BILL ANALYSIS
SENATE COMMITTEE ON BANKING, FINANCE,
AND INSURANCE
Senator Ronald Calderon, Chair
SB 633 (Wright) Hearing Date: May 6, 2009
As Amended April 27, 2009
Fiscal: No
Urgency: No
SUMMARY Would create two new exceptions to the law that
prohibits persons from requiring an impound or trust account as
a condition of a real property sales contract, or a mortgage or
deed of trust on single-family, owner-occupied real property.
DIGEST
Existing law
1. Provides that no impound, trust, or other type of account for
payment of taxes on the property, insurance premiums, or other
purposes relating to the property, may be required as a
condition of a real property sale contract or a loan secured by
a deed of trust or mortgage on real property containing only a
single-family, owner-occupied dwelling, except:
a. Where required by a state or federal regulatory
authority;
b. Where a loan is made, guaranteed, or insured by a state
or federal governmental lending or insuring agency;
c. Upon a failure of the purchaser or borrower to timely
pay two consecutive tax installments on the property;
d. Where the original principal amount of the loan is 90%
or more of the sales price, if the property is sold, or 90%
or more of the appraised value of the property securing the
loan, if the property is not sold (i.e., if the property is
being refinanced); or,
e. Whenever the combined principal amount of all loans
secured by the real property exceed 90% of the appraised
value of the property securing the loans;
SB 633 (Wright), Page 2
2. Further provides that nothing in existing law precludes
establishing such an account on terms mutually agreeable to the
parties to the loan, if, prior to executing the loan or sale
agreement, the seller or lender furnishes to the purchaser or
borrower a statement in writing, informing the purchaser or
borrower that establishing the account is not a condition of the
loan or sale agreement, and stating whether or not interest will
be paid on the funds in the account;
3. Provides that an account created in violation of the law
described above is voidable, at the option of the purchaser or
borrower, at any time, but clarifies that the invalid account
does not otherwise affect the validity of the loan or sale.
This bill
1. Adds two new exceptions to the five listed above in
Existing Law 1a through 1e, as follows:
a. Where a loan is made in compliance with the
requirements for higher priced mortgage loans established
in Regulation Z, whether or not the loan is a
higher-priced mortgage loan; or,
b. Where a loan is refinanced or modified in connection
with a lender's homeownership preservation program or a
lender's participation in such a program sponsored by a
federal, state, or local government authority or a
nonprofit organization.
COMMENTS
1. Purpose of the bill To eliminate potential conflicts
between federal Regulation Z or programs intended to reduce
foreclosures and California's law prohibiting impound
accounts in certain circumstances.
2. Background Impound accounts are accounts established by
mortgage servicers, to set aside money that the servicers
use to pay a borrower's homeowner's insurance and property
tax payments. If a borrower has an impound account, the
borrower pays an extra amount to his or her servicer each
month (over and above mortgage interest and principal), to
cover the servicer's prorated estimate of the borrower's
SB 633 (Wright), Page 3
homeowner's insurance and property tax obligations.
California's law regarding impound accounts was enacted when
many believed that these accounts could harm consumers, if
administered improperly. For that reason, California's law
prohibits impound accounts, except in certain circumstances.
However, California's (and the nation's) recent mortgage
problems have contributed to a significant change in
attitude toward impound accounts. Because many borrowers
who obtained loans during the height of the lending boom
failed to understand their property-related obligations,
popular opinion now views impound accounts as a potential
benefit to a borrower. Impound accounts, the logic goes,
can not only help borrowers understand the true costs of
owning a home, but can also help borrowers set aside money
for their property tax and homeowner's insurance
obligations.
As discussed below, this change in public opinion is reflected
in recent changes to consumer protection laws and in the
rules which apply to federally-sanctioned home preservation
programs. Unfortunately, California's impound account law
has failed to keep up, and requires updating.
On July 30, 2008, the Federal Reserve Board (FRB) finalized
changes to Regulation Z, the regulation which implements the
Truth in Lending Act and Home Ownership Equity Protection
Act. The changes to Regulation Z (Federal Register Volume
73, No. 147, pp. 44522-44614) are generally effective
October 1, 2009, and apply to all federal and state
licensees who engage in the activities covered by the
regulation, including mortgage lending, brokering, and
servicing. California need not take any action to apply the
Regulation Z changes to our licensees; the regulations will
apply automatically to all federally-regulated and
state-regulated lenders, when the regulation changes become
operative.
Regulation Z defines a higher-priced mortgage loan as a
consumer-purpose, closed-end loan secured by a consumer's
principal dwelling, with an annual percentage rate (APR)
that exceeds the average prime offer rates for a comparable
transaction published by the FRB by at least 1.5% for first
lien loans and 3.5% for subordinate lien loans. The
definition includes home purchase loans, refinancings, and
home equity loans; it excludes home equity lines of credit,
SB 633 (Wright), Page 4
reverse mortgages, construction loans, and bridge loans.
One of the changes to Regulation Z requires lenders to establish
impound accounts for property taxes and homeowners insurance
on loans defined as higher-priced under the regulation.
Borrowers are allowed to opt out of the requirement to have
an impound account after one year.
In its discussion accompanying Regulation Z, the FRB
acknowledges that, because a loan's APR is typically not
known with certainty until after the underwriting is
completed and the interest rate is locked, lenders may build
in a cushion against this uncertainty by voluntarily setting
their internal thresholds lower than the threshold in the
regulation. (In other words, to avoid the possibility that
a lender will be in violation of Reg. Z by falsely
classifying a loan as not higher-priced, when it is
higher-priced, lenders may internally classify more loans as
higher-priced than may ultimately be higher-priced, once the
final APR is known). Lenders who classify a loan as
higher-priced will establish an impound account for the
borrower who holds that loan, to ensure compliance with
Regulation Z. Some financial institutions are concerned
that California's existing law prohibiting impound accounts
in certain circumstances is not sufficiently flexible to
cover these situations.
These financial institutions are also seeking an exception to
California's existing impound account law, to reflect the
existence of certain impound account requirements, which are
part of foreclosure avoidance plans being championed at the
local, state, and federal levels. If a financial
institution offers to modify or refinance a borrower's
mortgage as part of a foreclosure avoidance effort, and is
required by that foreclosure avoidance program to establish
an impound account in connection with that modified or
refinanced mortgage, the financial institution should not
trigger a violation of California law through its actions.
The financial institutions are concerned that, because the
refinance and modification programs are seldom codified in
statute or regulation, California's exceptions might not
apply.
3. Support . The California Bankers Association (CBA) supports
the bill, for the reasons stated immediately above. CBA
notes that, in general, impound accounts are now viewed as a
SB 633 (Wright), Page 5
consumer protection, which help borrowers manage significant
home-related expenditures. SB 633 will eliminate compliance
conflicts for financial institutions that operate in
California.
4. Opposition None received.
5. Prior and Related Legislation
a. AB 1830 (Lieu) from the 2007-08 Legislative
Session: Would have enacted the Higher-Priced
Mortgage Loan Law, effective July 1, 2009, as
specified, codified a fiduciary duty for mortgage
brokers, effective January 1, 2009, and authorized
California's mortgage regulators to apply specified
federal mortgage lending laws and regulations to their
licensees, effective January 1, 2009. Vetoed by
Governor Schwarzenegger.
b. AB 260 (Lieu) from the 2009-10 Legislative
Session: Virtually identical to AB 1830, but with
delayed operative dates. Pending in the Assembly
Appropriations Committee.
POSITIONS
Support
California Bankers Association
Oppose
None received
Consultant: Eileen Newhall (916) 651-4102