PA 07-91—sSB 1143

Banks Committee

Insurance and Real Estate Committee

Judiciary Committee

AN ACT CONCERNING MORTGAGE, SMALL LOAN AND MONEY TRANSMITTER LICENSEES, MORTGAGE LOANS AND EMERGENCY ORDERS OF THE BANKING COMMISSIONER AND ADOPTING THE UNIFORM PRUDENT MANAGEMENT OF INSTITUTIONAL FUNDS ACT

SUMMARY: This act makes a number of changes to banking statutes. Among other things it:

1. authorizes the banking commissioner to, under certain circumstances, require a person to take or refrain from taking actions, in order to effectuate the purposes of the law;

2. consolidates statutes concerning mortgage closings and requires loan proceeds to be paid at loan consummation or when the right of rescission terminates, if one exists;

3. allows the commissioner to adopt regulations and make necessary findings for the conduct of small loan licensees in their association with other businesses and the conduct of those associated businesses, rather than doing so just for the licensee; and

4. makes a number of changes to the money transmitter laws to specify that certain provisions apply to monetary value, rather than just money, and Connecticut payment instruments, rather than all payment instruments.

It also provides guidelines for the management, investment, and expenditure of institutional funds by establishing the Uniform Prudent Management of Institutional Funds Act. The act applies to institutions, which are defined as entities organized and operated exclusively for charitable purposes; government or governmental subdivisions, agencies, or instrumentalities, to the extent that they hold funds exclusively for a charitable purpose; and trusts that had both charitable and noncharitable interests, after all noncharitable interests have terminated. The term “charitable purpose” includes purposes related to relieving poverty, advancing education or religion, promoting health, and other purposes that are communally beneficial.

Finally, the act defines a number of terms and makes technical and conforming changes.

EFFECTIVE DATE: October 1, 2007, except for the provisions on small loan licensees and the commissioner's authority regarding enforcement activities, which are effective on passage, and the provision on the IOLTA advisory panel which is effective July 1, 2007.

ORIGINATORS

1 & 4 — Definition

The act makes several changes to the definition of first and second mortgage loan originators. It specifies that the term includes individuals who act on behalf of lenders and brokers, rather than just those employed or retained by those individuals as under prior law. It includes taking a mortgage loan application in the duties that define an originator. Previously, originators only included those that negotiated, solicited, arranged, or found a first mortgage loan. The law specifies that the term does not include officers, partners, members, or sole proprietors of the corporate entity holding the first or second mortgage broker or lender license. The act also excludes individuals who do not engage in any originator activities and whose only responsibilities are clerical and administrative.

2 & 5 — False or Misleading Statements in Registration Application

The act specifies that a first or second mortgage broker or lender filing an originator registration renewal application with knowledge that it contains a material misstatement by the originator violates the banking law prohibiting false or misleading statements. Prior law applied only to initial applications.

3 & 6 — MORTGAGE LOAN LICENSE CHANGES

The act requires that, at least 21 calendar days before changing the name or location specified on a first or second mortgage loan license, the licensee file written notice with the banking commissioner on a form satisfactory to the commissioner. For a first mortgage loan license, the licensee must provide a bond rider or endorsement reflecting the changes. Prior law required only prior written notice before a location change. The act allows the licensee to make the change unless the commissioner disapproves in writing or requests further information within the 21-day period.

8-11 — MONEY TRANSMISSION

The act makes a number of changes to the money transmission statutes. First, it specifies that the definitions of “electronic payment instrument” and “payment instrument” relate to the transmission of monetary value, rather than just money. The term money transmission already includes the transmission of monetary value, which is defined as a medium of exchange, whether or not it is redeemable in money.

The act also specifies that the proceeds of the surety bond that money transmitter licensees must file are for the benefit of any claimant against a licensee in connection with the sale or issuance of payment instruments sold in this state, rather than just payment instruments generally. It specifies that the provision applies to the transmission of monetary value, rather than just money. It also specifies that investments in lieu of a surety bond benefit any claims against a licensee in connection with the transmission of monetary value, rather than just money.

The act specifies that permissible investments that money transmitter licensees must maintain must equal the aggregate amount of its outstanding payment instruments located in this state and stored value. Prior law did not limit the requirement to Connecticut payment instruments.

Finally, the act makes a licensee liable for the failure of its agents or subagents to forward the proceeds of any monetary value, rather than just money, given for transmission.

12, 38 — REAL ESTATE CLOSINGS

The act requires first and second mortgage loan proceeds to be paid when the loan is consummated or, in the case of a loan where the mortgagor has the right to rescind the transaction within three days under Regulation Z, at the end of this period. Under prior law, proceeds had to be paid when the loan was executed or at the termination of the rescission period. The act allows the lender to pay the loan proceeds to any person specified in the settlement agreement or any written agreement, as well as to the mortgagor or his attorney as allowed under prior law. The law allows funds to be paid by certified bank or cashier's check or by wire transfer.

The act repeals requirements specifically for first and second mortgage loan proceeds paid by wire transfer. Specifically, prior law required these proceeds to be transferred to the bank that holds the mortgagor's attorney's account in a timely manner, but no later than the scheduled time and date of closing or, if there is a right to rescind, by the disbursement date. For second mortgages, the requirement only applied to loans to finance the acquisition or initial construction of the mortgagor's principal dwelling. The law also specifically allowed the commissioner to suspend, revoke, or refuse to renew a license for failure to comply. The commissioner can still take these actions generally for any violation of the banking laws.

13-26 — BANKING COMMISSIONER'S AUTHORITY

The act specifically authorizes the commissioner to order a summary suspension of a license, in accordance with the law, if he finds that the public health, safety, or welfare imperatively requires emergency action and puts that finding in the required notice.

It also allows him to require a licensee to take or not take certain actions in the interim in order to effectuate the law's purposes, pending proceedings for suspension, revocation, or refusal to renew a license. The act specifically allows the commissioner to take these actions for each type of licensee. It gives the commissioner similar authority with regard to a related person of any Connecticut bank, holding company, credit union, or credit union service organization and registrants under the Connecticut Uniform Securities Act.

The law already allows the commissioner to issue a temporary cease and desist order for any person who is violating, about to violate, or has violated the banking laws after finding that the public welfare requires immediate action and putting this fact in the required notice. The act also allows him, as part of the order, to require that person or entity to take or not take any action that he believes will effectuate the purposes of the law, as part of the order. It gives the commissioner similar authority for cease and desist orders issued against a Connecticut bank, holding company, credit union, or credit union service organization and registrants under the Connecticut Uniform Securities Act.

27 — IOLTA ADVISORY PANEL

The act requires the advisory panel established to oversee the program that uses the interest on lawyers' clients' funds accounts (IOLTA) to report on the program to the Banks Committee, in addition to the Judiciary Committee and chief court administrator as required under prior law. It specifies that the committees or the administrator can request such reporting.

28–37 — UNIFORM PRUDENT MANAGEMENT OF INSTITUTIONAL FUNDS ACT

Management and Investment

In addition to complying with the duty of loyalty imposed by law, the act requires individuals or entities responsible for managing and investing an institutional fund to do so in good faith and with the care an ordinarily prudent person in a like position would exercise under similar circumstances. Institutions must also consider, subject to the donor's intent expressed in the gift instrument, the charitable purposes of the institution and the purposes of the fund. The act defines institutional fund, generally, as a fund held by an institution exclusively for charitable purposes.

In managing and investing an institutional fund, the act requires institutions to (1) incur only costs that are appropriate and reasonable in relation to the institution's assets, purposes, and available skills and (2) make a reasonable effort to verify relevant facts. The act allows institutions to pool institutional funds for management and investment purposes.

Additionally, the act requires the institution to consider the following factors in managing and investing an institutional fund (if they are relevant and except as otherwise provided in the gift instrument):

1. general economic conditions;

2. the effect of inflation or deflation;

3. expected tax consequences;

4. the role that each investment or course of action plays within the overall investment portfolio of the fund;

5. the expected total return from the investments;

6. the institution's other resources;

7. the need to make distributions and to preserve capital; and

8. an asset's special relationship or value to the institution's charitable purposes.

The act also sets out a number of other requirements that must apply to an institution, except as otherwise provided in the gift instrument. First, management and investment decisions about an individual asset must be made in the context of the institutional fund's whole portfolio of investments and as a part of an overall investment strategy having risk and return objectives reasonably suited to the fund and institution.

Second, the act allows an institution to invest in any kind of property or type of investment, except as otherwise provided by law, consistent with the standards set by the act. It requires institutions to diversify an institutional fund's investments unless it reasonably determines that the purposes of the fund are better served without diversification because of special circumstances. Within a reasonable time after receiving property, the act requires institutions to make and implement decisions on the retention or disposition of the property or to rebalance a portfolio in order to bring the institutional fund into compliance with the act and the purposes, terms, distribution requirements, and other circumstances of the institution.

Finally, the act specifies that a person who has special skills or expertise, or is selected in reliance on the person's representation that she or he has such skills or expertise, has a duty to use them in managing and investing institutional funds.

Appropriation and Expenditure of Endowment Funds

The act allows an institution to accumulate or appropriate for expenditure an amount from an endowment fund that the institution determines to be prudent for the fund's uses, benefits, purposes, and duration, subject to the donor's intent as expressed in a gift instrument. However, the gift instrument must specifically state any limitation on the authority to appropriate for expenditure or accumulate. The act defines an endowment fund as an institutional fund, or any part thereof, that is not currently wholly expendable by the institution under the terms of a gift instrument. The term does not include an institution's assets that it designates as an endowment fund for its own use.

In making a determination to appropriate or accumulate funds, the institution must act in good faith with the care that an ordinarily prudent person in a like position would exercise under similar circumstances. It must consider, if relevant, the following:

1. the endowment fund's duration and preservation;

2. the purposes of the institution and the endowment fund;

3. general economic conditions;

4. possible effects of inflation or deflation;

5. expected total return from income and the appreciation of investments; and

6. the institution's other resources and investment policy.

The act provides that terms in a gift instrument designating a gift as an endowment or a direction or authorization in the gift instrument to use only “income,” “interest,” “dividends” or “rents, issues or profits,” or “to preserve the principal intact,” or similar words (1) create an endowment fund of permanent duration unless other language in the gift instrument limits the duration or purpose and (2) do not otherwise limit the authority to appropriate for expenditure or accumulate as provided in the act.

The act specifies that, unless otherwise stated in the gift instrument, the assets in an endowment fund are considered donor-restricted until the institution appropriates them for expenditure.

External Agents

The act allows an institution to delegate the management and investment of an institutional fund to an external agent, if it could prudently do so and subject to any specific limitation in a gift instrument or in existing law. The act requires institutions to act in good faith, with the care that an ordinarily prudent person in a like position would exercise under similar circumstances, in:

1. selecting an agent;

2. establishing the scope and terms of the delegation, consistent with the purposes of the institution and the institutional fund; and

3. periodically reviewing the agent's actions in order to monitor the agent's performance and compliance with the scope and terms of the delegation.

An institution that complies with these requirements is not liable for the decisions or actions of an agent.

An agent owes a duty to the institution to exercise reasonable care to comply with the scope and terms of the delegation and, by accepting such a delegation from an institution, submits to the jurisdiction of the state's courts in all proceedings related to the delegation or performance of the delegated function.

The act also specifies that institutions can delegate management and investment functions to its committees, officers, or employees as authorized by existing law.

Release or Modification of Restrictions

The act allows an institution to release or modify a restriction on the management, investment, or purpose of an institutional fund if it has a record of the donor's consent. However, the fund must still be used for the institution's charitable purposes. The act defines a record as information that is transcribed in a tangible medium that is stored in an electronic or other medium and is retrievable in perceivable form.

Additionally, the act allows a court, upon an institution's application, to modify a management or investment restriction if (1) it becomes impracticable or wasteful or impairs management or investment or (2) a modification will further the purposes of the fund because of circumstances the donor did not anticipate. Modifications must be made in accordance with the donor's probable intention to the extent practicable. Similarly, the act allows a court, upon an institution's application, to modify a fund's purpose or use restriction in a manner consistent with the charitable purposes expressed in the gift instrument if a particular charitable purpose or a restriction becomes unlawful, impracticable, impossible to achieve, or wasteful. In both of these situations, the institution must notify the attorney general, who must be given an opportunity to be heard.

The act states that its provisions should not be construed as amending or altering existing standards for approximation, cy pres (next best use), or equitable deviation actions.

Applicability

The act specifies that (1) its requirements apply to institutional funds existing on or established after October 1, 2007 and, for funds existing on that date, govern only decisions or actions occurring after that date; (2) compliance must be determined in light of the facts and circumstances at the time decisions or actions occur; and (3) in applying and construing the act, consideration must be given to the need to promote uniformity among enacting states.

The act specifies that it modifies, limits, and supersedes most of the federal Electronic Signatures in Global and National Commerce Act except for some basic provisions. This federal law was established to facilitate the use of electronic records and signatures in interstate and foreign commerce by ensuring the validity and legal effect of contracts entered into electronically.

BACKGROUND

Uniform Management of Institutional Funds Act

In 1973, Connecticut adopted the Uniform Management of Institutional Funds Act (UMIFA), which this act does not repeal. UMIFA, requires the governing board of a charitable, religious, or educational institution to exercise the same reasonable skill, care, and caution in managing its endowment as a prudent investor would under the Connecticut Prudent Investor Act. An endowment is a fund held by an institution exclusively for its use or benefit that is not wholly expendable by the institution on a current basis under the terms of the gift instrument. A gift instrument is a will, deed, grant, agreement, or other document that transfers property to set up the fund.

UMIFA allows boards to invest funds for total return and hire professional investment counsel and managers. It also sets rules for the appropriation of net appreciations; accumulation of income; investment of funds; delegation of authority; and elimination of obsolete, inappropriate, or impractical restrictions on the fund.

OLR Tracking: SC: SS: CR: RO