BILL ANALYSIS
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|SENATE RULES COMMITTEE | AB 620|
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THIRD READING
Bill No: AB 620
Author: Leno (D)
Amended: 6/9/03 in Senate
Vote: 21
SENATE BANKING, COMMERCE & INT. TRADE COMMITTEE : 7-0,
6/11/03
AYES: Florez, Hollingsworth, Denham, Ducheny, Dunn,
McClintock, Ortiz
ABSENT/ABSTAINING/NOT VOTING: Karnette, Murray
ASSEMBLY FLOOR : 78-0, 5/1/03 - See last page for vote
SUBJECT : Real estate brokers
SOURCE : Author
DIGEST : This bill revises provisions in existing law
pertaining to a multi-lender transaction involving real
estate construction or dwelling rehabilitation loans.
ANALYSIS : Existing law provides for the regulation of
real estate brokers pursuant to provisions of the Business
and Professions Code. Real estate brokers are licensed and
regulated by the Department of Real Estate. Real estate
brokers are entitled to arrange, service and offer for sale
a series of notes secured directly by interests in the same
real property, or sell undivided interests in a note
secured directly by real property. These are known as
"multi-lender" transactions.
CONTINUED
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Current law, specifically Business & Professions Code (B&P
Code) Sect. 10299, generally provides for various
protective restrictions to safeguard the interests of the
lenders involved in multi-lender transactions, and imposes
requirements on the real estate brokers arranging, services
and selling the interests secured by real property. A
ceiling expressed as a percentage of the current market
value of property is imposed, beyond which brokers cannot
seek to attract additional funding. The current market
value becomes the basis for determining how much funding
the brokers can obtain from "multi-lenders".
Some of the protective provisions of current law are:
1.The real property in question must be located in
California.
2.The advertising allowed for the sale of the notes must
not infer that a transaction has been approved by the
Department of Real Estate even if a sale is conducted
under the provisions of the existing law.
3.The notes or interests in the real property must be sold
through a real estate broker as principal or agent; and
at the time of sale the broker cannot have any interest
in the real property as an owner, lessor, or developer,
nor have an contractual right to achieve any of the
foregoing.
4.The notes shall not be sold to more than ten persons (but
there is no restriction on the number of offerees).
5.The aggregate principal amount of the notes or interests
sold, along with the principal amount of senior
encumbrances shall exceed specified percentages of the
current market value of the real property. The current
market value of the property is determined by the broker
or appraiser. For example the aggregate amount of notes
sold for a single family, owner-occupied residence cannot
exceed 80 percent of the current market value. For
commercial and income producing property the percentage
is 65 percent.
6.The B&P Code does allow the above percentages to be
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exceeded when the broker determines that an encumbrance
in excess of the stated percentages is "reasonable and
prudent considering all relevant factors".
This bill creates a new category of loans referred to as
construction or rehabilitation loans, which will not be
subject to the restrictions set out above. Subject to
certain provisions, real estate brokers may now change the
accepted basis for determining the amount of capital
allowed to be raised from "current market value", as noted
above, to "current market value plus the value of the
completed project". In order for a real estate broker to
achieve additional capital investment, he must comply with
8 safeguards:
1.An independent third party escrow account shall be used
for deposits and disbursements.
2.A partnership that is not formed specifically for the
purposes of purchasing securities offered pursuant to
Corporations Code Section 25102 shall be counted as one
person.
3.The loan shall be fully funded, with entire loan amount
deposited into escrow prior to recording of any deeds or
deeds of trust.
4.A comprehensive draw-down schedule of funds is utilized.
5.Disbursements from escrow are conditioned on
certification by an independent, qualified person; i.e.,
licensed architect, structural engineer, general
contractor or local building inspector.
6.An appraisal is completed by a licensed appraiser.
7.Documentation shall include a detailed business plan of
actions to be taken in event of failure of the project.
8.The amount of the loan does not exceed $2.5 million.
This bill allows "current market value" to reflect the
value of the completed project. That is the current market
value plus the projected value. This is allowed when
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certain conditions are met. Among these conditions are the
use of an independent neutral third party escrow to hold
the funds and the requirement that the loan disbursements
be based upon an independent certification that the
construction of the project meets applicable codes and
standards, and be consistent with the construction contract
and draw schedules. Facilitating the flow of investment
capital into small construction projects helps increase
available housing.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No
Local: No
SUPPORT : (Verified 6/17/03)
California Mortgage Association
ARGUMENTS IN SUPPORT : The author notes that many private
individuals invest funds through multi-lender arrangements,
believing that real estate loans are good, safe investments
that are a prudent component of an investment portfolio.
In addition to detailed disclosure requirements which tell
investors exactly how their investment will be secured, the
law contains maximum loan to value ratios which range from
a high of 80 percent for owner-occupied single family
residences, down to 50 percent for "bare land" and down to
35 percent for "other real estate".
ASSEMBLY FLOOR :
AYES: Aghazarian, Bates, Benoit, Berg, Bermudez, Bogh,
Calderon, Campbell, Canciamilla, Chan, Chavez, Chu, Cohn,
Corbett, Correa, Cox, Daucher, Diaz, Dutra, Dutton,
Dymally, Firebaugh, Frommer, Garcia, Goldberg, Hancock,
Harman, Haynes, Jerome Horton, Shirley Horton, Houston,
Jackson, Keene, Kehoe, Koretz, La Malfa, La Suer, Laird,
Leno, Leslie, Lieber, Liu, Longville, Lowenthal, Maddox,
Maldonado, Matthews, Maze, McCarthy, Montanez, Mountjoy,
Mullin, Nakanishi, Nakano, Nation, Negrete McLeod, Nunez,
Oropeza, Pacheco, Parra, Pavley, Plescia, Reyes, Richman,
Ridley-Thomas, Runner, Salinas, Samuelian, Simitian,
Spitzer, Steinberg, Strickland, Vargas, Wiggins, Wolk,
Wyland, Yee, Wesson
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RJG/NC:nl 6/17/03 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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