BILL ANALYSIS Ó
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Noreen Evans, Chair
2013-2014 Regular Session
AB 1770 (Dababneh) Hearing Date: June 18, 2014
As Amended: June 9, 2014
Fiscal: No
Urgency: No
SUMMARY Would provide a procedure by which an entitled person,
as defined, can, with the approval of the borrower, request the
suspension and closure of a home equity line of credit, as
specified.
DESCRIPTION
1. Would define beneficiary, entitled person, and payoff
demand statement by reference to Civil Code Section 2943.
2. Would define "revolving line of credit" as an open-end
revolving loan that is established pursuant to a written
agreement between a borrower and a lender on residential
real property consisting of one to four dwelling units, in
which the lender agrees to lend the borrower money on a
continuing basis for as long as the outstanding principal
amount owed by the borrower does not exceed a specified
amount, and which is secured by a mortgage or deed of trust
on real property.
3. Would define "suspend" for purposes of the bill as
prohibiting a borrower from drawing on, increasing, or
incurring any additional principal debt on his or her
revolving line of credit.
4. Would require a beneficiary that provides a payoff demand
statement in connection with a revolving line of credit to
include an e-mail address, fax number, or mailing address
for delivery of a request to suspend and close a line of
credit.
5. Would require a beneficiary to suspend a borrower's
revolving line of credit for a minimum of 45 days, upon
receipt from an entitled person of a Borrower's Instruction
AB 1770 (Dababneh), Page 2
to Suspend and Close Revolving Line of Credit, signed by the
borrower.
6. Would require a beneficiary to close a revolving line of
credit and release or reconvey the property securing that
line of credit, once the beneficiary is in receipt of a
Borrower's Instruction to Suspend and Close Revolving Line
of Credit and payment in accordance with the payoff demand
statement.
7. Would prescribe the form of the Borrower's Instruction to
Suspend and Close Revolving Line of Credit and provide that
an alternate form is acceptable, if it is made in
substantially the same form as the example provided in
statute. The wording of the form that would be written into
statute asks for the identities of the lender, borrower, and
escrow or settlement agent; the property address; and the
account number of the equity line of credit. By signing the
form, a borrower acknowledges that:
a. The escrow or settlement agent named on the form has
requested a payoff demand statement for the revolving
line of credit.
b. The borrower's ability to use the line of credit
will be suspended for at least 45 days to accommodate the
pending transaction.
c. The line of credit will be due and payable upon
close of escrow.
d. The line of credit will be closed once payment is
made in accordance with the payoff demand statement.
e. If any amounts remain due after payment is made in
accordance with the payoff demand statement, the borrower
understands that he or she will remain personally liable
for those amounts.
f. The borrower is instructing the beneficiary to close
his or her line of credit and cause the secured lien
against the subject property to be released, when the
lender is in receipt of the signed instruction and
payment in accordance with the lender's payoff demand
statement.
AB 1770 (Dababneh), Page 3
8. Would provide for a delayed operative date of July 1, 2015.
EXISTING LAW
9. Provides that, within 30 calendar days after an obligation
secured by a deed of trust has been satisfied, the
beneficiary or its assignee (i.e., the lender or its
representative) shall execute and deliver to the trustee the
original note, deed of trust, request for a full
reconveyance, and other documents necessary to reconvey the
deed of trust (Civil Code Section 2941). Section 2941 also:
a. Requires the trustee to execute the full
reconveyance and record it or cause it to be recorded in
the office of the county recorder in which the deed of
trust is recorded within 21 calendar days after receiving
the documents listed immediately above.
b. Provides that if a trustee fails to execute and
record the full reconveyance within 60 calendar days
after an obligation secured by a deed of trust is
satisfied, the beneficiary (i.e., the lender), upon
receipt of a written request from the trustor (i.e., the
borrower) or the trustor's heirs, successor in interest,
agent, or assignee, shall execute a certificate of
discharge and record or cause to be recorded a release of
the obligation in the office of the county recorder in
which the mortgage is recorded.
c. Provides that if a full reconveyance has not been
executed and recorded within 75 calendar days after an
obligation secured by a deed of trust is satisfied, a
title insurance company may prepare and record a release
of the obligation, as specified.
d. Authorizes the trustee, beneficiary, or mortgagee to
charge a reasonable fee to the trustor or mortgagor for
all services involved to prepare, execute, and record the
full reconveyance, and provides that if the fee does not
exceed $45, it is conclusively deemed to be reasonable.
e. Provides that a violation of Section 2941 makes the
violator liable to the person affected by the violation
for all damages that person sustains as a result of the
violation, plus a sum of $500. Pursuant to Section
2941.5, a willful violation of Section 2941 is a
AB 1770 (Dababneh), Page 4
misdemeanor, punishable by a fine between $50 and $400,
or by imprisonment in a county jail for up to six months,
or by both a fine and imprisonment.
10. Defines an "entitled person" as a borrower, lender in first
or subordinate position, and as the escrow or title company
handling the property escrow (technically, as "the trustor
or mortgagor of, or his successor in interest in, the
mortgaged or trust property, or any part thereof, any
beneficiary under a deed of trust, any person having a
subordinate lien or encumbrance of record thereon, or the
escrowholder;" Section 2943).
11. Defines a "payoff demand statement" as a written statement,
prepared in response to a written demand made by an entitled
person or authorized agent, setting forth the amounts
required as of the date of preparation by the beneficiary,
to fully satisfy all obligations secured by the loan that is
the subject of the payoff demand statement (Section 2943).
The statement must include information necessary to
calculate the payoff amount on a per diem basis for the
period of time, not to exceed 30 days, during which the per
diem amount is not changed by the terms of the note.
12. Requires a beneficiary (i.e., the lender) or his or her
authorized agent, to prepare and deliver a payoff demand
statement to the person demanding it within 21 days of
receipt of the demand, and authorizes the beneficiary to
charge up to $30 per statement, except as specified (Section
2943). Provides that a payoff demand statement may be
relied upon by the entitled person or her or her authorized
agent, in accordance with its terms, for the purpose of
establishing the amount necessary to pay the obligation in
full. A willful violation of this provision requires the
beneficiary to pay the entitled person $300, and renders the
beneficiary liable to the entitled person for all damages he
or she may sustain.
COMMENTS
1. Purpose: This bill is sponsored by the California Land
Title Association to provide a predictable process by which
a home equity line of credit (HELOC) can be suspended, and
then closed.
2. Background and Discussion: This bill is intended to prevent
AB 1770 (Dababneh), Page 5
a series of problems that can be triggered when a borrower
draws down his or her HELOC after escrow is opened in
connection with a home sale or a mortgage loan refinancing
with which that borrower is involved. As described in more
detail below, title companies will typically request payoff
demand statements from all lenders that hold outstanding
notes and deeds of trust on a property, shortly before that
property is sold or the outstanding deed(s) of trust secured
by that property are refinanced.
If the borrower involved in that sale or refinancing transaction
has a HELOC, he or she can legally draw on that HELOC after
the HELOC lender provides a payoff demand statement to the
title company. In these cases, the payoff demand statement
fails to reflect the additional draw, and the title company
ends up remitting less than the full amount necessary to pay
off the HELOC. Because the HELOC has not been fully paid
off, the HELOC lender does not release its lien on the
property. This can create several problems, as described in
more detail below. The language of this bill is intended to
prevent the HELOC draws that can trigger these problems.
The two most common scenarios this bill is intended to address
are as follows:
Scenario One (sale of the home): In this scenario, Borrower A
is seeking to sell his or her home to Borrower B. Borrower
A has a HELOC, held by Lender A. Borrower B is seeking a
mortgage from Lender B in connection with Borrower B's
purchase of the home. Upon the opening of escrow in
connection with the sale of the home, a title company
requests a payoff demand statement from Lender A, which
Lender A furnishes. Borrower A subsequently draws down
additional funds, which are available pursuant to the terms
of the HELOC.
Because the title company is unaware of this additional draw, it
pays off Lender A using the proceeds of escrow, based on
Lender A's (now outdated) payoff demand statement. The
title company also issues a title insurance policy to Lender
B, assuring Lender B that its loan to Borrower B is the
senior mortgage on the property. Lender A fails to close
the HELOC and reconvey the lien against the property that it
holds to secure the HELOC, because the HELOC has not been
fully paid off.
AB 1770 (Dababneh), Page 6
Furthermore, because the HELOC lien was recorded before the lien
attributable to the mortgage held by Lender B, Lender B is
not in first position, but rather in second position, behind
Lender A. Unless Borrower A can be located and forced to
pay off the amount still owing on the HELOC, someone other
than Borrower A will have to pay off Lender A in order to
remove Lender A's lien. Very likely, Lender B will file a
title insurance claim to cover the cost of removing Lender
A's HELOC lien.
Until that lien is removed, there is a cloud on the property,
which makes it impossible for Borrower B to refinance his or
her loan from Lender B, or to sell his or her property. In
rare cases, Lender A may move to foreclose on the property
to seek repayment of its outstanding loan, which creates
even greater problems for all involved.
Scenario Two (refinancing of a mortgage): In this scenario,
there is only one borrower, but three lenders. Borrower A
has a first mortgage from Lender A and a HELOC from Lender
B. Borrower A is seeking to refinance his or her first
mortgage; Lender C would replace Lender A as the holder of
the first mortgage following the refinancing. If Lender B
agrees to sign a subordination agreement, agreeing to remain
in second position following the refinancing, Borrower A's
HELOC can remain open; with a subordination agreement in
place, Lender C replaces Lender A as "first in line," and
Lender B remains in second position.
However, many lenders in Lender C's position want the HELOC
fully paid off and closed, and the HELOC lien removed,
before they will agree to refinance the loan held by Lender
A. This situation can result in outcomes like the one
described in scenario one above, where a title company
requests a payoff demand statement from Lender B (holder of
the HELOC), Borrower A draws on the HELOC following the
provision of the payoff demand statement from Lender B to
the title company, the title company pays off Lender B using
the (now outdated) payoff demand statement, and issues a
title insurance policy to lender C, assuring Lender C that
its mortgage is the senior mortgage on the property. Lender
B fails to close the HELOC and reconvey the lien against the
property that it holds to secure the HELOC, because the
HELOC has not been fully paid off.
Because the HELOC lien was recorded before the lien held by
AB 1770 (Dababneh), Page 7
Lender C, Lender C is not in first position, but rather in
second position, behind Lender B. This scenario is
considerably easier to address than scenario one, above,
because Borrower A is easily located, but still requires
considerable paperwork and recording fees to address, and
can also result in a title insurance claim by Lender C.
AB 1770 would establish a process by which a title company can
request a HELOC lender to temporarily suspend that HELOC
pending its closure, thereby preventing the HELOC borrower
from taking additional draws. The request would have to be
signed by the borrower, ensuring that the borrower is aware
he or she will no longer be able to draw on their HELOC.
Upon receipt of a request to suspend and close a HELOC, the
HELOC lender would be required to suspend the loan for a
specified period of time, and to subsequently close it and
reconvey the lien, following receipt of the amount specified
by the HELOC lender in its payoff demand statement.
3. Summary of Arguments in Support: The California Land Title
Association (CLTA) is sponsoring AB 1770 to create a
predictable process for shutting down HELOCs and help avoid
the negative consequences that can result when HELOCs are
not shut down during escrow. Title companies can face huge
claims and litigation, if they rely upon HELOC lenders to
shut down HELOC loans, and the HELOC lenders do not.
Negative consequences can also befall new homebuyers, whose
new homes have clouds on title, which make it impossible for
the homeowners to refinance, sell, or transfer their real
property. The existing lien may also affect their credit,
because the lien is associated with the real property they
now own. Furthermore, because the lien is on the new
homebuyer's property, the new homebuyer faces possible
foreclosure by the HELOC lender on the debt the previous
property owner ran up.
Negative consequences can also befall purchase money
mortgage lenders, who insist on their lien being first in
the chain of title over all other non-governmental
encumbrances. Being behind a HELOC lien puts the purchase
mortgage lender's security interest at risk. The HELOC
lender can now foreclose or imperil the purchase money
lender's security interest. Being behind a HELOC lien can
also pose problems for a purchase money lender that wants to
sell its loan into a mortgage pool. Investors typically
AB 1770 (Dababneh), Page 8
require that purchase money mortgages be senior liens.
Refinancing lenders share similar problems, when they end up
behind a HELOC lien.
4. Summary of Arguments in Opposition: None received.
5. Amendments: The following amendments represent a negotiated
compromise reached after the deadline for this Committee to
accept amendments. They are believed to address all
remaining, outstanding concerns held by interested parties
regarding the June 9th version of the bill.
2943.1. (a) For purposes of this section, the following
definitions apply:
(1) "Beneficiary" has the same meaning as defined in Section
2943.
(2) "Borrower's Instruction to Suspend and Close Equity Line
of Credit " means the instruction described in subdivision
(c), signed by the borrower or borrowers under an equity a
revolving line of credit.
(3) "Entitled person" has the same meaning as defined in
Section 2943.
(4) "Payoff demand statement" has the same meaning as
defined in Section 2943.
(5) "Equity line of credit" means a revolving line of
credit used for consumer purposes, which is secured by a
mortgage or deed of trust encumbering residential real
property consisting of one to four dwelling units, at least
one of which is occupied by the borrower. " Revolving line of
credit" means an open-end revolving loan that is established
pursuant to a written agreement between a borrower and a
lender on residential real property consisting of one to
four dwelling units in which the lender agrees to lend the
borrower money on a continuing basis for as long as the
outstanding principal amount owed by the borrower does not
exceed a specified amount, and which is secured by a
mortgage or deed of trust on real property.
(6) "Suspend" means to prohibit the borrower from drawing
on, increasing, or incurring any additional principal debt
on the revolving line of credit.
(b) Notwithstanding paragraph (5) of subdivision (a) of
Section 2943, a payoff demand statement issued by a
beneficiary in connection with an equity a revolving line of
credit shall include an email address, fax number, or
mailing address designated by the beneficiary for delivery
of the Borrower's Instruction to Suspend and Close Equity
AB 1770 (Dababneh), Page 9
Line of Credit by the entitled person.
(c) Upon receipt from an entitled person of a Borrower's
Instruction to Suspend and Close Equity Revolving Line of
Credit, that has been prepared and presented to the borrower
by the entitled person and signed by a borrower, a
beneficiary shall suspend the equity revolving line of
credit for a minimum of 30 45 days. A Borrower's Instruction
to Suspend and Close Equity Line of Credit shall be
effective if made substantially in the following form and
signed by the borrower:
AB 1770 (Dababneh), Page 10
--------------------------------------------
|"Borrower's Instruction to Suspend and |
|Close |
|Equity Revolving Line of Credit |
|--------------------------------------------|
| |
|--------------------------------------------|
|Lender:[Name of Lender] |
|--------------------------------------------|
| |
|--------------------------------------------|
|Borrower(s):[Name of Borrower(s)] |
|--------------------------------------------|
| |
|--------------------------------------------|
|Account Number of the Equity Line of |
|Credit:[Account Number] |
|--------------------------------------------|
| |
|--------------------------------------------|
|Encumbered Property Address:[Property |
|Address] |
|--------------------------------------------|
| |
|--------------------------------------------|
|Escrow or Settlement Agent:[Name of Agent]: |
|--------------------------------------------|
| |
|--------------------------------------------|
|In connection with a sale or refinance of |
|the above-referenced property, my Escrow or |
|Settlement Agent has requested a payoff |
|demand statement for the above-described |
|equity revolving line of credit. I |
|understand my ability to use this equity |
|line of credit account has been suspended |
|for at least 30 45 days to accommodate this |
|pending transaction. I understand that I |
|cannot use any credit cards, debit cards, |
|or checks associated with this equity line |
|of credit account while it my account is |
|suspended and all amounts will be due and |
|payable upon close of escrow. I also |
|understand that when payment is made in |
AB 1770 (Dababneh), Page 11
|accordance with the payoff demand |
|statement, my equity revolving line of |
|credit will be closed. If any amounts |
|remain due after the payment is made, I |
|understand I will remain personally liable |
|for those amounts even if the equity line |
|of credit account has been closed and the |
|property released. |
|--------------------------------------------|
| |
|--------------------------------------------|
|This is my written authorization and |
|instruction that you are to close my equity |
|revolving line of credit account and cause |
|the secured lien against this property to |
|be released when you are in receipt of both |
|this instruction and payment in accordance |
|with your payoff demand statement. |
|--------------------------------------------|
| |
--------------------------------------------
--------------------------------------------
|(Date| (Signature of Each Borrower) " |
|) | |
--------------------------------------------
(d) When a beneficiary is in receipt of both a Borrower's
Instruction to Suspend and Close Equity Revolving Line of
Credit and payment in accordance with the payoff demand
statement as set forth in Section 2943, the beneficiary
shall do all of the following:
(1) Close the equity revolving line of credit.
(2) Release or reconvey the property securing the equity
revolving line of credit, as provided by this chapter.
(e) The beneficiary may conclusively rely on the Borrower's
Instruction to Suspend and Close Equity Line of Credit
provided by the entitled person as coming from the borrower.
(f) This section shall become operative on July 1, 2015.
(g) This section shall remain in effect only until July 1,
2019, and as of that date is repealed, unless a later
enacted statute, that is enacted before July 1, 2019,
deletes or extends that date.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
AB 1770 (Dababneh), Page 12
California Land Title Association (sponsor)
Opposition
None received
Consultant: Eileen Newhall (916) 651-4102