BILL ANALYSIS
AB 1356
Page 1
Date of Hearing: April 24, 2007
ASSEMBLY COMMITTEE ON JUDICIARY
Dave Jones, Chair
AB 1356 (Houston) - As Introduced: February 23, 2007
As Proposed To Be Amended
SUBJECT : Real Property: Equity Purchasers
KEY ISSUE : Should the licensed representative of an "Equity
Purchaser" have the option of MEETing FINANCIAL responsibility
requirements by either surety bond or professional liability
coverage?
SYNOPSIS
Existing law requires a representative of an "equity purchaser"
(i.e. one who buys properties facing foreclosure) to possess a
current valid California real estate license and have a surety
bond in an amount at least twice the fair market value of the
subject property. In addition, existing law requires the
representative to provide to all parties to the contract written
proof, including a statement signed under penalty of perjury,
that the representative is in fact licensed and has the
requisite bond. The sponsor of this bill, the California
Association of Realtors, claims that legitimate real estate
agents cannot obtain surety bonds for equity purchases. This
bill, therefore, would permit the representative to demonstrate
financial responsibility by either having a surety bond or
obtaining professional liability insurance. However, as noted
in the analysis, neither the author nor the sponsor has provided
any evidence supporting the claim that real estate agents cannot
obtain surety bonds. Neither the author nor the sponsor has
explained why, if at all, surety insurers do not offer bonds to
legitimate real estate agents who represent equity purchasers.
And neither the sponsor nor the author has explained why
liability insurance would be a reasonable substitute for surety
bonds. It may well be that there are compelling reasons for why
this particular change in the law is necessary, but the author
and sponsor have not provided much in the way of either evidence
or arguments to demonstrate that necessity. Thus the Committee
may conclude the bill is not ready to move forward until further
analysis of evidence can be accomplished.
AB 1356
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SUMMARY : Permits a licensed representative of an "equity
purchaser" to demonstrate financial responsibility by either
surety bond or professional liability coverage. Specifically,
this bill :
1)Requires the representative of an equity purchaser to provide
written proof to the parties to the contract that he or she
has an unrestricted California Real Estate License and meets
certain financial responsibility requirements, as specified.
2)Provides that failure to comply with the above requirements
shall, at the option of the equity seller, render the equity
purchase contract void, and the equity purchaser shall be
liable to the equity seller for all damages proximately caused
by failure to comply.
3)Provides that the representative of an equity purchaser shall
demonstrate financial responsibility by providing written
proof (and a statement under penalty of perjury) that he or
she has either of the following: (a) professional liability
coverage in an amount equal to at least twice the value of the
subject property; or (b) a surety bond in an amount equal to
at least twice the value of the subject property.
EXISTING LAW:
1)Provides generally, under the Home Equity Sales Contract Act,
various measures designed to protect homeowners facing
foreclosure from certain unscrupulous individuals who attempt
to acquire title to homes facing disclosure by means of fraud,
deceit, misrepresentation, or other forms of unfair dealing.
(Civil Code Section 1695 et seq.)
2)Defines an "equity purchaser" as any person who acquires title
to any residence in foreclosure, unless that person is
acquiring the property as a personal residence or under other
specified conditions. (Civil Code Section 1695.1.)
3)Defines the "representative" of an equity purchaser as any
person who in any manner solicits, induces, or causes any
property owner to transfer title or solicits any member of the
property owner's family or household to induce or cause any
property owner to transfer title to the residence in
foreclosure to the equity purchaser. (Civil Code Section
1695.1)
AB 1356
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4)Requires the representative of an equity purchaser to provide
to the parties of the contract written proof, including a
statement under penalty of perjury, that he or she has a valid
current California real estate license and is bonded in an
amount equal to twice the fair market value of the real
property that is subject to the contract. (Civil Code Section
1695.17(a).)
5)Provides that failure to comply with the above requirements
shall, at the option of the equity seller, render the equity
purchase contract void and the equity purchaser shall be
liable to the equity seller for all damages proximately caused
by the failure to comply. (Civil Code Section 1695.17(b).)
6)Provides that an equity purchaser is liable for all damages
resulting from any statement made or act committed by the
equity purchaser's representative in any manner connected with
the equity purchaser's acquisition of a residence in
foreclosure or receipt of any consideration or property from
or on behalf of the equity seller. (Civil Code Section
1695.15.)
FISCAL EFFECT : As currently in print this bill is keyed
fiscal.
COMMENTS : In 1979 the California Legislature enacted the Home
Equity Sales Contracts Act in order to protect homeowners faced
with foreclosure from unscrupulous individuals who, by means of
fraud or deceit, try to induce owners to sell their homes for a
fraction of the market value and often cause the owners to lose
whatever equity they have built up in their homes. (See e.g.
Boquilon v. Beckwith 49 Cal. App. 4th 1697 (discussing the
purpose of the Act); see also findings and declarations in Civil
Code Section 1695.) Because the so-called "equity purchaser"
who buys property under threat of foreclosure often uses an
agent or representative, the law was amended in 1990 (AB 2641,
c.1737, Stats. of 1990) to require any representative of an
equity purchaser to provide all parties to the contract written
proof that he or she has a valid California real estate license
and is bonded in an amount twice the fair market value of the
subject property. In addition, the 1990 amendment required the
representative to provide to all parties a written statement,
signed under penalty of perjury, that the representative is
sufficiently bonded.
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The purpose of the existing law is straightforward enough: when
persons are under the pressure of imminent foreclosure, they are
more vulnerable to various "equity rip-off" schemes that
convince the pressured homeowner to sign over title or enter
into complex contractual terms that are impossible to meet.
(See e.g. Analysis of AB 2641, Assembly Judiciary Committee,
August 15, 1990.) Thus, in addition to requiring that equity
purchasers and their agents meet certain requirements, the Home
Equity Sales Contracts Act provides other protections for
foreclosed upon homeowners, including opportunities to cancel or
rescind a contract.
This bill amends existing law by making it easier for the
representative of an equity purchaser to demonstrate financial
responsibility. Existing law requires the representative to
have a current valid real estate license AND a surety bond in an
amount equal to twice the value of the subject property. This
bill would give the equity purchaser representative an
additional option. That is, under this bill, the representative
could demonstrate financial responsibility by either (1)
providing evidence of a license and a surety bond OR (2)
providing evidence of a license and liability insurance equal to
twice the amount of the subject property. In short, in lieu of
the surety bond, a licensed representative can now meet the
legal requirement by having liability insurance.
ARGUMENTS IN SUPPORT : Unfortunately, the author and sponsor
have provided very little information by which to analyze the
potential merits of this bill, or to fully understand the nature
of the problem that it seeks to address. The author's
two-sentence background sheet states the following:
The Home Equity Sales Act requires revision in order to
accomplish its purpose of protection homeowners in the
process of foreclosure against being taken advantage of by
unscrupulous equity purchasers and the process itself.
It is not explained, however, how giving an additional option to
the representative of the equity purchaser will protect the
homeowner from unscrupulous equity purchasers. In fact the
Committee may conclude that on its face such a change in law
might do the opposite.
The second sentence in the background paper states the
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following:
AB 1356 will allow legitimate real estate agents to
demonstrate financial responsibility so that a sale can
take place in order to salvage a homeowner's remaining
equity prior to foreclosure.
The relevance of this statement to the specific changes made by
this bill is not made clear. Apparently, it is meant to suggest
that "legitimate real estate agents" cannot demonstrate their
financial responsibility because they cannot obtain a surety
bond. However the author's office has not provided the
Committee with the evidence necessary to determine if this is
the case.
If it is truly impossible for the representatives of equity
purchasers to obtain surety bonds, then the bill possibly makes
sense: that is, if the representatives of equity purchasers
cannot possibly obtain bonds then it might be unreasonable for
the law to require that they obtain them. But this mere claim
on the part of the sponsor raises more questions than it
answers. For example: If the claim is true, how then have the
representatives of equity purchasers managed to buy properties
since this requirement went into effect since 1990? Have there
been no equity purchases since 1990? This seems highly
unlikely. Have surety insurers, the companies that sell surety
bonds, only recently stopped making them available to equity
purchasers, so that this has only now become an issue? And if
surety insurers have stopped offering bonds to a real estate
agent working with equity purchasers, is there a good reason
that they have done so?
In sum, there may be answers to the above questions that could
justify this bill but neither the author nor sponsor have yet
provided sufficient information for the Committee to provide
more than a cursory analysis of whether or not the bill is
needed. The Committee was only able to research the legislative
history of the provisions in question, and what is clear is that
these earlier provisions were logically added to prevent
situations in which certain unethical equity purchasers shielded
themselves by using representatives and agents to acquire title
to homes facing foreclosure. (Analysis of AB 2641, Assembly
Judiciary Committee, August 15, 1990.)
Proposed Author Amendments: As reflected in the mock-up, the
AB 1356
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author is taking the following amendments to meet the concerns
of the Western Center on Law & Poverty:
Amendment 1 : On p. 2, line 6 delete "a valid current" and
insert "an unrestricted" (This amendment ensures that the real
estate is in good standing as described by regulations of the
Real Estate Commissioner and that the license is not restricted
under the Real Estate Recovery Program.)
Amendment 2: On p. 3, line 1 delete "any" and insert "either"
Amendment 3: On p. 3, delete lines 7 through 13 (with
amendments 1 & 2 above, this amendment ensures that simply
having an unrestricted license alone is not enough to
demonstrate financial responsibility.)
However, these amendments do not address the foundational
concerns raised above, namely that the author and sponsor have
not provided any evidence or arguments that address why this
change in law is needed at this time, or whether the proposed
change in law may in fact be detrimental to homeowners
undergoing foreclosure.
REGISTERED SUPPORT / OPPOSITION :
Support
California Association of Realtors (sponsor)
Conference of Delegates of California Bar Associations
Opposition
None on file
Analysis Prepared by : Thomas Clark / JUD. / (916) 319-2334