BILL ANALYSIS                                                                                                                                                                                                    Ó






                             SENATE JUDICIARY COMMITTEE
                         Senator Hannah-Beth Jackson, Chair
                              2013-2014 Regular Session


          AB 1770 (Dababneh)
          As Amended June 19, 2014
          Hearing Date: June 24, 2014
          Fiscal: No
          Urgency: No
          TMW


                                        SUBJECT
                                           
            Real Property Liens:  Revolving Lines of Credit:  Suspend and  
                                        Close

                                      DESCRIPTION  

          This bill would provide a procedure by which a borrower, lender  
          in first or subordinate position, or the escrow or title company  
          handling a property escrow can, with the approval of the  
          borrower, request the suspension and closure of a home equity  
          line of credit.

          (This analysis reflects author's amendments to be offered in  
          Committee.) 

                                      BACKGROUND  

          A home equity line of credit (HELOC) is a type of home loan that  
          allows a borrower to open up a line of credit using his or her  
          home as collateral.  A HELOC allows the homeowner to borrow up  
          to a pre-determined amount set by the mortgage lender and is  
          similar to a credit card in that it is a revolving line of  
          credit.

          Under existing law, the borrower may draw funds from a HELOC  
          while the home is in escrow for sale to a new purchaser, and,  
          depending on the timing of the withdrawal, the resulting HELOC  
          lien may not be fully paid off as part of the sale of the home.   
          In addition, the borrower may request multiple HELOCs from  
          different lenders, and the borrower may draw funds from one  
          HELOC while another HELOC is being requested.  In this scenario,  
          the second or third lenders may not receive updated information  
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          that the first HELOC has an outstanding balance, creating loan  
          priority problems for the subsequent lenders.

          This bill would, upon the borrower's instruction to close out  
          the loan, direct a lender to suspend (freeze) the home equity  
          line of credit for a minimum of 30 days, and close the account  
          completely upon payment of a payoff demand.  This bill has a  
          delayed implementation date of July 1, 2015, and would sunset on  
          July 1, 2019.
          This bill was heard by the Senate Banking and Financial  
          Institutions Committee on June 18, 2014, and passed out on a  
          vote of 9-0.

                                CHANGES TO EXISTING LAW
           
           Existing law  requires, within 30 calendar days after an  
          obligation secured by a deed of trust has been satisfied, the  
          beneficiary or its assignee to 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.  (Civ. Code Sec. 2941(b)(1).)

           Existing law  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.  (Civ. Code Sec. 2941(b)(1)(A).)

           Existing law  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, upon receipt of a written request from the trustor  
          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.  (Civ.  
          Code Sec. 2941(b)(2).)

           Existing law  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.  (Civ. Code Sec. 2941(b)(3).)

           Existing law  authorizes the trustee, beneficiary, or mortgagee  
          to charge a reasonable fee to the trustor or mortgagor for all  
                                                                      



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          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.  (Civ. Code Sec.  
          2941(e).)

           Existing law  provides that a violation of the above provisions  
          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, and a willful violation is a  
          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.  (Civ. Code Secs. 2941(d), 2941.5.)

           Existing law  defines an "entitled person" to mean a borrower,  
          lender in first or subordinate position, and as the escrow or  
          title company handling the property escrow.  (Civ. Code Sec.  
          2943(a)(4).)

           Existing law  defines a "payoff demand statement" to mean 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, and 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.  (Civ. Code Sec. 2943(a)(5).)

           Existing law  requires a beneficiary 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.  (Civ. Code Sec. 2943(c).)

           Existing law  provides that a payoff demand statement may be  
          relied upon by the entitled person or his or her authorized  
          agent, in accordance with its terms, for the purpose of  
          establishing the amount necessary to pay the obligation in full.  
           (Civ. Code Sec. 2943(d)(1).)

           Existing law  provides that a willful violation of the above  
          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.  (Civ. Code Sec.  
          2943(e)(4).)
                                                                      



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           This bill  would additionally require a payoff demand statement  
          issued by a beneficiary in connection with an equity line of  
          credit to 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 Line of  
          Credit by the entitled person.

           This bill  would require, upon receipt from an entitled person of  
          a Borrower's Instruction to Suspend and Close Equity Line of  
          Credit that has been prepared and presented to the borrower by  
          the entitled person and signed by a borrower, a beneficiary to  
          suspend the equity line of credit for a minimum of 30 days.

           This bill  would prescribe the form of the Borrower's Instruction  
          to Suspend and Close Equity 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  
          that form 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:
           the escrow or settlement agent named on the form has requested  
            a payoff demand statement for the revolving line of credit;
           the borrower's ability to use the line of credit will be  
            suspended for at least 30 days to accommodate the pending  
            transaction;
           the line of credit will be closed once payment is made in  
            accordance with the payoff demand statement; 
           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; and
           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.

           This bill  would require, when a beneficiary is in receipt of  
          both a Borrower's Instruction to Suspend and Close Equity Line  
          of Credit and payment in accordance with the payoff demand  
          statement, the beneficiary to close the equity line of credit  
          and release or reconvey the property securing the equity line of  
          credit.

                                                                      



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           This bill  would provide that 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.

           This bill  would provide the following definitions:
           "beneficiary" means a mortgagee or beneficiary of a mortgage  
            or deed of trust, or his or her assignees;
           "Borrower's Instruction to Suspend and Close Equity Line of  
            Credit" means the instruction provided under this bill, signed  
            by the borrower or borrowers under an equity line of credit; 
           "entitled person" means a borrower, lender in first or  
            subordinate position, and as the escrow or title company  
            handling the property escrow;
            "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;
           "payoff demand statement" means 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, and 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; and
           "suspend" means to prohibit the borrower from drawing on,  
            increasing, or incurring any additional principal debt on the  
            revolving line of credit.

           This bill  would become operative on July 1, 2015, and remain in  
          effect until July 1, 2019.

                                        COMMENT
           
          1.  Stated need for the bill  
          
          The author writes:
          
            Under existing practice, new homebuyers, title companies,  
            purchase money mortgage lenders and refinancing lenders are  
            finding that [home equity line of credit (HELOC)] lenders are  
            not always shutting down the HELOC loans and executing the  
                                                                      



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            reconveyance to eliminate the HELOC lien.  If the HELOC is not  
            properly shut down and the HELOC borrower is able to keep  
            using his or her HELOC after escrow closes, it creates a  
            serious problem for those parties in the escrow process,  
            including new homebuyers, purchase money mortgage lenders,  
            refinancing lenders, and title companies.  

            In many cases, title companies have encountered HELOCs, which  
            should have been shut down during the escrow process, can run  
            into the hundreds of thousands of dollars.  As a result,  
            innocent new homebuyers are threatened with foreclosure by the  
            HELOC lender for a debt over which they have no control and  
            should not be responsible for.

            AB 1770 attempts to address that issue through clarity and  
            tighter procedures created for lenders and "entitled persons"  
            (title companies) in the escrow process.

          2.  Providing protection to subsequent purchasers and subsequent  
            HELOC lenders  

          This bill would proscribe a process through which a HELOC lender  
          would be required to suspend and close a HELOC when a homeowner  
          borrower transfers the home to a new owner.

          The California Land Title Association (CLTA), sponsor, asserts  
          that "[t]his legislation would clarify the process for closing a  
          [HELOC] loan when the home is being sold or an existing loan  
          refinanced.  Currently, existing practice results in some HELOC  
          loans not being shut down to the detriment of new homebuyers,  
          purchase money mortgage lenders, refinancing lenders, and title  
          companies."  CLTA notes that this bill would replicate a process  
          that already works for consumers, HELOC lenders, and title  
          companies in Arizona, and is written so that HELOC lenders are  
          provided with a written request signed by the HELOC borrower to  
          shut down his or her HELOC loan in conformity with their  
          existing HELOC contracts and federal regulations.  

          This bill would require a HELOC borrower to affirm in the  
          required form prescribed in this bill that the HELOC borrower is  
          aware that he or she is responsible for outstanding amounts on  
          the HELOC loan.  In this way, this bill would provide notice to  
          the HELOC borrower that he or she is responsible for outstanding  
          amounts owed on the HELOC that is not satisfied from the sale of  
          the home.  Further, this bill seeks to protect subsequent home  
          purchasers from being liable for outstanding amounts on the  
                                                                      



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          prior homeowner's HELOC loan.

          Additionally, this bill would, upon the borrower's instruction  
          to close out the loan, direct the HELOC lender to suspend the  
          home equity line of credit for a minimum of 30 days, and close  
          the account completely upon payment of a payoff demand.  These  
          provisions seek to protect subsequent HELOC lenders from  
          unknowingly approving a HELOC to the borrower without adequate  
          information on amounts the borrower draws on the first HELOC  
          after the borrower has applied for the subsequent HELOCs, which  
          would put subsequent HELOC lenders in jeopardy of recovering  
          from the borrower the amounts loaned.

          This bill would also require the instruction form to include the  
          name of the HELOC lender, borrower, account number, property  
          address associated with the HELOC, and name of the escrow or  
          settlement agent.  These provisions would provide critical  
          contact information for title companies and escrow companies  
          forwarding payments to HELOC lenders from the sale proceeds.

          3.  Author's amendments  

          The author offers the following technical and conforming  
          amendments.
          
             Author's amendments  :

             1.   On page 3, in line 11, strike "45" and insert "30"
             2.   On page 3, in line 32, strike "account" and insert  
               "equity line of credit"


           Support  :  None

           Opposition  :  None

                                        HISTORY
           
           Source  :  California Land Title Association

           Related Pending Legislation  :  None Known

           Prior Legislation  :  None Known

           Prior Vote  :

                                                                      



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          Senate Committee on Banking and Financial Institutions (Ayes 9,  
          Noes 0)
          Assembly Floor (Ayes 76, Noes 0)
          Assembly Committee on Judiciary (Ayes 11, Noes 0)

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