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:

February 22, 2006

STATUS:

As Reported by Senate Finance and Financial Institutions

SPONSOR:

Sen. Padgett

LOCAL IMPACT STATEMENT REQUIRED:

No —

Minimal cost

 


CONTENTS:

Modifies the application of, and damages available under, the Consumer Sales Practices Act; generally prohibits the appraisal of real estate 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; 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 2006

FY 2007

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

Increase for development of database

Increase for development of database

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 workload.  As a result of the bill, 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, as this is an area of sales practices in which the Attorney General does not currently have jurisdiction, estimating the number and magnitude of related complaints filed, and investigations and enforcement actions taken, is problematic.  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.

·        Civil penalties.  As of this writing, it is uncertain as to how much civil penalty revenue may be collected annually from persons in violation of the bill’s transactions prohibition and subsequently deposited to the credit of the Attorney General’s Consumer Protection Enforcement Fund (Fund 631).

·        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 require the licensure or certification of all real estate appraisers by removing that language.  It is uncertain how many unlicensed or uncertified real estate appraisers are operating 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 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. 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.

·        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.

·         CSPA Remedies – Civil Actions.  This bill expands the Consumer Sales Practices Act (CSPA) to include consumer transactions between mortgage brokers and loan officers employed by non-depository lending institutions.  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.

·        Database Reporting Costs.  This bill would require clerks of court to mail final judgments regarding civil and criminal actions brought by the Attorney General, Superintendent of Financial Institutions, or county prosecuting attorney for violations of the Mortgage Brokers/Loan Officers Law  for purposes of maintaining the public database that is to be developed by the Department of Commerce.  It is uncertain what impact this may have on courts, as the effect would depend on the extent that such reporting mechanisms are currently in 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 modifies the application of the Consumer Sales Practices Act to include mortgage brokers and loan officers employed by non-depository lending institutions, prohibits the appraisal of real estate without state certification or licensure, 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.

 

Consumer Sales Practices Act (CSPA)

 

The Consumer Sales Practices Act (CSPA) prohibits unfair or deceptive trade practices in "consumer transactions," such as falsely representing the characteristics of a product, falsely indicating that a specific price advantage exists, misrepresenting a warranty, or falsely indicating the need for a repair.  The CSPA also prohibits unconscionable acts in consumer transactions.  Overall, the statute authorizes the Attorney General to investigate alleged violations and to seek civil penalties and remedies for various consumer transactions, and provides consumers with a private right of action. 

 

In current law, in an individual action, a consumer generally may rescind the transaction or recover the individual's damages.  The bill would specify that the recovery of damages is only for actual damages, which would be direct, incidental, or consequential monetary losses resulting from a violation.  The current CSPA also permits consumers to seek a declaratory judgment, an injunction, or otherwise appropriate relief against an act or practice that constitutes a violation.  The court may award to the prevailing party a reasonable attorney's fee if the consumer brought an action that is groundless and filed that action in bad faith or if a particular violation of the CSPA was knowingly committed.  The bill would make mandatory the awarding of reasonable attorney's fees limited to the work performed in cases where a consumer has brought or maintained an action that is groundless, and the consumer filed or maintained the action in bad faith.

 

            Inclusion of Certain Transactions

 

Existing law exempts certain transactions from the protection of the CSPA.  It does not cover transactions between a customer or client and a public utility, a financial institution, a dealer in intangibles, a domestic or foreign insurance company, a certified public accountant, a public accountant, an attorney, a physician, a dentist, or a veterinarian for a transaction that pertains to medical treatment.  This bill would specifically include transactions between loan officers, mortgage brokers, non-bank mortgage lenders, and their customers.

 


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 CSPA Complaints

 

Given the recent attention concerning the number of foreclosures in Ohio, it is likely that the Attorney General’s Office may receive a significant number of complaints regarding the transactions that would be included in the CSPA.  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.  As noted, the bill essentially expands the types of transactions that are covered under the CSPA and are thus 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, as this is an area of sales practices in which the Attorney General does not currently have jurisdiction, estimating the number and magnitude of related complaints filed, and investigations and enforcement actions taken, is problematic.  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 CSPA 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

 

            The bill also allows the Attorney General to directly bring a civil action within a reasonable period of time to enjoin a violation of the Second Mortgage Loan Law, the Mortgage Brokers/Loan Officers Law, and the Predatory Lending Act.  Additionally, the prosecuting attorney of the county in which the action may be brought may bring an action to enjoin a violation of such laws if the prosecuting attorney first presents any evidence of the violation to the Attorney General and the Attorney General chooses not to bring the action or if the Attorney General elects not to pursue any civil penalties within a reasonable time period. 

 

            Similarly, the Attorney General may initiate criminal proceedings under the Second Mortgage Loan Law, the Mortgage Brokers/Loan Officers Law, and the Predatory Lending Act.  The prosecuting attorney of the county in which an alleged offense may be prosecuted may also initiate criminal proceedings, but, to do so, the prosecuting attorney must first present any evidence of criminal violations to the Attorney General.  The Attorney General may defer prosecution of the violations to the prosecuting attorney or may proceed in the prosecution if the local prosecutor elects not to pursue the case or if the local prosecutor fails to take any action within a reasonable period of time.

 

            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

 

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 enforcement actions taken by the Superintendent of Financial Institutions for violations in regard to the Mortgage Brokers/Loan Officer Law, enforcement actions taken by the Attorney General under the CSPA against loan officers, mortgage brokers, and non-bank mortgage lenders, and all public record judgments by courts of this state, concerning which appellate remedies have been exhausted 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 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 Attorney General to submit to the Department of Commerce on a quarterly basis all relevant enforcement actions and judgments and the clerks of court to mail final judgments regarding civil and criminal actions brought by the Attorney General, Superintendent of Financial Institutions, or county prosecuting attorney for violations of the Mortgage Brokers/Loan Officers Law to the Superintendent of Financial Institutions for purposes of maintaining the public database.  It is uncertain what impact this may have on courts, as the effect would depend on the extent that reporting mechanisms are currently in place.

 

            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 Licensing and Loan Officer Examinations

 

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, in order to comport with federal law, would require the licensure or certification of all real estate appraisers by removing that language.  It is uncertain how many unlicensed or uncertified real estate appraisers are operating 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.  The fees for real estate appraisers vary between $125 and $150, depending on the type of license or certificate.

 

Under current law, each loan officer licensee had 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.

 

Modified Confidentiality Laws

 

Current law allows the Division of Financial Institutions to relate information relating to registrants and licensees to the Attorney General.  However, the information released remains privileged and confidential.  Several provisions within the bill provide for the Division of Financial Institutions to share information relating to registrants and licensees with the Division of Real Estate and Professional Licensing and the Department of Insurance in regard to administering the relevant chapter of the Revised Code.  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

 

            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.

 

            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 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.  A buyer injured by a violation of these requirements may bring an action for recovery of damages.

 

            The bill prohibits 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.  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 title insurance company or 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 a title or appraisal company, subject to certain requirements.  Furthermore, the bill prohibits a registered mortgage broker or licensed loan officer from referring a buyer to a title insurance company or 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. 

 

            For mortgage loan transactions, the bill requires both the registered mortgage broker and the licensed loan officer to be a fiduciary of the buyer and must use their best efforts to further the interest of the buyer, including complying with the reasonable and lawful instructions of the buyer and acting with reasonable care, skill and diligence on behalf of the buyer.

 

            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 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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