BILL ANALYSIS Ó SB 474 Page 1 Date of Hearing: July 7, 2015 ASSEMBLY COMMITTEE ON JUDICIARY Mark Stone, Chair SB 474 (Wieckowski) - As Amended April 6, 2015 PROPOSED CONSENT (As Proposed to Be Amended) SENATE VOTE: 38-0 SUBJECT: AUCTIONS: REAL ESTATE KEY ISSUE: SHOULD EXISTING LAW, ENACTED LAST YEAR TO PROHIBIT SHILL BIDDING AT REAL ESTATE AUCTIONS, BE REVISED TO CLARIFY THAT THE PROHIBITION APPLIES TO BIDS OFFERED BY THE AUCTIONEER DURING A REAL ESTATE AUCTION, AND NOT TO "CREDIT BIDS" OFFERED BY CREDITORS IN A FORECLOSURE AUCTION? SYNOPSIS This non-controversial bill, sponsored by the California Association of Realtors, seeks to clarify the application of a law passed just last year, AB 2039 (Muratsuchi), Ch. 893, Stats. 2014, that restricted the practice of shill bidding in real estate auctions. Proponents of this bill contend that the new law created some unintended confusion for consumers and auction participants because of the way it defined the prohibition and SB 474 Page 2 also created a statutory exception for credit bids from the scope of the new law. This bill effectively seeks to narrow AB 2039's prohibition on any bids placed on behalf of sellers to cover only those bids made by an auctioneer. Proponents contend that because the auctioneer is never the same person as a creditor placing a credit bid, the bill's narrower prohibition will have no impact on credit bids made in a foreclosure auction. The California Bankers Association supports the bill and states that the changes in this bill provide "clarity to the confusing opening provision found in [existing law] and, as amended, appropriately [focus] on the actions of the auctioneer, making it clear that the auctioneer is prohibited from stating an increased bid during an auction when one does not exist." As a result of this clarification, proponents assert that the existing exclusion of credit bids is no longer necessary, and the exclusionary language is deleted by this bill. Proposed author's amendments to the bill merely revise the facts constituting the necessity for the urgency clause and delete an obsolete provision establishing an operative date of July 1, 2015. This bill previously passed the Senate unanimously and has no known opposition. SUMMARY: Revises and recasts the law governing real estate auctions to make unnecessary a statutory exception for "credit bids" from the meaning of "shill bids," and deletes the existing exception. Specifically, this bill: 1)Deletes existing provisions prohibiting any person from causing or allowing a person to bid at a sale for the sole purpose of increasing the bid on any real property being sold by the auctioneer. 2)Provides, instead, that an auctioneer shall not state at an SB 474 Page 3 auction that an increased bid greater than that offered by the last highest bidder has been made when, in fact, no person has made an increased bid. 3)Clarifies that, notwithstanding the above prohibition, an auctioneer or another authorized person may place a bid on the seller's behalf during an auction of real property that would not result in a sale of the real property, if both of the following are true: a) Notice is given to all auction participants, including all other bidders, that liberty for that type of bidding is reserved and that type of bid will not result in the sale of the real property. b) The person placing that type of bid contemporaneously discloses to all auction participants, including all other bidders, that the particular bid has been placed on behalf of the seller. 4)Deletes existing language specifically exempting credit bids, as described, from being subject to these provisions. 5)Contains an urgency clause to cause this bill to take effect immediately upon being chaptered into law. EXISTING LAW: 1)Provides that a person shall not cause or allow a person to bid at a sale for the sole purpose of increasing the bid on any real property being sold by the auctioneer, including, but not limited to, stating any increased bid greater than that SB 474 Page 4 offered by the last highest bidder when, in fact, no person has made an increased bid. (Civil Code Section 1812.610(b). All further references are to this code unless otherwise stated.) 2)Provides that, notwithstanding the above prohibition, an auctioneer or another authorized person may place a bid on the seller's behalf during an auction of real property, if both of the following are true: a) Notice is given to all auction participants, including all other bidders, that liberty for that type of bidding is reserved and that type of bid will not result in the sale of the real property; and b) The person placing that type of bid contemporaneously discloses to all auction participants, including all other bidders, that the particular bid has been placed on behalf of the seller. (Id.) 3)Provides that the prohibition on placing auction bids on behalf of the seller shall not apply to credit bids made by creditors holding a deed of trust, mortgage, or other lien on the property that is the subject of the auction when the credit bid can result in the transfer of title to property to the creditor. (Section 1812.610(d).) 4)Prohibits causing or allowing any person to bid at a sale for the sole purpose of increasing the bid on any item or items being sold by the auctioneer (but not including real property), except as otherwise authorized. Further provides that a violation of this prohibition includes: SB 474 Page 5 a) Stating any increased bid greater than that offered by the last highest bidder when, in fact, no person has made such a bid; and b) Allowing the owner, consignor, or agent thereof, of any item or items to bid on the item or items, without disclosing to the audience that the owner, consignor, or agent thereof has reserved the right to so bid. (Section 1812.608(h).) FISCAL EFFECT: As currently in print this bill is keyed non-fiscal. COMMENTS: This non-controversial bill, sponsored by the California Association of Realtors, seeks to clarify the application of law passed just last year, AB 2039 (Muratsuchi), Ch. 893, Stats. 2014, that restricted the practice of shill bidding in real estate auctions. Proponents of this bill contend that the new law created some unintended confusion for some auction participants because of the way the author of AB 2039 sought to define the prohibition itself and then create a statutory exception for credit bids from the scope of the new law. According to the author and sponsor: Last year, AB 2039 brought real estate auctions under the state's auction law. That law, beginning July 1, 2015, now governs the submittal of a "shill bid" (i.e., a bid intended to increase the bidding above the last legitimate bid). In order that a "credit bid" (i.e., a bid submitted by a mortgage note holder at a foreclosure sale) not be confused with a "shill bid," an exception was made for "credit bids" in the real estate auction statute. SB 474 will recast the statute governing real estate auctions so that the exception for "credit bids" - which are unrelated to SB 474 Page 6 the conduct of real estate transactions - is eliminated. Background on real estate auctions. A short sale describes a type of real estate transaction where a homeowner sells his or her home for less than the balance remaining on a mortgage. Short sales require sellers to find a buyer willing to purchase their property at its current market value, either with or without the assistance of a real estate agent, and require the sellers' lender to agree to accept the proceeds from the sale as payment in full for the outstanding mortgage debt. Since a lender must typically agree to accept the short sale proceeds in lieu of the amount owed under a mortgage or in lieu of going through nonjudicial foreclosure, lenders often condition the acceptance of a sale offer upon certain terms and conditions. Some lenders have started requiring homeowners to agree to have their property put out for bid using an auction company to see if the property fetches a higher price at auction before a short sale offer will be accepted - a process known as validating the sale price. In some of these auctions, the auctioneer will "counter-bid" or place bids on behalf of the seller when the highest bid fails to meet an auction's set reserve price, which is the minimum selling price set by the seller of a property prior to the auction. For example, Auctions.com (also known as ADC), which conducts many real estate auctions through its website, states in its Terms of Use: "Except where prohibited by law, ADC may counter bid on behalf of Seller on any Property up to the amount of the Reserve Price (and no such bid will result in a sale of the Property). If the Reserve Price is not met, Seller is under no obligation to sell the Property; however, Seller may accept a bid that is below the Reserve Price in its sole discretion." (See: http://www.auction.com/lp/legal/ auction-terms/) SB 474 Page 7 AB 2039 enacted last year to regulate short sale transactions. Last year the Legislature passed AB 2039 (Muratsuchi) to regulate short sale transactions, including measures to ensure greater transparency in real estate auctions to protect bidders. Among other things, the bill prohibits any person, including the seller, auctioneer, or their agents, from bidding at a real property auction for the sole purpose of increasing the bid, unless two conditions are met. First, all auction participants must receive advance notice that such bidding will be allowed during the auction, and secondly, the auctioneer or other person placing the bid must contemporaneously disclose to all auction participants that the bid has been placed on behalf of the seller. After these requirements were amended into the bill in the Senate, the California Bankers Association (CBA) raised concerns that the bill may impact the existing practice of creditors who offer credit bids on property during a foreclosure auction. Unlike a bid placed on behalf of the seller, a credit bid offered in a foreclosure auction can result in the transfer of title to property since the bid is backed by an interest in the property, such as a lien, mortgage, or deed of trust. In response to CBA's concerns, the author amended AB 2039 to expressly exclude credit bids from the scope of the bill's general prohibition on bids placed on behalf of sellers. According to CBA, this exclusionary language "was offered instead of refining and clarifying the . . . underlying restrictions on auctioneer practices." This bill clarifies that the existing prohibition on shill bidding applies only to bids by the auctioneer, eliminating any need to exempt credit bidding from the scope of prohibition. This bill effectively seeks to narrow AB 2039's prohibition on any bids placed on behalf of sellers to cover only those bids made by an auctioneer. Proponents contend that because the SB 474 Page 8 auctioneer is never the same person as a creditor placing a credit bid, the bill's narrower prohibition will have no impact on credit bids made in a foreclosure auction. According to CBA, the changes in this bill provide "clarity to the confusing opening provision found in [existing law] and, as amended, appropriately [focus] on the actions of the auctioneer, making it clear that the auctioneer is prohibited from stating an increased bid during an auction when one does not exist." As a result of this clarification, CBA asserts, "the exclusion for credit bids . . . is no longer necessary." In short, this bill simplifies the changes enacted by AB 2039 by eliminating the creditor bid exemption and re-casting the prohibition on placing a bid on behalf of the seller to apply only to bids offered by an auctioneer. Proposed author's amendments: At the time this bill was referred to this Committee, it was the author's intent to seek to have the bill chaptered into law before July 1, 2015-the day that AB 2039 was scheduled to take effect. Even though that particular objective is no longer achievable, the author still wishes to proceed with the bill as an urgency bill. Proposed author's amendments to the bill revise the facts constituting the necessity for the urgency clause and delete the provision establishing an operative date of July 1, 2015. The amendments are: On page 3, delete line 39. On page 4, delete lines 14 and 15, and insert "In order to revise and eliminate, as soon as possible, certain provisions from Civil Code Section 18612.610 that became operative on July 1, 2015 before they potentially harm participants in real estate auctions, it is necessary that this act take effect immediately." SB 474 Page 9 REGISTERED SUPPORT / OPPOSITION: Support California Association of Realtors California Bankers Association Opposition None on file Analysis Prepared by:Anthony Lew / JUD. / (916) 319-2334 SB 474 Page 10