BILL ANALYSIS
AB 1534
Page 1
Date of Hearing: April 28, 2009
ASSEMBLY COMMITTEE ON BUSINESS AND PROFESSIONS
Mary Hayashi, Chair
AB 1534 (V. Manuel Perez) - As Introduced: February 27, 2009
SUBJECT : Contractors: mortgages.
SUMMARY : Prohibits a general building contractor from
originating, directly or through a related entity, a consumer
loan for a home purchase. Specifically, this bill :
1)Prohibits a home builder from directly or through an
affiliate, subsidiary, or partner of the home builder,
originating a consumer loan for a home purchase that is sold
by the home builder or an affiliate, subsidiary, or partner of
the home builder.
2)Defines "Consumer loan" as a consumer credit transaction
secured by real property that is located in this state and is
used, or intended to be used or occupied, as the principal
dwelling of the consumer. "Consumer loan" does not include a
reverse mortgage, an open line of credit, a bridge loan, or a
consumer credit transaction that is secured by rental property
or second homes.
3)Defines "Home" as a single-family residence or townhouse, but
does not include apartment buildings or condominiums.
4)Defines "Home builder" as a general building contractor
engaged in the construction of new homes.
5)Defines "Originate" to mean arranging, negotiating, or making
a consumer loan.
EXISTING STATE LAW :
1)Authorizes the Contractors' State License Board (CSLB) to
license and regulate contractors.
2)Authorizes the CSLB to discipline, revoke or suspend a
license, issue citations, collect civil penalties, and apply
for injunctive relief against violators.
3)Authorizes the Department of Corporations (DOC), the
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Department of Real Estate (DRE), and the Department of
Financial Institutions to license and regulate individuals
providing specified financial services.
EXISTING FEDERAL LAW :
1)Establishes controlled business arrangements under the Real
Estate Settlement Procedures Act (RESPA) and provides for the
following:
a) Requires that the relationship between the person
performing settlement services and the person making the
referral is disclosed, along with the estimated charges of
the provider.
b) Prohibits requiring a consumer to use an affiliated
settlement service provider, except under certain specified
exemptions; and,
c) Prohibits the referring party to receive any value,
beyond a return on ownership interest or franchise
relationship or payments.
2)Establishes the Truth in Lending Act (TILA).
3)Establishes the Home Ownership Equity Protection Act (HOEPA).
FISCAL EFFECT : Unknown
COMMENTS :
Purpose of the bill . According to the author, "This bill seeks
to address the rising crisis of home foreclosures in California.
Due to faulty loans, sub-prime mortgages, and misleading
information, families across the State have been forced out of
their homes, resulting in California being one of the states
with the highest number of reported foreclosures. It is in the
benefit of the State to ensure that home buyers are not only
able to have access to home ownership, but are also able to stay
in their homes."
Background . In 1983, Congress enacted the "controlled business
arrangement" (CBA) in RESPA and established that CBAs do not
violate RESPA, provided that the relationship between the
referring party and the settlement services provider is
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disclosed, the consumer is not required to use the affiliated
lender, and the referring party does not receive a financial
return, beyond permitted ownership interest or franchise
payments.
There are three state departments regulating mortgage
origination loans in California - DOC, DRE, and DFI. DOC, DRE,
and DFI enforcement officials forward legislative findings and
consumer complaints concerning federal home loan violations to
the appropriate federal authorities. While there has been
debate over whether the state entities can regulate licensees on
federal violations involving home loans, there is current
legislation, AB 260 (Lieu) that would codify current practice
and authorize the DOC, DRE, and DFI to suspend or revoke
licenses for violations of RESPA, TILA, and HOEPA.
In November 2008, the Department of Housing and Urban
Development (HUD) issued a final ruling, RESPA: Rule to Simply
and Improve the Process of Obtaining Mortgages and Reduce
Consumer Settlement Costs. The new rule standardizes the Good
Faith Estimate (GFE) and makes it easier for consumers to shop
among settlement providers, and strengthens the prohibition
against requiring the use of affiliated businesses. The ruling
declares that "the final GFE continues to inform borrowers about
critical loan and settlement cost information and allows
borrowers to effectively shop among loan originators without
burdening them with extraneous information." In addition, HUD
retained the lender disclosure in the GFE to inform consumers
that lenders can receive additional fees by selling the loan
after settlement, but that lenders cannot change the borrower's
loan or the charges paid by the borrower at the time of
settlement.
In an April 2001 National Mortgage News article, a HUD
enforcement official was quoted as saying the agency was looking
into whether some builders were illegally penalizing home buyers
who did not use their affiliated mortgage companies. Some
affiliated mortgage companies were charging consumers above
average points to increase their loan payments while advertising
savings through home price discounts or upgrades. This practice
violates existing RESPA law and is enforceable through legal
action.
Additional examples of consumer harm provided by the author's
office include: lack of disclosure of the relationship between
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the builder and lender, predatory lending practices (including
lenders knowingly offering consumers loans they cannot afford),
withholding a consumer's down payment or deposit for refusing to
use the builder's affiliated lender, etc. These are further
examples of current practices that violate existing law.
A 2006 Seattle Times article alluded to increasing RESPA
violations that HUD enforcement officials investigated. In the
article, HUD officials mentioned that common allegations against
builders when a buyer declines the mortgage affiliate include:
increasing the home purchase price, increasing the buyer's
deposit in an escrow account, and threatening to withdraw
closing costs credits. HUD advised buyers to: compare interest
rates before agreeing to use a builder's mortgage affiliate,
become familiar to with the contract penalties, and be wary of
large discounts.
Structure vs. practice . This bill results in an overall
prohibition on a builder to work with a mortgage lender of their
choice. The author's office contends that the financial
relationship between the builder and affiliated mortgage lender
is motivated by profit and cannot provide the best consumer
option for a potential homeowner. The author references the
mortgage crisis as an example of how this structure, or
relationship, was responsible for a massive number of sub-prime
loans and foreclosures because homeowners were pressured to
close with the affiliated lender or else face financial
penalties or guarantee of a home sale.
In 1992, HUD added consumer protections to the affiliated
business regulations under RESPA and required the following
statement to be acknowledged in writing by the consumer on
mortgage loan applications: "THERE ARE FREQUENTLY OTHER
PROVIDERS WHO OFFER THE SAME SERVICES, AND YOU SHOULD SHOP
AROUND TO SEE THAT YOU ARE GETTING THE BEST SERVICES AT THE BEST
RATES."
Potential homebuyers have the right to select a mortgage lender
or their choice when closing on a home - it can be either a
builder preferred or affiliated lender, or it can be a real
estate broker. All applications for an affiliated lender
mortgage loan are required to include a statement that
reinforces a consumer's right to shop around for a lender,
because he or she may find a better interest rate elsewhere. If
an individual decides not shop around for a better deal with
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other lenders, he or she may lose the opportunity of securing a
lower interest rate. A Bankrate article provided by the
author's office states, "People who don't compare what builders
or agents are offering with what's available from outside
sources are just like car buyers who don't scrutinize
dealer-financing offers. Both can end up paying too much."
Furthermore, potential homeowners are not guaranteed that they
will receive a better interest rate on a home loan with a
non-affiliated mortgage broker, and the ability to shop around
allows an individual to make an informed decision after
consulting with several businesses - just as an individual may
shop around for a home that he or she is comfortable purchasing.
In addition, prohibiting builders from offering mortgage loans
will reduce market competition, reduce the selection of loan
options, require a consumer to use a non-affiliated mortgage
lender, and in the end, may not guarantee consumers that they
will receive a better deal with a non-affiliated mortgage
broker.
Staff notes that similar seller financing models exist in other
segments of the economy, such auto dealers that typically sell
vehicles using an affiliated preferred lender. In addition,
furniture stores, major appliance stores, electronics,
department stores, and other retail stores extend credit to
consumers using incentive credit cards.
Support . According to the sponsor, " Homebuilders are misled to
believe that the reason a builder has a preferred lender is due
to the fact that the mortgage company offers the best possible
mortgage products available. Many of the preferred lenders even
become 'packaged labeled' subsidiaries of the builder. In those
instances, builders and mortgage lenders alike hold owner ship
and interest in each other portion of the home buying process.
It is in the builder's best interest to sell their home product
as soon as possible, but also at a price that allows them to
receive the highest possible profit. A lender benefits from
being the preferred lender by being given business in mortgage
products. Lenders have full ability to change the product so
that a buyer may qualify to purchase the home and therefore hold
a great benefit as well. Many home buyers are not aware of this
fact? The lack of State regulation of transparency in order to
protect the consumer is stalling the recovery of our economy.
Home foreclosures throughout the state not only raise public
safety concerns, but also affect the quality of life within a
community.
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"During the housing boom from 2001-2005, home builder and
mortgage lenders began creating business relationships with one
another in order to provide consumer convenience. Home buyers
are now able to approach a home builder and then be referred to
the home builder's preferred lender so as to cut time and cost
and benefit the buyer from having to shop around. However,
aside from providing consumer convenience, there is a more
financial benefit with from the relationship between a builder
and a mortgage lender. When an investor seeks a loan to build
new housing in a certain community, a builder engages in a
relationship with a lender for the financing of materials to
build their products. These loans allow a builder to begin
construction. In an effort to lower their interest rate or
assist in repayment, builders begin creating partnerships with
these financial institutions and make them the 'preferred
lender.'
"Most home buyers are completely unfamiliar with the process of
purchasing a home. Many depend on the guidance of their home
builder and preferred lender in that the productions and rates
that are provided are the best possible products available in
the open market. Homebuyers are never made aware of the true
nature of the relationship between a home builder and the
builder's preferred lender. In theory, a preferred lender
offers the best possible mortgage rate available in order to
complete the purchase of a new home."
Opposition . According to the California Bankers Association,
California Financial Services Association, and the California
Mortgage Bankers Association, "The measure singles out and
precludes a home builder, directly or indirectly, through
affiliates, subsidiaries, or partners from originating a
consumer loan that is used for the purchase of a home from that
home builder. This measure directly conflicts with existing
federal law which allows affiliated business arrangements as
long as the buyer is not required to use any specific affiliated
business arrangement. Therefore, a consumer is not restricted
in their choice of lenders when they decide to purchase a home.
Given the benefits provided through the preferred lender
relationships, convenience enjoyed by consumers, and the
existence of important consumer legal protections, we believe
this measure is unnecessary and will only discourage home
ownership."
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According to the CalChamber, California Building Industry
Association (CBIA), and California Major Builders Council
(CMBC), this bill would outlaw dozens of California businesses
that employ thousands of Californians, result in negative
economic impact, hurt consumers, discriminates against
homebuilders, and ignores existing consumer safeguards. The
three organizations argue that builder affiliated lenders
provide convenience and cost savings to consumers, as well as
expanding the lending options for potential homeowners. They
write, "Builder-affiliated lenders ensure on-time closings.
Many players in the mortgage market have exited or removed
products from the market just days before a homebuyer is
required to close escrow. A delay or failure to close may
result in buyers losing their deposit and add carrying and
marketing costs to the builder."
CalChamber, CBIA, and CMBC also contend that AB 1534 singles out
homebuilders "for lending regulation that does not apply to any
other home seller, manufacturer or retailer. For example, the
bill does not prohibit auto manufacturers from financing their
own products, or retailers who offer a 10% discount on their
purchases for opening an in-store credit account. Nor does the
bill prohibit a homeowner from financing the sale of their
existing home or a realtor from using an affiliated lender.
Homebuilder-affiliated lenders represent less than 3% of all
loan originations in California every year."
According to DHI Mortgage (DHIM), DHIM "is a subsidiary of D.R.
Horton, Inc., the largest homebuilder in American by units
closed for the last seven consecutive years. DHIM employs
approximately 400 people in 18 states, while D.R. Horton employs
approximately 2,300 employees across the country. Homebuilders
began offering incentives to their customers who use affiliated
settlement service providers because the builder/seller has true
savings through efficiencies and economies of scale that can be
passed to the buyer, (and) their consumers can be better
protected by settlement service providers whose mission is to
facilitate the closing and consumer experience?
"This streamlined process includes, but is not limited to,
assistance in managing the 'backlog' (homes under contract) to
effectively schedule closings, dedicating loan officers to
communities or other field offices, linked communication
systems, and common goals that better assist consumers through
the complicated process of closing on a home. These
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efficiencies result in lower costs to homebuilders that can be
passed on to the consumer in the form of an incentive? Often
times, we are asked by consumers working with a third party
lender to step in and 'rescue' them from either not closing at
all or closing a loan that is too expensive, which could mean a
financial hardship for them later.
"Affiliated business arrangements are widely used in the
homebuilding industry, just as they are in the settlement
industry. The homebuilder-lender affiliate business model
depends on the homebuilder's ability to offer bona fide
incentives to encourage homebuyers to use its affiliated lender
when purchasing a home. Homebuilders made substantial
investments required to open and operate their affiliated
mortgage companies. If the is implemented, there is question,
if not doubt, as to whether affiliated settlement service
providers could ultimately survive. High volume homebuilders
would have to establish relationships with non-affiliated
lenders in an attempt to generate efficiencies and customer
service for the builders and customers that currently exist with
their affiliated settlement service providers (and it is
doubtful that the same level of efficiencies and customer
service could be achieved)."
Related Legislation . AB 260 (Lieu) authorizes the DOC, DRE, and
DFI to suspend or revoke licenses for violations of RESPA, TILA,
and HOEPA. This bill is pending in the Assembly Appropriations
Committee.
Prior Legislation. AB 1837 (Garcia) would have banned payment
of compensation for originating a subprime loan or
nontraditional loan with an interest rate above the wholesale
par rate for which the consumer qualifies. This bill was held
in the Assembly Banking and Finance Committee.
AB 2161 (Swanson), would have enacted a mortgage lender
complaint processing system. Furthermore, it requires lenders
to have a dedicated complaint processing system to handle
borrower complaints and assist borrowers with workout
opportunities. This bill would have also required lenders to
document complaints and submit complaint logs to their
regulator. This bill was held in the Assembly Appropriations
Committee.
AB 2740 (Brownley) would have provided that a loan servicer, or
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a bank, credit union, or finance lender that services loans
secured by residential real property, owes a duty of good faith
and fair dealing to a borrower. This bill would have regulated
the fees and charges that may be imposed by loan servicers or
mortgage loan servicers. This bill would have also established
various other prohibited acts and requirements applicable to the
servicing of residential mortgage loans. This bill failed
passage in the Assembly Banking and Finance Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
California State Council of Laborers (sponsor)
Opposition
CalChamber
California Bankers Association (CBA)
California Building Industry Association (CBIA)
California Financial Services Association (CFSA)
California Major Builders Council (CMBC)
California Mortgage Bankers Association (CMBA)
DHI Mortgage (DHIM)
Analysis Prepared by : Joanna Gin / B. & P. / (916) 319-3301