OLR Bill Analysis
AN ACT CONCERNING MORTGAGE CORRESPONDENT LENDERS, THE SMALL LOAN ACT, VIRTUAL CURRENCIES AND SECURITY FREEZES ON CONSUMER CREDIT REPORTS.
1. allows Connecticut-licensed mortgage correspondent lenders to act as mortgage servicers without obtaining a mortgage servicer license from the banking commissioner, under certain circumstances;
2. changes the fidelity bond and error and omissions coverages requirements for mortgage servicers;
3. voids a contract or other agreement involving interest, consideration, or charges that violates the laws governing small loans and makes other changes regarding violations of these laws;
4. requires an applicant for a money transmitter license to indicate whether the business will transmit virtual currency (such as Bitcoin), allows the commissioner to deny such a license if the proposed business model poses an undue risk of financial loss to consumers, and allows him to place additional requirements on such a license including requiring different surety bond amounts than for other money transmitters; and
5. prohibits credit reporting agencies from charging certain people (including identity theft victims) fees related to credit freezes.
EFFECTIVE DATE: Upon passage, except the provisions on virtual currency are effective October 1, 2015.
§§ 1-3 — MORTGAGE SERVICERS
Correspondent Lenders Acting as Servicers
The law requires mortgage servicers, with some exceptions, to obtain a license from the banking commissioner. New licensing requirements took effect on January 1, 2015. The bill conforms the law to agency practice by allowing Connecticut-licensed mortgage correspondent lenders to act as mortgage servicers without obtaining a mortgage servicer license when they do so:
1. for residential mortgage loans they made,
2. during the loan's 90-day holding period, and
3. from a licensed main or branch office.
This exception does not apply while a person's correspondent lender license is suspended.
By law, Connecticut-licensed mortgage correspondent lenders are allowed to make residential mortgage loans in their names, the mortgages are funded by others under certain types of agreements, and the correspondent lenders can hold the loans for up to 90 days.
The bill requires these correspondent lenders to follow the law's requirements for mortgage servicers when they perform this role, including recordkeeping and disclosure requirements, complying with federal law and fee schedule restrictions, and avoiding prohibited acts. But the bill does not require them to meet the surety and fidelity bond and errors and omissions coverage requirements for mortgage servicers.
The law already allows most banks, their subsidiaries, and Connecticut-licensed mortgage lenders that meet the bond and errors and omissions coverage requirements to act as mortgage servicers without a license.
Fidelity Bonds and Insurance Coverage
The law requires mortgage servicers and mortgage lenders acting as mortgage servicers to have (1) a fidelity bond to cover losses from fraud, embezzlement, misplacement, forgery, and similar acts committed by their employees and (2) errors and omissions coverage for losses arising from negligence, errors, and omissions related to the payment of real estate taxes and special assessments, hazard and flood insurance, or maintaining mortgage and guaranty insurance.
The law sets the fidelity bond and errors and omissions coverage amounts based on the mortgage servicer's volume of servicing activity most recently reported to the commissioner. The bill allows the servicer to have more coverage than the amounts currently required, which are as follows:
1. $300,000 if the amount of the residential mortgage loans serviced is $100 million or less or
2. if the loan amount exceeds $100 million, the principal amount must be $300,000 plus (a) 0.15% of the amount of residential mortgage loans serviced between $100 million and $500 million, (b) 0.125% of the amount of such loans serviced from $500 million to $1 billion, and (c) 0.1% of the amount of such loans serviced above $1 billion.
Currently, the fidelity bond and errors and omissions coverage may include a deductible of up to $100,000 or 5% of the principal. The bill instead caps the deductible at $100,000 or 5% of the face amount of the bond or coverage.
§ 4 — SMALL LOANS
The law prohibits anyone, unless authorized under the small loan lender laws, from directly or indirectly charging, contracting for, or receiving any interest, charge, or consideration greater than 12% annually on the loan, use, or forbearance of money or credit on the amount or value up to $15,000. The law prohibits enforcing in Connecticut any loan with an interest rate or charge greater than allowed under these provisions.
The bill also makes a contract of loan, use, or forebearance of money or credit void if it charges, contracts for, or someone receives interest, consideration, or charges beyond what the law permits. It prohibits anyone from collecting or receiving the principal, interest, charges, or consideration on such a contract. It also prohibits anyone from directly or indirectly assisting another person in prohibited conduct regarding small loans.
Anyone who violates the bill's provisions is subject to the commissioner's authority to (1) investigate suspected violations of the small loan requirements and (2) take various actions including suspending, revoking, or refusing to renew a person's license; issuing a cease and desist order; imposing civil penalties; and requiring restitution.
§§ 5-8 — VIRTUAL CURRENCY AND MONEY TRANSMISSION
Generally, the Money Transmission Act regulates businesses, other than banks, that receive and transmit money. It requires these businesses to be licensed, imposes financial conditions on them, and subjects them to Banking Department oversight.
As part of the initial application or license renewal process, the bill requires a person to indicate whether his or her money transmission business will include transmitting monetary value in the form of virtual currency.
The bill allows the commissioner to deny a money transmission license to an otherwise qualified applicant who will or may engage in business involving virtual currency if the commissioner believes it would be an undue risk of financial loss to consumers, considering the applicant's proposed business model. By law, the commissioner can deny a license if certain individuals associated with the business have certain criminal convictions or are listed on certain U.S. Treasury Department lists.
Licenses Restrictions and Bond Requirements
The bill allows the commissioner to place additional requirements, restrictions, or conditions on the license of an applicant involved with virtual currency. This can include imposing different surety bond requirements than ordinarily apply to money transmitters, if a money transmitter will or may engage in transmissions involving virtual currency. Any amount imposed must reasonably address the current and prospective volatility of the market in virtual currencies.
By law, transmitters post these bonds for the faithful performance of their obligations and to ensure they conduct business according to law. Table 1 shows the bond requirements currently imposed on money transmitters.
Table 1: Bond Requirements for Money Transmitters
Average weekly amount of money transmitted in the state for year ending June 30
Amount of Bond
Less than $300,000
$300,000 to $500,000
More than $500,000
By law, a money transmitter may replace some or all of the bond requirement with specified investments, but the total amount of investments and bonds must equal the bond limits described above.
Virtual Currency Defined
Under the bill, virtual currency is a digital unit (1) used as a medium of exchange or form of digitally stored value or (2) incorporated into payment system technology. It includes digital units of exchange that:
1. have a centralized repository or administrator,
2. are decentralized without a centralized repository or administrator, or
3. may be created or obtained by computer or manufacturing effort.
Under the bill, virtual currency does not include digital units used:
1. solely in online gaming platforms with no other market or application or
2. exclusively in a consumer affinity or rewards program that can be used only as payment for purchases with the issuer or another designated merchant and cannot be converted into or redeemed for fiat currency (government-backed currency, such as the U.S. dollar).
§ 9 — SECURITY FREEZES ON CREDIT REPORTS
The law allows a consumer to request that a credit rating agency place a security freeze on his or her credit report. A freeze prohibits the agency from releasing information in the credit report without the consumer's express authorization.
The bill prohibits credit rating agencies from charging the fees that would otherwise apply for placing a security freeze on a person's credit report, removing the freeze, or temporarily lifting one (up to $10) or temporarily lifting the freeze for a specific party (up to $12) to the following people:
1. an identity theft victim who submits a copy of a policy report,
2. the spouse of an identity theft victim,
3. anyone under age 18 or at least age 62,
4. anyone who has a court-appointed guardian or conservator, or
5. a person who provides evidence that he or she is a domestic violence victim (evidence may include police, government, or court records; documents from people the victim sought assistance from such as shelter workers or medical or legal professionals; or a statement from someone who knows the circumstances of the violence).
The bill prohibits credit reporting agencies from charging a fee the first time a consumer requests a replacement identification number. By law, after placing a security freeze, credit reporting agencies give consumers an identification number which must be used when the consumer wants to release his or her report to a third party, release the report for a period of time, or remove the freeze.
HB 6403 (File 113), favorably reported by the Banking Committee, allows a minor's parent or legal guardian to place a security freeze on the minor's credit report.
Joint Favorable Substitute