BILL ANALYSIS
SENATE COMMITTEE ON BANKING, FINANCE,
AND INSURANCE
Senator Michael J. Machado, Chair
AB 941 Author: (Torrico) Hearing Date:
June 20, 2007
As Amended June 11, 2007
Fiscal: Yes
Urgency: No
SUMMARY Would require the Department of Real Estate (DRE),
with the cooperation of the Department of Financial Institutions
(DFI) and Department of Corporations (DOC), to review the real
property transaction disclosure process and report to the
Legislature, as specified, with recommendations on how the
process can be improved to ensure a consumer's ability to better
understand the terms of the transaction, including the terms of
his or her mortgage loan.
DIGEST
Existing federal law
1. Requires a multitude of disclosures to be provided to a
borrower in connection with financing real property,
including:
a. A seller financing disclosure, when a seller extends
credit to a buyer in the form of a seller carry-back; the
disclosure is required to include comprehensive
information about the financing, cautions applicable to
certain types of financing, and suggestions for
procedures intended to protect the parties during the
term of the financing (12 USC 1701x);
b. A notice of transfer of loan servicing (12 USC 2601
et seq.);
c. A notice of the borrower's or lender's right to a
copy of the appraisal report (15 USC 1691 et seq.);
d. A Truth in Lending Act (TILA) disclosure that lists
the amount financed; the finance charge; the annual
AB 941 (Torrico), Page 2
percentage rate; total of all payments; payment schedule;
identity of the lender; itemization of the amount
financed; disclosures relating to variable interest rates
(which may be satisfied by giving the consumer a copy of
the Consumer Handbook on Adjustable Rate Loans, also
known as the CHARM Booklet); demand features of the loan;
loan prepayment penalties; late payment charges; a
description of the deed of trust that will be retained by
the lender as security for the loan; a statement
regarding whether insurance premiums are included in the
finance charges; certain security interest charges such
as taxes or fees paid to public entities or the premium
for insurance in lieu of perfecting the security interest
(if the loan is subject to the Real Estate Settlement
Procedures Act [RESPA], the RESPA statement is
sufficient); specific terms of the contract related to
nonpayment, default, acceleration, and prepayment;
due-on-sale clauses; balances that may be required to be
placed on deposit by the borrower; and a notice regarding
the borrower's right to rescind the real estate contract,
if applicable (15 USC 1601 et seq. and 12 CFR Part 226);
e. High-cost and high-rate loan disclosures on loans
whose annual percentage rate exceeds the rate on Treasury
securities of comparable maturity by a certain amount
(eight percent if the loan is a senior loan and ten
percent if the loan is a junior loan) or whose total
points and fees exceed a specified level (15 USC 1601 et
seq.);
f. RESPA disclosures, which include a Good Faith
Estimate (GFE) of Settlement Costs provided by both the
lender and the mortgage broker; the GFE is required to be
provided at the time of the loan application or within
three business days of the loan application; a servicing
disclosure statement indicating whether the lender or
broker expects someone else to be servicing the loan; an
affiliated business arrangement disclosure when any
participant in the settlement process refers the borrower
to an affiliate for a settlement service; a HUD-1
settlement statement; and disclosures relating to escrow
account operations (12 USC 2601 et seq. and 24 CFR Part
3500);
g. Advance disclosures in loan transactions subject to
TILA and RESPA (15 USC 1601 et seq. and 12 CFR Part 226);
AB 941 (Torrico), Page 3
h. An adjustable rate loan disclosure, required of all
lenders that offer adjustable rate loans; lenders may
satisfy this requirement by providing the Consumer
Handbook on Adjustable Rate Mortgages, a document that is
also required under TILA (12 USC 3801 et seq., 12 CFR
Part 226);
i. A statement of reasons why a borrower was denied
credit, if applicable, or a written notification of the
applicant's right to obtain a statement of reasons for
denial, if applicable (15 USC 1691 et seq. and 12 CFR
Part 202);
2. Requires selected disclosures to be provided to a consumer
in connection with the transfer of real property, including
those which explain the type, thickness, and R-value of
insulation installed in a new home (16 CFR Part 460 et seq.)
and the rules that apply to income tax withholding if the
seller of the property is a foreign person, as defined (26
USC 1445);
Existing state law
1. Requires a multitude of disclosures to be provided to a
borrower in connection with financing real property,
including:
a. An advance fee disclosure when any kind of fee or charge
is demanded, imposed or collected by a mortgage broker in
advance of providing service or closing the loan (Business
and Professions Code Sections 10026, 10085, 10085.5, and
10146);
b. A seller financing disclosure, when a seller extends
credit to a buyer in the form of a seller carry-back; the
disclosure is required to include comprehensive information
about the financing, cautions applicable to certain types of
financing, and suggestions for procedures intended to protect
the parties during the term of the financing (Civil Code
Sections 2956 et seq.);
c. A Mortgage Loan Disclosure Statement (MLDS) or Mortgage
Loan Disclosure Statement/Good Faith Estimate (MLDS/GFE),
which must be provided by the mortgage broker and must list
the expected maximum costs and expenses to the borrower of
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making the loan; the total amount of real estate commissions
and fees to be received by the broker; liens against the real
property; the estimated amount to be paid by the borrower for
fire insurance, balances due on prior liens, amounts due
other creditors, and
assumption/transfer/forwarding/beneficiary statement fees;
the estimated balance of the loan to be paid to the borrower
after deducting all commissions, loan fees, penalties, and
costs and expenses to secure the loan; the principal amount
of the loan, the rate of interest and whether fixed or
variable, the term of the loan, number and amount of each
installment, approximate loan balance at maturity, and a
specific notice regarding the risk of balloon payments; a
statement containing the name, real estate license number,
and business address of the real estate broker negotiating
the loan; the source of the loan funds; the terms of
prepaying the loan, including any prepayment penalty that may
apply; and a statement that the purchase of credit life or
disability insurance is not required as a condition of the
loan (Business and Professions Code Sections 10240, 10241,
and 10245);
d. A translation by the mortgage broker of the MLDS/GFE
into Spanish, Chinese, Tagalog, Vietnamese, or Korean, if the
loan is negotiated in any one of these languages (Civil Code
Section 1632);
e. A Lender/Purchaser Disclosure Statement in certain
multi-lender transactions or transactions involving private
financing (Business and Professions Code Sections 10237 et
seq);
f. A notice of transfer of loan servicing (Civil Code
Section 2937);
g. A notice of the borrower's or lender's right to a copy
of the appraisal report (Business and Professions Code
Sections 10238, 10232.4, 10232.5, 10238, 10241.3, and 11423);
h. Covered loan law disclosures (Financial Code Section
4970 et seq.);
i. Disclosure of the compensation received by a real estate
agent from a lender (Business and Professions Code Section
10176);
AB 941 (Torrico), Page 5
j. An adjustable rate loan disclosure, required of all
lenders that offer adjustable rate loans; lenders may satisfy
this requirement by providing the federal Consumer Handbook
on Adjustable Rate Mortgages (Civil Code Section 1921);
aa. A statement of reasons why a borrower was denied credit,
if applicable, or a written notification of the applicant's
right to obtain a statement of reasons, if applicable (Civil
Code Section 1787.1 et seq.);
bb. A statement informing the borrower about the credit
score used by the lender to evaluate the borrower for the
loan, providing information about the ways in which credit
scores are calculated, and providing the consumer with
information on how to contact the credit reporting agencies
(Civil Code Section 1785.1 et seq.);
cc. A description of the borrower's rights under the Housing
Financial Discrimination Act of 1977 (Holden Act), which
generally prohibits the consideration of race, color,
religion, sex, marital status, national origin, or ancestry
in lending for the purpose of construction, improvement, or
rehabilitation of housing; and the address where complaints
may be filed and where information may be obtained about the
Holden Act (Health and Safety Code Section 35800 et seq.);
2. Requires multiple disclosures to be provided to a buyer in
connection with the transfer of real property, including those
related to: the right to terminate the contract under specified
circumstances; the real estate transfer disclosure statement;
local option real estate transfer disclosure statement; natural
hazards disclosure; Mello-Roos bonds and taxes; property taxes;
supplemental property tax assessments; ordinance locations;
window security bars; industrial uses; methamphetamine
contamination; earthquake guides; smoke detector statement of
compliance; lead-based paint hazards; other environmental
hazards; structural pest control inspection and certification
reports; requirements of various local ordinances relating to
minimum energy conservation standards; information regarding the
rules for state income tax withholding on sales of real
property; controlling documents and financial statements
concerning common interest developments; the advisability of
title insurance; certification regarding a water heater's
security against earthquake; locations of registered sex
offenders; results of a visual inspection of the property;
agency relationship disclosures; disclosure of the negotiability
AB 941 (Torrico), Page 6
of real estate commissions; and disclosure of sales price
information (various sections of the Civil Code, Health and
Safety Code, Revenue and Taxation Code, Public Resources Code,
Business and Professions Code, Building Code, and the Government
Code);
3. Requires additional disclosures to be provided to the purchaser
of a home in a new residential subdivision, including:
disclosure of material facts about a subdivision, disclosure
about the right to rescind, disclosure and notice of blanket
encumbrance, delivery of governing documents and disclosures to
prospective purchasers in common interest developments,
statement of defects disclosure for a common interest
development conversion, and notices disclosing an owner's intent
to convert an apartment to individual ownership (various
sections of the Civil Code and Business and Professions code).
AB 941 (Torrico), Page 7
This bill
1. Would require DRE, with the cooperation of DFI and DOC, to
review the real property transaction disclosure process and
report to the Legislature with recommendations on how the
process can be improved to ensure a consumer's ability to
better understand the terms of the transaction, including
the terms of his or her mortgage loan;
2. Would require the report to include recommendations on
which state-required mortgage documents should be amended,
consolidated, made optional, or eliminated;
3. Would require DRE to complete a draft report by July 1,
2008; post that report on its Internet web site and make it
available free of charge to members of the public for
review; hold two public hearings to receive public comment
on the draft report, one each in northern and southern
California; accept written comments on the draft report
through October 31, 2008; and submit a final report to the
Legislature by January 1, 2009.
COMMENTS
1. Purpose of the bill To help ensure that consumers who
obtain mortgage loans understand the terms of those loans by
improving the real property transaction disclosure process.
2. Background It is widely acknowledged by anyone who has
participated in a real estate transaction in California that
individuals who wish to purchase or refinance a residential
property in this state are faced with a mountain of
disclosures and other forms, all of which must be signed or
initialed as a condition of the sale, and virtually none of
which are carefully read prior their acknowledgement by the
buyer.
DRE periodically publishes a report titled, "Disclosures in
Real Property Transactions," the last edition of which was
issued in 2005. That publication, which is available on
DRE's web site (www.dre.ca.gov), describes the most common
real property transaction disclosures required by federal
and state law; it does not list disclosures required by
agreement between parties to real estate transactions
pursuant to contracts between the parties. The most recent
AB 941 (Torrico), Page 8
report, which runs 71 pages, lists over fifty separate
disclosures that are required as part of a residential real
estate transaction. Each of the required disclosures can be
several pages long.
The current system designed to inform consumers simply does not
work. Consumers receive multiple sets of documents at
multiple different times during the course of a residential
real estate transaction. Some documents are duplicative;
others supersede earlier provided documents. Some documents
are written in a confusing, legalistic style. Some of the
most critical documents are not received until a purchaser
is sitting in the title company office, faced with a
mountain of documents and a limited amount of time in which
to sign them. Often no one is able to answer questions that
arise during a signing, because the people most
knowledgeable about the documents are not required to be
present at the signing. Many borrowers who have found
themselves struggling or unable to make their mortgage
payments report that they never understood the terms of
their loans before signing onto their obligations.
As dysfunctional as the existing situation is, California is
only partially responsible. Many of the confusing,
un-timely, and potentially unnecessary mortgage loan
disclosures are required by federal law and cannot be
changed by, nor waived by, the state. True real estate
disclosure reform can only occur through a collaborative
state-federal effort. However, there is undoubtedly a
benefit in examining and improving our own disclosures.
Review of the sheer volume of disclosures required under
state, but not federal, law (see Existing Law) suggests the
need to prioritize which of this information is most
critical and which can be consolidated, eliminated, or made
optional.
3. Support . None received.
4. Opposition None received.
5. Questions The Federal Trade Commission recently issued a
282-page report titled, "Improving Consumer Mortgage
Disclosures," in which it evaluated consumers' understanding
of current mortgage disclosures and tested several protype
disclosures designed to improve consumers' understanding.
The Federal Reserve Board has recently signaled its intent
AB 941 (Torrico), Page 9
to review the mortgage loan disclosure process, and several
ranking members of Congress have been pushing federal
regulators for prompt action in this regard. Should DRE be
asked to include an update on federal actions to reform the
mortgage loan disclosure process in its report?
6. Suggested Amendments .
a. This bill should be clarified to define what
is meant by "with the cooperation of." For example,
will DFI and DOC be required to allocate staff
resources toward assisting DRE with its report? Does
"with the cooperation of" include supplying
information from their internal databases? Staff
suggests asking DRE to define "with the cooperation
of" in order to ensure that DRE is able to obtain the
information it needs from DFI and DOC.
b. The bill directs DRE to review all
state-required real estate transaction disclosures but
to recommend only which state-required mortgage
documents should be amended, consolidated, made
optional, or eliminated. While expanding DRE's
recommendations to all real estate transaction
documents is likely to increase the cost of the
report, there seems to be little sense in directing
DRE to review all of the disclosures, but require them
to suggest changes to only some of them.
Staff suggests that the bill be amended by striking the
word "mortgage" on Page 2, line 9 and inserting the
words "real property transfer." Doing so will enable
DRE to make recommendations designed to improve the
entire disclosure process, not just the mortgage loan
disclosure process.
7. Related Legislation :
a. SB 385 (Machado): Would require DFI, DOC, and
DRE to apply nontraditional mortgage product risk
guidance to state-regulated mortgage lenders and
brokers and make other related changes. The guidance
includes, but is not limited to, a requirement that
all borrowers being marketed nontraditional mortgage
loans be provided with clear, balanced, and timely
disclosures explaining the terms and features of the
AB 941 (Torrico), Page 10
loans. Currently pending in the Assembly.
b. AB 512 (Lieber): Would require all supervised
financial organizations, as defined, to translate
specified mortgage documents into Spanish, Chinese,
Tagalog, Vietnamese, or Korean, as applicable, if the
mortgage loans are marketed in any of these five
languages. Currently pending in the Senate.
POSITIONS
Support
None received
Oppose
None received
Consultant: Eileen Roush (916) 651-4102