BWM C.S.H.B. 2352 75(R)BILL ANALYSIS FINANCIAL INSTITUTIONS C.S.H.B. 2352 By: Marchant 4-19-97 Committee Report (Substituted) BACKGROUND In recent years there has been a significant increase in the number of people who act in the capacity of mortgage brokers. A mortgage broker is a person who brings a potential borrower and a lender together in order to close a mortgage loan. Today in Texas, there is no requirement for a mortgage broker to register with any state agency in order to do business. Because of the extensive growth in the brokerage business, it is now necessary to provide a framework for registering brokers. This will provide the citizens of Texas a level of confidence and safety when dealing with a mortgage broker. HB 2352 is the result of the work of concerned persons within the mortgage broker industry, the Office of Consumer Credit and the Texas Association of Mortgage Brokers. It will assure both the people of Texas and the mortgage industry a level of professionalism when obtaining a mortgage loan. PURPOSE If enacted, HB 2352 will provide for the registration of mortgage brokers by the Texas Office of Consumer Credit. It would require that mortgage brokers keep a minimum level of net worth or bond and would limit the types of advertising that a broker may use in marketing their services. RULEMAKING AUTHORITY It is the committee's opinion that this bill expressly grants rulemaking authority in SECTION 1, Sec 13(a) to the Consumer Credit Commissioner to accomplish the purposes of this article, including rules relating to (1) improper or fraudulent business practices or other acts harmful to consumers in this state, and (2) the interpretation, implementation, and enforcement of this article. In SECTION 1, Sec. 13(b) to the Consumer Credit Commissioner to prohibit false, misleading, or deceptive practices by registrants, but may not restrict the use of any medium for advertising, the personal appearance of or voice of a person in an advertisement, the size or duration of an advertisement, or the registrant's advertisement under a trade name. In Sec. 13 (c) to the Consumer Credit Commissioner to provide for proportionate recovery from the cost of applications, renewals, and investigation. SECTION BY SECTION ANALYSIS SECTION 1. Amends Chapter 20, Title 132 by adding 9001 as follows: Sec. 1. DEFINITIONS. (1) commissioner, (2) mortgage, (3) mortgage applicant, (4) mortgage banker, (5) mortgage broker, (6) registrant. Sec 2. CERTIFICATION OF REGISTRATION REQUIREMENT. Provides for requirements for certificate of registration. (a) A person cannot act as a mortgage broker without first having obtained a certificate of registration for each office to be maintained by the person. (b) An employee of the registrant is not required to obtain a certificate of registration. (c) Provides entities not required to have a certificate of registration: Sec. 3. APPLICATION FOR CERTIFICATE OF REGISTRATION. Provides for the application for certificate of registration. (a) An application must be in writing, under oath, and in the form proscribed by the commissioner. It must also include $150 for each office location. (b) Provides that the application fee is not refundable. (c) Provides that one shareholder or partner must be named as business manager if applicant is a corporation or partnership. Sec.4. QUALIFICATIONS. Provides qualifications to be eligible for a certificate of registration. (1) Applicant must have at least one of the following requirements: (A) have an associate's degree in finance, banking or business; (B) have certification form or similar to the National Association of Mortgage Brokers; (C) have a real estate broker or salesman license under The Real Estate License Act; (D) be an attorney licensed in Texas; (E) be a CPA licensed in Texas; or (F) have three years experience (i) in the mortgage or lending field, or (ii) that the commissioner determines meets a minimum standard for education and experience. (2) Applicant must be in compliance with the financial requirements of this article; (3) Applicant must have the financial confidence of the public and warrant belief that the business will be operated honestly and fairly. Sec. 5. MINIMUM NET ASSETS. (a) Provides that the registrant shall maintain a minimum net assets of $25,000 and a surety bond of $50,000 that coincides with the term of the registration. (b) This section does not apply to a registrant licensed to practice law in Texas. (c) Defines net worth for this section and disallows assets of doubtful or uncertain value. Sec. 6. CRIMINAL HISTORY RECORD INFORMATION. (a) Entitles the commissioner to check criminal history of the applicant. (b) Provides that criminal history information is confidential. Sec. 7. ISSUANCE OF CERTIFICATE OF REGISTRATION. (a) Provides that the commissioner shall issue a certificate of registration by the 30th day after receipt of the completed application, unless requirements are not believed to be met. (b) Provides denials must be made in writing, and appeals are to be made within 30 days after decision of denial. (c) Provides for a $150 renewal fee for each office and a $100 late renewal fee if renewal application is made within 180 days of registration expiration. (d) Provides for a 30 day notification preceding an address change, and requiring a new application with application fee and a $15 relocation fee if the business is moved to a new municipality. (e) Fees are not refundable after certificate of registration is issued. (f) Provides that certificates of registration are not transferrable and cannot be assigned. Sec. 8. INVESTIGATION AND INSPECTION OF RECORDS. (a) Provides that the commissioner may request information and records if the commissioner receives a written complaint or has reason to believe a person is in violation of state law to which this article applies. Provides that the commissioner may conduct an investigation if a person fails to comply with above request. (b) All information obtained in investigating alleged violations is confidential. Sec. 9. PROHIBITIONS. Prohibits a registrant or applicant from: (1) obtaining a certificate of registration through fraud or misrepresentation, (2) publish misleading or deceptive advertisements, (3) engaging in conduct that is improper or fraudulent, (4) failing to notify the commissioner if they are convicted or plead guilty to a felony or criminal offense involving fraud, (5) failing to use fees for the purposes for which they were paid, or (6) charging or receiving fees for obtaining a mortgage until mortgage proceeds are disbursed to applicant except as provided by Section 10. Sec. 10. FEE ASSESSMENT AND DISCLOSURE. (a). Allows fees to be charged before completion of all services for the following: (1) to obtain a credit report; (2) to appraise the real estate; (3) paid directly by the applicant to a state or federal agency for processing a mortgage application relating to government-sponsored or guaranteed mortgage program; (4) subject to Subsection (b), to lock in an interest rate, issue a commitment letter, and process a loan or a loan application when obtaining or refinancing a mortgage loan. (b) Provides that a registrant may not charge fees locking in interest rates, issuing commitment letter, or processing a loan or loan application unless a written agreement is signed by the applicant that contains: (1) the expiration date of the locked-in interest rate; (2) the principle amount of the mortgage; (3) the term of the loan; (4) an identification of the property; (5) the initial interest rate; (6) the discount or points to be paid; (7) the amounts and payment terms of the fees to lock in the interest rate and commitment fee; (8) whether or not the fee in Subsection (7) is refundable; and (9) sources and amount to be paid to a broker by anyone other than the applicant. (c) Provides for return of fees in the event the mortgage is refused or denied. (d) Defines "bona fide third party." Sec. 11. SUSPENSION, REVOCATION, OR REFUSAL OF LICENSE; INVESTIGATIONS; CEASE AND DESIST ORDERS. (a) Provides for refusal of certification if the commissioner finds: (1) Failure of payment of fees by registrant; (2) Violation of rule or order of this article by registrant; (3) Existence of a fact or condition justifying refusal if existing at the time of application; (4) The registrant has conspired to circumvent the requirements of this article; (5) The registrant does not command the confidence of the public that the business will be operated lawfully and fairly; or (6) The registrant has failed to maintain the minimum financial requirements. (b) Provides the commissioner may investigate and take to court any alleged violations and complaints of violations of this article. (c) Provides for subpoena of witnesses, examination of records, verification of records, admissible evidence, and powers of the commissioner in an investigation of alleged violations of this article. (d) Provides for district court orders to compel obedience to the commissioner in investigating alleged violations of this article. (e) Provides for the issuance of a cease and desist order if a person is found to be in violation of this article. Sec. 12. CIVIL ACTIONS; INJUNCTIVE RELIEF; CRIMINAL PROSECUTIONS. (a) Provides applicant may bring an action for recovery of damages and reasonable attorney's fees if injured by violation of this article. (b) Provides the commissioner, attorney general, and applicant can bring an action to enjoin a violation. (c) Provides remedies are in addition to any other remedy provided by law. (d) Provides burden of proving an exemption to be on the person claiming the benefit. (e) Provides a person does not violate this article with respect to an act taken or omission made in reliance on a written notice, interpretation or report from the commissioner, unless affected by a subsequent amendment. (f) Provides for the completion of the registrant's services. Sec. 13. RULEMAKING POWERS. (a) Provides for rules to be adopted by the commissioner relating to: (1) improper or fraudulent business practices; and (2) interpretation, implementation, and enforcement of this article. (b) Provides for rulemaking authority of the commissioner to prohibit deceptive business practices, but restricts these prohibitions from: (1) restricting the use of any medium for advertising; (2) restricting appearance or voice of a person in an advertisement; (3) restricting the size or duration of an advertisement; or (4) restricting the registrant's advertisement under a trade name. (c) Provides for rulemaking authority of the commissioner to provide for proportionate recovery from registrants of the cost of applications, renewals, and investigation. Sec. 14. ACCOUNT. (a) Provides for deposit by the commissioner into a special account in the general revenue fund for all money received under this article. (b) Provides that money in this account be used only to administer this article. Sec. 15. EFFECT ON TEXAS CREDIT SERVICES ORGANIZATIONS ACT. Provides that a registrant is exempt from the requirements of Chapter 18, Business and Commerce Code, to the extent that the registrant does not charge a fee for any service regulated under that chapter. Sec. 16. SECONDARY MARKET TRANSACTIONS. Provides the mortgage broker is not restricted from receiving a fee from a party other than the mortgage applicant. SECTION 2. (a) Effective date of September 1, 1997. (b) Provides a person is not required to be registered before January 1, 1997. SECTION 3. Emergency clause. COMPARISON OF ORIGINAL TO SUBSTITUTE The Committee Substitute to HB 2352 makes several non-substantive and conforming changes in order that it be consistent with current statutes and administrative procedures. Furthermore, the definitions of "consumer reporting agency," "person," and "secondary market transaction" were deleted, while the definition of "borrower" is changed to "mortgage applicant," and the definition of "mortgage" and "mortgage broker" were amended to apply only to residential transactions. The Committee Substitute clarifies who must obtain a certificate of registration and adds that a person licensed under Chapter 3, Title 79 to list of persons not required to obtain a certificate of registration. The Substitute removes the requirement that an application must provide business address information and name and address of sole proprietors, partners and shareholders. The substitute added qualifications requiring experience of the applicant, and adds attorney's, CPA's, and licensed real estate brokers and salespersons to the list of those who automatically qualify. The Substitute changes the amount of time for the commissioner to issue certificates of registration to 30 days and creates a late fee ($100) and provides a 180 day period for late renewal. The Substitute removes the requirement to keep records. The Substitute eliminates fees the registrant may charge for the following: notary services; to record, file or release a security interest or mortgage; performance of a title search; and the survey of real estate. Also removed is the limitation of fee for locking in an interest rate to 1-1/2 percent of the mortgage loan. The Substitute eliminates limitations on advertising, and prohibits false advertising. Furthermore, the commissioner is granted the authority to adopt rules regarding the prohibition of false advertising. The Substitute removes from recovery of damages the restriction against punitive damages and removes the ability of the commissioner to initiate criminal proceedings. The Substitute does not include the provision to establish the Mortgage Brokers Advisory Commission and the provision requiring continuing education and criminal penalties. The Substitute rewrites investigations by the commissioner into alleged violations to make section more consistent with administrative procedure. The Substitute adds that the commissioner may adopt rules relating to fraudulent business practices and harmful acts to consumers, to prohibit false advertising, and to assess and recover fees for additional costs.