BILL ANALYSIS Ó
AB 1770
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CONCURRENCE IN SENATE AMENDMENTS
AB 1770 (Dababneh)
As Amended July 1, 2014
Majority vote
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|ASSEMBLY: |76-0 |(May 19, 2014) |SENATE: |35-0 |(July 3, 2014) |
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Original Committee Reference: B. & F.
SUMMARY : Specifies a process for termination of a Home Equity
Line of Credit (HELOC). Specifically, this bill :
1)Provides for a borrower's Instruction to Suspend and Close
Equity Line of Credit.
2)States that on receipt of an Instruction to Suspend and Close
Equity Line of Credit to terminate a HELOC the lender shall
suspend the HELOC for a minimum of 45 days.
3)Provides that when the HELOC lender is in receipt of the
Instruction to Suspend and Close Equity Line of Credit and the
payment required in the payoff demand statement the HELOC
lender shall do the following:
a) Close the HELOC; and
b) Release or reconvey the property securing the HELOC.
4)Defines "authorized person" as a licensed title insurance
company, underwritten title company, or escrow company acting
on behalf of the borrower.
5)Defines "equity line of credit" as 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.
6)Defines "borrower's" Instruction to Suspend and Close Equity
Line of Credit as the instruction signed by the borrower that
closes the HELOC.
7)Provides that "receipt of written request" includes
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confirmation by delivered by United States Postal Service
first-class mail, registered or certified mail, express mail,
overnight delivery by an express carrier, electronic mail,
facsimile, or other electronic means.
8)Requires that the Instruction to Suspend and Close Equity Line
of Credit shall be provided to the borrower and shall be
accompanied by language explaining the reason for the
cancelation and the rights and responsibilities of the
borrower.
9)Provides for an operative date of July 1, 2015, and a sunset
date of July 1, 2019.
The Senate amendments :
1)Provide for the creation of a borrower's "Instruction to
Suspend and Close Equity Line of Credit" as a document that a
borrower can provide to a HELOC lender in order to freeze or
close the HELOC.
2)Specify that once the Instruction to Suspend and Close Equity
Line of Credit is received, the HELOC lender shall suspend the
HELOC for 45 days.
3)Eliminates a borrower notice relating the closing of the HELOC
and instead provides for the disclosure of the ramifications
of closing the HELOC via the Instruction to Suspend and Close
Equity Line of Credit.
4)Make other technical and clarifying changes.
EXISTING LAW requires, under Civil Code Section 2941, for
execution and recordation of a reconveyance in order to show
that the lien has been satisfied.
FISCAL EFFECT : None
COMMENTS :
According to the author's office this bill is needed for the
following reasons:
Right now, if a borrower has a home equity line of
credit (HELOC) secured by a lien on his house, he/she
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is supposed to shut down the HELOC loan and not draw
down any money on the loan if he/she is selling or
refinancing his/her house. If the lender fails to
close the HELOC during escrow and money is drawn on
the HELOC, the underlying lien and loan become the
debt of the innocent buyer.
Many sellers don't realize their line of credit
(HELOC) is secured by a lien on their home. Wanting
money they sometimes draw on the HELOC loan during
escrow or immediately following sale of their house,
resulting in the underlying HELOC loan and lien
becoming the obligation of the new buyer because the
lien follows the real property unless it is
extinguished.
A HELOC is secured by the borrower's property and the lien
associated with that loan will follow the property until it is
paid back. Currently, when title and escrow companies handle
the escrow they contact the HELOC lender for a payoff statement
that will tell the title company the amount of money needed in
escrow to pay off the HELOC loan. Often this process is
automated by the larger financial institutions so that the
payoff statement is automated but the HELOC is not automatically
shut down.
A potential problem with a home sale that involves a HELOC is
that the borrower could draw down from their HELOC during the
escrow or immediately after the home is sold, but the liability
for the loan would follow the new purchaser of the property.
This could be a result of confusion on the part of the HELOC
borrower who may not understand that the loan follows the
property. In other cases it could be an outright purposeful
decision on the part of the HELOC borrower. This bill is
intended to provide a standardized process to terminate a HELOC
when the home is in escrow so that the HELOC will not
inadvertently become the liability of the subsequent homeowner.
According to the latest Equifax National Consumer Credit Trends
Report the total number of new HELOCs is 71,600, an increase of
10% from same time a year ago. The balance of newly originated
HELOCs was up 18.4%, from $6.2 billion to $7.3 billion. The
total outstanding balance of existing HELOCs in March 2014
decreased 6.5% from same time a year ago, the report says. Of
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total severely delinquent balances, 69% are from loans
originated from 2005-2007. The total balance of severely
delinquent loans in March 2014 is slightly more than $8 billion,
a five-year low. This current market of HELOCs is quite small
compared to pre-foreclosure crisis numbers. Many of the HELOCs
issued prior to the foreclosure crisis are close to coming due.
Most HELOCs allow the borrower to take out money against their
home for the first ten years without making any payments. Over
the next 20 years that balance must be paid off. For HELOCs
issued during the housing price appreciation boom that peaked in
2006 those loans are coming due between 2014 and 2018. This
surge accounts for $208 billion in HELOCs. This wave is so
large that the Office of Controller of Currency has urged
national banks to adopt policies to address this onslaught.
Many institutions are reaching out to borrowers in advance of
due dates to discuss refinance options.
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081
FN: 0004212