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 (more) AB 1770 (Dababneh) Page 2 of ? 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 AB 1770 (Dababneh) Page 3 of ? 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).) AB 1770 (Dababneh) Page 4 of ? 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. AB 1770 (Dababneh) Page 5 of ? 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 AB 1770 (Dababneh) Page 6 of ? 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 AB 1770 (Dababneh) Page 7 of ? 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 : AB 1770 (Dababneh) Page 8 of ? 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) **************