BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Ellen M. Corbett, Chair
2007-2008 Regular Session
AB 941 A
Assemblymember Torrico B
As Amended June 11, 2007
Hearing Date: June 26, 2007 9
CS:rm 4
1
SUBJECT
Real Property loans: disclosures
DESCRIPTION
This bill would require the Department of Real Estate
(DRE), with the consultation of other departments as
necessary, to review the real property transaction
disclosure process. It would require DRE to: 1) complete a
draft report by July 1, 2008, to be posted on the DRE
website, affording copies to be made available free of
charge to members of the public for review, and allow for
feedback via two public hearings; and 2) submit a final
report to the Legislature by January 1, 2009, with
recommendations on how the process can be improved.
(This analysis reflects author's amendments to be offered
in committee.)
BACKGROUND
On June 13, 2007, the Federal Trade Commission (FTC),
Bureau of Economics, issued a staff report in which it
evaluated consumers' understanding of current mortgage
disclosures. The FTC report, which included 36 in-depth
interviews and tested over 800 recent mortgage customers,
concluded that: "If consumers do not understand the costs
and terms of their mortgages, they may pay more for their
mortgages than necessary, obtain inappropriate loan terms,
fall prey to deceptive lending practices, and experience
unpleasant surprises and financial difficulties during the
(more)
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course of their loans." (FTC, Bureau of Economics, Staff
Report, Improving Consumer Mortgage Disclosures (June 2007)
p. ES-12.)
Similar to the FTC's attempts to solve the complex mortgage
disclosure process, the California Department of Real
Estate (DRE) also publishes reports, such as Disclosures in
Real Property Transactions, in order to educate the public
and practitioners about their state (and federal) consumer
rights and obligations. However, existing studies and
reports may not effectively inform the average layperson,
considering the FTC study is over 200 pages long and the
most recent DRE report is well over 70 pages.
AB 941 is a modest attempt to examine and improve
California's real property transaction disclosure process
by first providing a draft report that will be posted on
the DRE website, with copies made available free of charge
to members of the public for review and feedback.
Additionally, AB 941 would require the DRE to report its'
findings to the Legislature so that lawmakers can also
better understand what information is most critical to
consumers and determine which parts of the disclosure
process can be consolidated, eliminated, and ultimately
fixed.
CHANGES TO EXISTING LAW
1. Existing state law requires several disclosures to
be provided to a consumer in
connection with financing and transferring real property,
found at: Business and Professions Code Sections 10026,
10085-10085.5, 10176, 10232.4 - 10232.5, 10237-10238,
10240-10241, 10245, 10247.3, 11423; Civil Code Sections
1632, 2937, 2956, 1785.1, 1787.1; Financial Code Section
4970 et seq.; and Health and Safety Code Section 35800 et
seq.
Existing federal law also requires a multitude of
disclosures to be provided to a consumer in connection
with financing and transferring real property, found at:
12 U.S.C. 1701x, 2601, 3801; 12 C.F.R. 202, 226
(2007); 15 U.S.C. 1601, 1691; 16 C.F.R. 460 et seq.
(2007); and 26 U.S.C. 1445.
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This bill would require the Department of Real Estate to
review the real property transaction disclosure process,
as specified, and issue a draft report by July 1, 2008 to
be posted on its Internet Web site, with copies made
available free of charge to members of the public for
review. The bill would also require the department to
hold two public meetings to receive public comment on the
draft report.
This bill would also require the Department of Real
Estate to issue a final report on the real property
transaction disclosure process to the Legislature by
January 1, 2009 with recommendations on how that process
can be improved to ensure a consumer's ability to better
understand the terms of the transaction and the terms of
his or her mortgage loan. This report shall also include,
but not be limited to, recommendations on which
state-required documents should be amended, consolidated,
made optional, or eliminated.
COMMENT
1. Need for the report
According to the author:
As anyone who has ever bought a home knows, obtaining
a mortgage loan can be a very daunting task. From
finding the perfect rate to negotiating the final
closing cost, the process is grueling. One of the
most overwhelming elements of the process is the
awesome amount of disclosures that the borrower faces
right from the start.
The story is all too common. Borrowers get into a
loan - making the biggest purchase of their lives -
but have absolutely no idea of the actual terms of the
loan. Many times, this lack of understanding is not
because there is a lack of disclosure?but because
there may be just too many of them or maybe just
because they are just too complicated. Whatever the
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cause may be, the resulting problem is evident, as
shown by the rising number of borrowers suffering from
"payment shock" and defaulting on their loan.
Something needs to be done.
AB 941 sets the stage to address the complicated and
often daunting disclosure process associated with a
mortgage loan. It will allow all stakeholders -
lenders and consumers - to provide their suggestions
for improvements and modifications to the current loan
disclosure process. At the end of the discussions and
all suggestions reported, I am hopeful we will be able
to produce a more streamlined, easier to understand
loan process that will benefit the consumer and
mitigate the number of mortgage loan defaults in our
state.
2. Draft report, submitted to the public, will provide
beneficial consumer
feedback
From a policy standpoint, the most effective resource to
help the DRE, members of the Legislature, and other
departments respond to the growing problems related to
the real property disclosure process, may be members of
the public-the actual consumer. To that end, AB 941 will
require the DRE to post a draft report for review on its
website, and make copies available free of charge to
members of the public. In addition, the DRE will also be
required to provide two public hearings to receive public
comment.
Similar to the FTC report previously mentioned, it is
likely that engaging actual consumers will provide the
best research on AB 941's final report-how real property
transfer documents should be amended, consolidated,
eliminated, and ultimately fixed. Moreover, it appears
that the FTC report reached many of its recommendations
and conclusions based on consumer feedback.
In sum, the final report that will be submitted to the
Legislature will be more effective for members, the DRE,
and other departments, if there is detailed feedback
received from consumers.
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3. DRE's consultation with other departments and their
resulting cooperation is
necessary to ensure a comprehensive study
Although the DRE is charged with primary responsibility
of conducting the report provided by this bill, the real
property transfer disclosure process does encompass other
California agencies. However, based on cost concerns
and other factors, it was unsettled whether other
departments should be included as authors of the report.
As amended, AB 941 would have required DRE to work in
"cooperation with the Department of Corporations and the
Department of Financial Institutions" in issuing the
report. Yet, it was unclear whether those departments
would have to allocate staff and other resources as a
condition of that "cooperation."
To clear up those concerns, the author agreed to take
amendments, discussed below, to clarify that the DRE will
work in consultation with other departments, as
necessary, in preparing the report.
Because AB 941 seeks to provide a report that will help
consumers and the Legislature better understand the
problems and subsequent solutions to the disclosure
process, it is good policy for the DRE to look to as many
industry stakeholders as necessary, without burdening
other departments for their staff and resources. The
result of such input will likely produce a more
comprehensive and useful report.
4. The final report should not lead to the elimination
of disclosures that may
need amending, and should remain open to recommendations
that will provide additional disclosures to the consumer
Although there is concern, reflected by the FTC study,
that the sheer volume of real property transaction
disclosures may not be informing consumers adequately,
this should not lead to eliminating useful and needed
disclosures. For instance, there are arguments that
consumers are inundated with too many disclosures and due
to the amount of paperwork they must travel through, they
miss very important information regarding their
transaction. Additionally, some disclosures which are
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required under federal law, are viewed as confusing,
untimely, and potentially unnecessary, but cannot be
waived or changed by the state. (Senate Banking,
Finance and Insurance Committee analysis, dated June 20,
2007.)
However, despite concerns that there might be too much
disclosure, in some cases there might be good policy to
over inform the consumer. For example, many of the
problems pointed out by proponents of this measure,
include situations where the consumer simply did not
understand the terms of their loan. In some cases, this
is not due to too much disclosure, but a lack of it.
In light of the recent sub-prime loan industry debacle in
California, it would be troublesome to eliminate
disclosures where they are truly needed. Therefore, the
DRE's final report should be directed to not eliminate
disclosures that may need simple amendments. Moreover,
the DRE report should be open to recommendations that
will lead to additional, but much needed disclosures.
SHOULD NOT THE REPORT ALSO INCLUDE RECOMMENDATIONS ON
MORE DISCLOSURES, WHERE NEEDED AND AS APPROPRIATE?
5. Author's Amendments
When this bill was heard in the Senate Banking, Finance,
and Insurance Committee, on June 20, 2007, the author
agreed to take technical amendments which will be offered
in this committee, as follows:
Amendment 1:
Deletes the requirement that the DRE issue the reports in
cooperation with the Department of Corporations and the
Department of Financial Institutions because it was
unclear whether those departments would be required to
allocate staff and other resources to assist DRE with the
reports;
Page 2, line 1, strike out the comma, strike out line 2,
and in line 3, strike out "the Department of Financial
Institutions,"
Amendment 2:
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Expands the reports to include all real property transfer
disclosures, rather than being limited to mortgages;
Page 2, line 9, strike out "mortgage" and insert:
real property transfer
Amendment 3:
Clarifies that the DRE will work in consultation with
other departments, as necessary, in preparing the
reports;
Page 2, line 11, after the period insert:
(b) The department shall consult with other departments
as necessary to assist in the preparation of the report.
Any department so consulted shall comply with the
request.
Amendment 4:
Page 2, line 12, strike out "(b)" and insert: (c)
Support: None Known
Opposition: None Known
HISTORY
Source: Author
Related Pending Legislation: SB 385 (Machado), would
require Department of Financial
Institutions, Department of
Corporations, and DRE to apply
nontraditional mortgage product risk
guidance to state-regulated mortgage
lenders and brokers, in addition to
other related changes. This bill is
currently in the Assembly Banking and
Finance Committee.
AB 512 (Lieber), would require all
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supervised financial organizations,
as defined, to translate specified
mortgage documents in Spanish,
Chinese, Tagalog, Vietnamese, or
Korean, if the mortgage loans are
marketed in the specified languages.
This bill is currently in the Senate
Banking, Finance and Insurance
Committee.
Prior Legislation: None Known
Prior Vote: Assembly Banking and Finance Committee (Ayes
7, Noes 1)
Assembly Floor (Ayes 59, Noes 8)
Senate Banking, Finance and Insurance Committee
(Ayes 11, Noes 0)
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