BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  SB 978
                                                                  Page  1

          Date of Hearing:   August 8, 2012

                        ASSEMBLY COMMITTEE ON APPROPRIATIONS
                                Felipe Fuentes, Chair

                    SB 978 (Vargas) - As Amended:  June 18, 2012 

          Policy Committee:                             Banking and 
          Finance      Vote:                            11-0

          Urgency:     No                   State Mandated Local Program: 
          Yes    Reimbursable:              No

           SUMMARY  

          This bill enacts several changes to the Real Estate Law and 
          Corporations Code, by increasing real estate investor 
          protections, and requiring the Department of Corporations (DOC) 
          to focus greater regulatory scrutiny on, and provide greater 
          transparency regarding, the activities of those who solicit 
          investors in connection with real estate investments.  
          Specifically, this bill:   

       1)Requires that loans for which investors are sought cannot exceed 
            loan-to-value (LTV) ratios specified in the statute.  These 
            LTVs vary from 35% to 80%, depending on the type of property 
            and its intended use (i.e., developed single-family residence, 
            developed commercial, construction, undeveloped, etc.).  

       2)Interests in loans could not be sold, unless the real estate 
            broker soliciting the investor ensures that the investor meets 
            at least one of the following two requirements:

             a)   The investment does not exceed 10% of the investor's net 
               worth, as defined.
             b)   The investment does not exceed 10% of the investor's 
               adjusted gross income for federal income tax purposes, as 
               specified.

       3)Requires every real estate broker and any issuers, as specified, 
            that solicit investors for privately-funded loans to make 
            reasonable effort to ensure the purchaser understands the 
            investment and it is suitable for the investor.

       4)Requires the DOC Commissioner to annually prepare a report, as 








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            specified, for publication on the DOC's Internet Web site, 
            summarizing data collected from persons to which it issues 
            securities permits.

       5)Authorizes the DOC Commissioner to examine those persons to which 
            it issues permits, review compliance with the conditions of 
            the permits and other applicable state law, and disqualify an 
            offering if the Commissioner finds that the issuer materially 
            violated the provisions of their permit.

           FISCAL EFFECT  

          The Department of Corporations anticipates the need for two PYs 
          to conduct regulatory examinations at a cost of approximately 
          $250,000 (special fund).  






































                                                                  SB 978
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           COMMENTS

          1)Purpose  .  According to the author, SB 978 would implement a 
            series of recommendations stemming from a joint informational 
            hearing held by Senate Banking and Financial Institutions 
            Committee and Senate Business, Professions and Economic 
            Development Committee on hard money lending on January 18, 
            2012.  The author argues SB 978 would increase the reporting 
            requirements on those who seek to raise money from investors 
            pursuant to Corporations Codes securities law exemptions.  The 
            author concludes that SB 978 would increase the protections 
            available to people who invest their savings with entities 
            soliciting funds for real estate investments.

           2)Background  .  The provisions of this bill are designed to 
            address issues related to what is commonly referred to as 
            "hard money lending," which is the lending of money by private 
            individuals and small pension plans to other private 
            individuals and/or businesses.  Interest rates are higher as 
            the risk taken by the lender is usually higher and the loan is 
            more likely to be secured by the asset than the 
            creditworthiness of the borrower. Most hard money lenders lend 
            solely based upon the deal or property at hand.

            As with all lending, hard money lending has two parts, raising 
            money from investors and lending that money out.  The funds 
            usually come from private individuals, not a lending 
            institution.  Generally speaking, a license or permit is not 
            required to solicit investors to invest in real estate 
            securities.  Investor solicitation may be conducted by 
            licensed real estate brokers, or it may be conducted pursuant 
            to state and federal securities laws.

            Hard money lending is common in real estate and construction 
            characterized by short-term, high-interest loans and relaxed 
            underwriting standards. Hard money lending is typically used 
            by investors intending to buy a blighted property and 
            rehabilitate it to increase its market value.  Most hard money 
            lending happens in lower-middle class neighborhoods where 
            property values are relatively stable and blighted properties 
            are available to purchase at significant discounts.  Because 
            of the nature of the transactions and the risks, hard money 
            lending is done at high interest rates.
                
            3)Previous legislation  .








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             a)    SB 53 (Calderon and Vargas), Chapter 717, Statutes of 
               2011 enacted several changes to California's Real Estate 
               Law, including a requirement that hard money lenders inform 
               their investors about which provision or provisions of the 
               Real Estate Law or the Corporate Securities Law govern 
               their transactions. 

             b)   AB 2288 ((Blakeslee) of 2010) would have implemented 
               specific criteria for issuers involved in hard money 
               lending.  This bill failed passage in Assembly Banking and 
               Finance Committee.



           Analysis Prepared by  :    Roger Dunstan / APPR. / (916) 319-2081