or loan officer must present each option to the buyer, who is not to be hindered from choosing the option the buyer deems to best suit the buyer's needs, situation, or goals.  The bill states that the fiduciary duty and standards of care above cannot be waived or modified. 

 

            Fiscal Effects – Potential Increase in Civil Cases

 

            Current law provides the Superintendent of Financial Institutions, the Attorney General, or a buyer to bring a civil action to enjoin a violation of the Mortgage Brokers/Loan Officers Law.  The bill would also allow county prosecuting attorneys to bring an action if the Attorney General chooses not bring the action.  In light of the additional requirements presented in the bill, it may be that more civil cases are filed in county and municipal courts statewide.  However, it is uncertain how many such cases might be filed.  As such, it is possible that legal expenses for the Division of Financial Institutions and the Attorney General may increase if court action is initiated.  Any increase in adjudication costs for county and municipal courts is likely to be minimal as filing fee and court cost revenue would assist in offsetting the additional cost.

 

State and Local Criminal Justice Effects

 

            This bill prohibits any person from directly or indirectly knowingly compensating, instructing, inducing, coercing, or intimidating a real estate appraiser into making a false valuation of the dwelling offered as security for repayment of a mortgage loan.  This bill makes such a violation a felony of the fifth degree, which is punishable by a prison term of up to six to twelve months and a fine up to $2,500.  Additionally, the bill prohibits appraising real estate for a mortgage loan without the appropriate license or certification.  Violators of this prohibition would be guilty of a misdemeanor of the first degree, which carries a maximum sentence of six months and a maximum fine of $1,000. 

 

At the state level, the GRF and the Victims of Crime/Reparations Fund (Fund 402) may experience a minimal gain in the amount of court cost revenue from these penalties.  Violators of felonies of the fifth degree typically are not sentenced to prison, as there is a preference against such an action unless the offense involves certain drug offenses.  As such, it is not likely that the state will incur incarceration expenses.

 

At the local level, the bill's provisions could increase local criminal justice expenditures related to investigating, prosecuting, adjudicating, and sanctioning offenders.  However, it is uncertain how many new cases would result from the bill's new penalties.  The severity of the sentence in a case involving a misdemeanor is entirely up to the judge's discretion, as several factors, such as available bed space, severity of the crime, the presence of a repeat offender, and the judge's attitudes about the crime in question, can influence the decision.  Any increase in costs related to prosecuting and adjudicating these cases may be at least somewhat offset through court cost and fine revenue, making it likely that any additional cost would not be more than minimal.

 

 

 

LSC fiscal staff: Jason Phillips, Budget Analyst

 

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