BILL ANALYSIS
AB 620
Page 1
Date of Hearing: April 21, 2003
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Patricia Wiggins, Chair
AB 620 (Leno) - As Amended: April 21, 2003
SUBJECT : Real estate
SUMMARY : Allows construction or rehabilitation loans with
multiple lenders to be made based on the value of the property
after improvements are completed. Specifically, this bill
allows that the term "current market value" may be the value of
the completed project if the following safeguards are met:
1)An independent, neutral third-party escrow account is used for
all deposits and disbursements.
2)A comprehensive, detailed, draw schedule is used to ensure
proper and timely disbursements to allow for completion of the
project.
3)The loan must be fully funded with the entire loan amount put
in escrow prior to recording the deed or deeds of trust.
4)The transaction documents include a detailed description of
actions that may be taken in the event of a failure to
complete the project, whether the failure is due to default,
insufficiency of funds or other causes.
5)The disbursement draws from the escrow account are based on
verification from an independent qualified person who
certifies that the work completed to-date meets the related
codes and standards and that the draws were made in accordance
with the construction contract and draw schedule. For this
purpose, "independent, qualified person" means a licensed
architect, general contractor, structural engineer, or active
or retired local building official who is not an employee of
the broker.
6)An appraisal is completed by a qualified and licensed
appraiser in accordance with the Uniform Standards of
Professional Appraisal Practice (USPAP).
EXISTING LAW:
AB 620
Page 2
1)Provides that real estate brokers must be licensed by the
Department of Real Estate. Brokers may negotiate loans
between borrowers and lenders, collect payments or perform
services for borrowers, lenders or note owners in connection
with loans secured by real property. (Business and Professions
Code, Section 10131)
2)Authorizes the Commissioner of the Department of Real Estate
to suspend or revoke the license of a real estate licensee for
certain infractions including for violations of Section 10229
of the Business and Professions Code, the "multi-lender law."
(Business and Professions Code, Section 10177)
3)Permits licensed real estate brokers to arrange loans with
multiple lenders (where more than one private investor has a
partial ownership interest in a mortgage note secured by real
property). The multi-lender law (Business and Professions
Code, Section 10229) includes the following provisions:
d) Provides that the sale of 10 or less notes secured by
real property by a licensed real estate broker is to be
regulated by the Department of Real Estate;
g) Requires brokers of multi-lender loans to notify the
Commissioner of the Department of Real Estate (DRE) in
writing within 30 days of the first multi-lender
transaction. Also requires those who become the servicing
agent of a multi-lender loan to notify the Commissioner if
the loan meets certain standards;
h) Requires that multiple lender transactions be the
subject of a written agreement that, among other
provisions, obligates the broker to act as an agent for the
purchasers or lenders to service the notes. It requires a
broker to furnish to a purchaser the names and addresses of
other interests in the loan; and
i) Imposes a number of other conditions to protect
individual lenders who purchase one of a number of notes
secured by a single piece of real property. Those
requirements include: i) the real property must be in
California ii) the sale of the notes must be through a
licensed real estate broker iii) all the notes must be
identical in their underlying terms, and iv) the total
amount of the notes plus existing encumbrances may not
AB 620
Page 3
exceed a specified percentage of the current market value
of the property
1)Transactions completed under Section 10229 of the Business and
Professions Code are exempt from Section 25110 of the
Corporations Code and therefore are not subject to California
securities' laws under the jurisdiction of the Department of
Corporations. (Corporations Code, Section 25102.5).
FISCAL EFFECT : None
COMMENTS :
1)Need for the bill. Real estate brokers typically make loans
under the multi-lender law for construction and rehabilitation
projects. Up until 1997, Section 10229 of the Business and
Professions Code was part of the Corporations Code. Under the
Department of Corporations and up until last year, mortgage
brokers had been making loans based on the value of properties
after construction or rehabilitation projects were completed.
Since the DRE took over enforcement of the multi-lender law,
they have taken the position that current market value does
not mean future value after improvements. In that case, the
only value that exists is the value of the undeveloped land or
the value of the property prior to any improvements. From the
sponsor's perspective, this has made it very difficult to
finance many rehabilitation or construction projects and still
comply with the loan-to-value (LTV) ratio requirements of the
multi-lender law.
2)Other options. While the supporters of the bill argue that
DRE's recent actions have severely limited access to capital,
the DRE suggests that there may be better ways to finance this
type of activity. Under Section 25110 of the Corporations
Code these deals could be capitalized by creating real estate
investment trusts, limited partnerships or other instruments.
3)Usual practice. The bill's sponsor, the California Mortgage
Association, argues that this bill will enable mortgage
brokers to continue their long time practice of making loans
based on the value of the completed rehab or construction
project.
4)Adequate protections. The sponsor argues that the bill
AB 620
Page 4
provides adequate protections for lenders while still allowing
borrowers to make needed investments in upgrades or
construction. Given that many lenders who participate in
these transactions may not be sophisticated investors, does
the multi-lender law, even with the requirements in this bill,
provide adequate protection for times when property values are
decreasing?
Also, the DRE notes that of the approximately 111,000 brokers
licensed in California, there are around 300 brokers who
arrange private investor or "hard money" loans. These brokers
require a disproportionate amount of DRE resources and are
responsible for large losses to the public. In addition, of
the approximately 154 brokers known to the DRE who arrange
multi-lender loans, over 20% have been the subject of
disciplinary action.
5)Put a lid on it? The DRE expressed concerns that with this
measure, the multi-lender law could be used to finance
multi-million dollar transactions without the oversight of the
Department of Corporations. The sponsor, in working with the
DRE, has agreed to put a cap of $2.5 million on the amount
that can be financed under this subdivision.
6)Related legislation. AB 679 (Chavez) also amends Section
10229 of the Business and Professions Code. This measure
expands the provisions of the multi-lender law to include
transactions involving notes secured by more than one parcel
of real property.
REGISTERED SUPPORT / OPPOSITION :
Support
California Mortgage Association
Opposition
None on file.
Analysis Prepared by : Margaret Gladstein / B. & F. / (916)
319-3081