BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Ellen M. Corbett, Chair
2009-2010 Regular Session
AB 957
Assemblymember Galgiani
As amended June 16, 2009
Hearing Date: June 23, 2009
Civil Code
BCP
SUBJECT
Residential Real Estate Transfers
DESCRIPTION
This urgency bill would prohibit a seller from requiring a buyer
to purchase title insurance, escrow services, or a Natural
Hazard Disclosure Statement, in connection with the sale of a
property, from a company chosen by the seller, as specified.
This bill would limit its provision to properties purchased at a
foreclosure sale, and sunset on January 1, 2015.
BACKGROUND
In California, the nonjudicial foreclosure process begins with
the filing of a Notice of Default and concludes with a trustee's
sale where the property is sold to the highest bidder. If
there are no bids over and above the opening bid, the property
reverts back to the lender or servicer who placed that opening
bid (thus, becoming a bank owned property). Those lenders are
then left with an abundance of properties that may then be sold
or auctioned off at a later date.
For those bank owned properties, this bill would prevent the
seller (the foreclosing lender or servicer) from requiring a
buyer to purchase title insurance, escrow services, or a Natural
Hazard Disclosure Statement from a company chosen by that
seller. That provision partially codifies a prohibition in the
federal Real Estate Settlement Procedures Act (RESPA) that, with
respect to federally related mortgage loans, prohibits sellers
from requiring a buyer to purchase title insurance from a
(more)
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particular title company.
CHANGES TO EXISTING LAW
Existing federal law , the federal Real Estate Settlement
Procedures Act (RESPA), regulates transactions between buyers,
sellers, and mortgagees involving "settlement services"
(including title insurance and escrow services). That Act
generally requires that borrowers receive certain timely
disclosures relating to the costs of those settlement services,
and prohibits certain practices on the part of a mortgagee that
increase the costs of settlement services. (12 U.S.C. Sec. 2601
et seq.)
Existing federal law provides, under RESPA, that no seller of
property that will be purchased with the assistance of a
federally related mortgage loan shall require directly or
indirectly, as a condition to selling the property, that title
insurance covering the property be purchased by the buyer from
any particular title company. Any seller who violates that
provision is liable to the buyer in an amount equal to three
times all charges made for such title insurance. (12 U.S.C.
Sec. 2608.)
Existing state law , the Escrow Law, provides for the licensing
of escrow agents by the Department of Corporations, and states
that any person subject to the Escrow Law who violates any
provision of RESPA, or any regulation promulgated thereunder,
violates the Escrow Law. (Fin. Code Sec. 17425.)
Existing state law requires a real property seller, or the
seller's agent, to disclose to buyers any material facts that
would have a significant and measurable effect on the value or
desirability of the property (if the buyer does not know, and
would not reasonably discover, those facts). (Karoutas v.
Homefed Bank (1991) 232 Cal.App.3d 767; Reed v. King (1983) 145
Cal.App.3d 261.)
Existing state law requires a seller, or the seller's agent in
certain cases, to disclose to a buyer when a property is in a
specified natural hazard zone, and requires the disclosure to be
on a Natural Hazard Disclosure Statement, as specified. (Civ.
Code Secs. 1103, 1103.2.) Existing law permits a seller to use
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an expert report or opinion from an engineer, land surveyor,
geologist, or expert in natural hazard discovery to fulfill his
or her natural hazard notification requirements. (Civ. Code Sec.
1103.4.)
Existing state law exempts certain transfers from the above
requirement to provide a natural hazard disclosure statement,
including transfers of property acquired at a foreclosure sale.
(Civ. Code Sec. 1103.1.) Existing law provides that neither the
seller, nor their agent, shall be liable for any error,
inaccuracy, or omission of any information delivered if the
error, inaccuracy, or omission was not within the personal
knowledge of the transferor or the listing or selling agent, as
specified. (Civ. Code Sec. 1103.4.)
This bill , the Buyer's Choice Act, would prohibit a seller from
directly or indirectly, as a condition of receiving offers or
selling residential real property to a buyer, require the buyer
to purchase title insurance, escrow services, or a Natural
Hazard Disclosure Statement in connection with the sale of that
property from a company chosen by the seller.
This bill would define "seller" as a mortgagee, beneficiary
under a deed of trust, or other person who acquired title to
residential real property at a foreclosure sale, including a
trustee, agent, officer, or other employee of any such
mortgagee, beneficiary, or other person.
This bill would state that a seller who violates the bill's
provisions shall be liable in an amount equal to three times all
charges made for the title insurance, escrow service, or Natural
Hazard Disclosure Statement. In addition, any person who
violates this section shall be deemed to have violated his or
her license law and shall be subject to discipline by his or her
licensing entity.
This bill would provide that a transaction subject to the bill's
provisions shall not be invalidated solely because of the
failure of any person to comply with any provision of the Act.
This bill would further state that the bill does not affect any
duty or obligation that follows from Civil Code Section 1103.1,
nor any liability waived pursuant to Section 1103.4.
This bill would sunset on January 1, 2015.
COMMENT
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1. Stated need for the bill
According to the author,
Since the last major bout of foreclosures during the
downturn of the 1990's, a practice has developed in the
foreclosure market that is having significant consequences
to many groups, including home buyers. Banks and the
Housing and Urban Development Department are increasingly
requiring the use of specific service providers when they
are the seller of residential property, regardless of who
pays for the service. This practice is illegal under
federal laws and regulations. Assembly Bill 957 seeks to
strengthen state law to further curtail this practice.
Small businesses are the undisputed heart of the American
economy. Local businesses, which offer the best resources
and solutions for relieving the current housing crisis, are
being shut out of the Real Estate Owned (REO) market.
Instead of local businesses assisting homeowners and
expediting the transfer of foreclosed properties to
purchasers, they're literally on the outside with no way to
get in. Excluding local businesses from competition for
services, eliminates local job creation that stimulates
local economies and violates anti-competition and anti-trust
laws.
2. June 16, 2009 amendments
In addition to prohibiting a seller from requiring a buyer to
purchase title insurance or escrow services from a particular
company, the June 16th amendments would additionally prohibit a
seller from requiring the buyer to purchase a Natural Hazard
Disclosure (NHD) statement from a particular company. Those
statements provide disclosure of certain specified hazards, such
as a special flood hazard area or an earthquake fault zone, and
are required to be provided by the seller under certain
circumstances. When provided, the seller and their listing or
selling agent are not liable for any error, inaccuracy, or
omission of the information that was delivered, provided that
they did not have personal knowledge and the information was
provided by public agencies or by other persons (report or
opinion prepared by a specified expert).
a. Seller's responsibility to provide disclosures
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It is important to note that when a NHD statement is required,
it is the seller's responsibility to provide that statement.
That requirement builds on the general rule that sellers and
their agents are required to disclose any fact that would have
a significant or measurable effect on the value or
desirability of the property. (Even when a NHD statement is
not statutorily required, the seller still has the obligation
to disclose certain types of natural hazards.) Property ID, a
provider of natural hazard disclosure reports, provides the
following justification for including NHD statements in the
bill's prohibition:
Some large title companies that are used in foreclosed
real estate transactions also have wholly-owned
subsidiary NHD companies. It is very common that when
one of these title companies is used in the transaction,
the subsidiary's NHD report is forced upon the buyer
without the opportunity for negotiations between the
buyer and seller. AB 957 will make it clear that NHD
reports cannot be forced upon a buyer as a condition as
sale.
Given that it is the seller's responsibility to provide
disclosures, and that concerned buyers can always purchase
their own reports (Property ID allows for the downloading of a
form to order various reports), it is unclear how a buyer
would be injured if the seller provides them with a product
that they are not required to pay for. On the other hand, if
a seller selects the provider of a NHD report and then charges
the buyer for that report, the policy question arises as to
whether the borrower should be able to select the provider of
the report for which they have been charged. This bill seeks
to address that issue.
Specifically, the bill's language only prevents the seller
from requiring the buyer to purchase a NHD statement from a
particular company - the bill does not prohibit a seller from
purchasing a product of their own choosing, provided that the
cost is not passed onto the borrower. Considering that it is
the seller's obligation to provide disclosures, and that the
seller may want to use a specific company for their NHD
disclosures out of concern that another disclosure may be
incomplete or inaccurate, the practical result of the "buyer's
choice" offered by this bill could be to effectively require
the seller to pay for their NHD disclosures and not pass the
cost onto buyers.
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From a public policy standpoint, it is important to ensure
that nothing in this bill is construed to shift the burden of
disclosure from the seller to the buyer - that duty of the
seller to disclose material facts regarding the property is a
fundamental principle of property law. The following
amendment is suggested to ensure that nothing in this bill is
construed to affect that duty.
Suggested amendment
On page 3, between lines 6 and 7, insert:
(f) Nothing in this section shall be construed to require
the buyer to purchase or provide a natural hazard
disclosure statement or report, or to alter any obligation
on the part of the seller to disclose defects in the
property.
b. Opposition's concerns about the inclusion of NHD
statements
In addition to noting that a NHD statement is not required in
a lender's sale of a foreclosure property, the California
Association of Realtors (CAR) contends:
The language . . . also suggests that a natural hazard
statement must be purchased. This is also not the case;
in fact, the Natural Hazard Disclosure Statement is a
statutory form found at Civil Code 1103 et seq. and is
freely available to all. Of course, many sellers do
purchase a consultant's report, but it is by no means
required. Indeed, even in sales where a Natural Hazard
Disclosure form is required, there is no requirement that
it be prepared by a consultant.
The California Bankers Association, California Financial
Services Association, and the California Mortgage Bankers
Association (the trade associations) and Fidelity National
Financial (FNF), in opposition, additionally contend that:
Civil Code Section 1103.1 exempts real-estate owned (REO)
transfers from the requirement that a NHD be provided as
part of a sales transaction. As such, the measure as
amended runs contrary to existing law and is likely to
lead to confusion for both the industry and consumers.
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In non-REO real estate transactions, it is the obligation
of the seller to provide the buyer with information on
natural hazards and it is the seller's liability that is
at risk with regard to the information provided.
Therefore, existing law rightly acknowledges that the
seller should have the option to choose who provides the
information. As amended, this measure inappropriately
implies that the buyer has the right to choose the NHD
provider.
In response, Property ID states that the seller should not be
allowed to pick the NHD company because: (1) the buyer has a
vested interest in making sure they receive the best and most
accurate NHD possible; and (2) it "is disingenuous for title
companies to argue that the seller should be able to pick an
NHD provider over the objections of the buyer since title
companies are not the seller of the property."
Despite those arguments, a buyer does have the ability to
directly purchase a report from Property ID (or a similar NHD
report provider) if they desire additional information or
security, and, as noted above, the language itself restricts
the seller's ability to require the buyer to purchase a
product from a specific company and would not apply if the
seller pays for the product themselves.
c. Concern that language would invite liability for
unsuspecting Realtors
This bill would additionally provide that nothing in this bill
affects any liability waived pursuant to Section 1103.4. The
California Association of Realtors, in opposition, notes that
"[t]he liability protections of Sec. 1103.4 for sellers and
their agents are not a waiver at all . . . the so-called
'substituted disclosure' safe harbor happens by operation of
law." Given that the section at issue, Civil Code Section
1103.4, does not technically allow for a waiver of liability,
the following amendment is suggested to clarify the provision:
Suggested amendment:
On page 3, lines 5 through 6, inclusive, strike "nor any
liability waived pursuant to Section 1103.4" and insert:
and shall not be construed to affect or modify Section
1103.4.
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d. Duties or obligations flowing from Civil Code Section
1103.1
The bill additionally provides that the section shall not
affect any duty or obligation that flows from Section 1103.1
of the Civil Code (which details the transfers exempt from the
article on NHD statements). CAR, in opposition, notes that
there are no duties that follow from Section 1103.1 and
contends that "the 'preservation' of them invites a court to
find some." Accordingly, the author should consider
broadening that disclaimer beyond that section to the entire
article concerning NHD disclosures.
Suggested amendment:
On page 3, line 5, strike out "Section 1103.1" and
insert:
Article 1.7, commencing with Section 1103
e. Bill's provisions would only apply to properties purchased
at a foreclosure sale
Existing law exempts certain transfers from the requirement to
provide a NHD statement, including those transfers made by a
mortgagee or beneficiary (lender or servicer) who acquired the
property at a foreclosure sale. (Civ. Code Sec. 1103.1(a).)
Similarly, the provisions of this bill would apply to a
mortgagee, beneficiary, or other person who acquired title to
residential real property at a foreclosure sale. As a result,
the provisions of this bill would generally apply in
circumstances in which the seller is not required to provide a
NHD statement.
To fully conform the NHD exemption to the scope of the present
bill, the following amendment is suggested to strike reference
to "or other person." That phrase applies the provisions of
this bill beyond lender-owned properties (the intended scope),
to those that are purchased by a private party at a trustee's
sale.
Suggested amendments:
1) On page 2, line 15, strike "beneficiary under a deed
of trust, or other person"
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and insert:
or beneficiary under a deed of trust
2) On page 2, line 18, strike out "beneficiary, or other
person" and insert:
or beneficiary
3. Remaining prohibitions would build upon RESPA
Under federal law (RESPA), a seller is prohibited from requiring
the buyer, as a condition of selling the property, to purchase
title insurance from any particular title company. That
provision only applies to properties that are to be purchased
with federally-related mortgage loans.
This bill would enact a similar prohibition, but with the
following significant differences: (1) this bill would include
escrow services or a Natural Hazard Disclosure statement; (2)
this bill only applies to properties acquired as a result of
foreclosure; (3) this bill would apply to federally-related and
non-federally related mortgage loans; and (4) this bill would
additionally apply in cases where the requirement is a condition
of the seller receiving offers. In support of the need for the
prohibitions imposed by this bill, the author contends:
Small businesses are the undisputed heart of the American
economy. Local businesses, which offer the best resources
and solutions for relieving the current housing crisis, are
being shut out of the Real Estate Owned (REO) market.
Instead of local businesses assisting homeowners and
expediting the transfer of foreclosed properties to
purchasers, they're literally on the outside with no way to
get in. Excluding local businesses from competition for
services, eliminates local job creation that stimulates
local economies and violates anti-competition and anti-trust
laws.
FNF, in opposition, contends that the language of the bill does
not, in fact, duplicate RESPA, and states: "If the intent of the
author is to duplicate RESPA . . . the language should be
amended to do so in order to avoid any potential confusion . .
.." (For reference, RESPA states: "No seller of property that
will be purchased with the assistance of a federally related
mortgage loan shall require directly or indirectly, as a
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condition to selling the property, that title insurance covering
the property be purchased by the buyer from any particular title
company.") FNF further states that while they understand that
the intent of the bill is to address reported RESPA violations,
"FNF fails to understand why RESPA itself is insufficient."
4. Allowing recovery of three times the cost and stating that
a violation is a licensing law violation
This bill would further provide that a seller who violates the
provisions of the bill shall be liable to three times all
charges made for the title insurance, escrow service, or a
Natural Hazard Disclosure Statement. That penalty is identical
to RESPA which also provides that any person who violates its
provisions "shall be liable to the buyer in an amount equal to
three times all charges made for such title insurance." (12
U.S.C. 2608.)
This bill would additionally provide that any person who
violates the provisions of this bill shall be deemed to have
violated his or her license law and shall be subject to
discipline by his or her licensing authority.
5. This bill contains an urgency clause
This bill is an urgency measure. The facts constituting the
urgency are: "In order to enact provisions designed to ensure
that residential homebuyers are not required to purchase title
insurance, escrow services, or a Natural Hazard Disclosure
Statement as soon as possible, it is necessary that this act
take effect immediately."
The trade associations and FNF, in opposition, raise concerns
about the above reason for the urgency and state, "While we do
not think it is the author's intent to prohibit the offering of
title insurance, escrow services, or NHDs in their entirety, we
nonetheless believe that this language should be deleted or
clarified." First American Corporation, in opposition, similarly
contends that the urgency language creates ambiguities, and CAR
states that the language "invites buyers to go without title
coverage, which is an unconscionably risky approach."
The author may consider the following amendment to clarify the
reasons for the urgency, provided that the language below
accurately reflects their rationale for the urgency.
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Amendment:
On page 3, strike out lines 33 through 36, and insert:
In order to enact provisions designed to ensure that a seller
does not require a residential homebuyer to purchase title
insurance, escrow services, or a Natural Hazard Disclosure
Statement from a particular company, as soon as possible, it
is necessary that this act take effect immediately.
Support : Escrow Institute of California; Property ID; over 400
individuals
Opposition : Fidelity National Financial (FNF); First American
Corporation; California Bankers Association; California
Financial Services Association; California Mortgage Bankers
Association; California Association of Realtors
HISTORY
Source : Author
Related Pending Legislation : None Known
Prior Legislation : None Known
Prior Vote :
Assembly Banking and Finance Committee (Ayes 10, Noes 1)
Assembly Judiciary Committee (Ayes 10, Noes 0)
Assembly Floor (Ayes 77, Noes 0)
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