BILL ANALYSIS
AB 2288
Page 1
Date of Hearing: April 19, 2010
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Mike Eng, Chair
AB 2288 (Blakeslee) - As Amended: April 6, 2010
SUBJECT : Issuers of securities: real estate brokers: hard
money lending.
SUMMARY : Implements specific criteria for issuers involved in
hard money lending. Specifically, this bill :
1)Requires an issuer engaging in hard money lending to satisfy
the following:
a) Maintain records for three years of copies of all
listings, deposit receipts, canceled checks, trust records,
and other documents executed by him or her or obtained by
him or her in connection with any transactions as required.
b) Establish a contractual agreement with person whom the
issuer sells a limited or general partnership, limited
liability company, limited liability partnership trust,
joint venture, unincorporated association, or similar
organization formed and operated for the primary purpose of
investing in mortgage loans.
i) Contract must be singed by both parties and include
a plan for the use of the invested moneys.
c) Maintain a surety bond with specific criteria including:
i) Bond shall be in an amount no less than 10 percent
of the amount of the total pooled investment.
ii) An issuer shall not make new investments unless the
total value of the pooled investment is covered by a bond
meeting the requirements.
iii) The issuer shall provide the Department of
Corporations (DOC) with evidence on an annual basis
indicating that requirements have been met.
iv) The original surety bond shall be filed with the DOC
within 10 days of it execution.
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2)Defines "hard money lending" as the offering or selling of a
limited or general partnership, limited liability company,
limited liability partnership trust, joint venture,
unincorporated association, or similar organization formed and
operated for the primary purpose of investing in mortgage
loan, commercial property loans, and construction loans.
3)Requires a real estate broker to provide information to the
person whom the real estate broker arranges a transaction
with.
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EXISTING LAW
1)Defines "issuer" as any person who issues or proposes to issue
any security, except when specified. [Corporations Code
25010]
2)Requires every issuer qualifying securities for sale in this
state to keep and maintain a complete set of books, records,
and accounts of such sales and the disposition of the proceeds
thereof, and shall thereafter, at such times as are required
by the commissioner, make and file in the office of the
commissioner a report, setting forth the securities sold by it
under such qualification, the proceeds derived there from and
the disposition thereof. [Corporations Code 25145]
3)Requires California Real Estate Law, Finance Lenders Law, and
Residential Mortgage Lending Act into compliance with the
federal Secure and Fair Enforcement for Mortgage Licensing Act
of 2008 (the SAFE Act) by requiring those engaging in mortgage
loan origination activities to obtain a license from
Department of Corporations after meeting specified
requirements, or if a real estate licensee, obtain a license
endorsement from the Department of Real Estate after meeting
specified requirements. [Business & Professions Code Section]
FISCAL EFFECT : Unknown
COMMENTS :
What is hard money lending?
Most hard money comes from private individuals with a great deal
of money on hand. The money used for investment purposes comes
from people, not a typical lending institution.
Most hard money lenders lend solely based upon the deal or
property at hand. They only lend up to a certain percentage of
the fair market value of the property, that way in the event of
default, the hard money lender would profit if they had to
foreclose or sell. Hard money lending is common in real estate
and construction characterized by short-term, high-interest
loans and relaxed underwriting standards. Hard money lending is
typically used by investors intending to buy a blighted property
and rehabilitate it to increase its market value. Most hard
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money lending happens in lower-middle class neighborhoods where
property values are relatively stable and blighted properties
are available to purchase at significant discounts.
Typically hard money lenders will only loan you up to 70% ARV
(after repaired value). This means that a hard money lender can
loan you up to 70% of what the home is worth in repaired
condition. So if a home is worth $45,000 in the condition it's
in and needs $20,000 in repair work and after it is repaired the
current fair market value is worth $100,000, then typically a
hard money lender can lend you up to $70,000, which would cover
the cost of the house and the repairs. Hard money lenders will
often loan the investor the funds necessary to both purchase the
property and to complete its rehabilitation.
Downsides to hard money lending include high interest rates.
Interest rates vary from 12% - 20% annually and terms can last
for 6 months to a few years. Many times these rates vary
depending on a credit score. Typically hard money lenders will
charge anywhere from 2-10 points just to use their money. One
point equals one percent of the mortgage amount. So charging 1
point on a $100,000 loan would be $1000.
Investors also use hard money when they need to purchase
quickly. Typical soft money or conventional loans take 30 days
or more.
NEED FOR BILL: According to the author, "The hard money lending
industry has minimal regulations, lending itself to possible
fraudulant behavior. In San Luis Obispo County there were a
series of losses due to lack of oversight in these types of
investments. People lost significant savings into the real
estate market with hard money lenders who were subsequently
convicted of fraud. The issuers of the investments, also called
"pooled money investments," are not required to be transparent
with investors about where the money goes and are not required
provide progress of their investment making it difficult for
investors to take precautionary steps to protect their
investments. Victims have lost their life savings, have had to
sell their homes, given up retirement. While there is no way to
prevent fraud, AB 2288 provides sufficient protection to those
who invest in pooled investments to guard against undue losses."
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CONCERNS: Currently, it is unclear as to why this bill is
necessary and what problems this measure is trying to address.
In all known cases where investors have sued hard money lenders
for fraudulent behavior, the court has found in favor of the
investors and the hard money lenders have been prosecuted. It
seems the law is working correctly by prosecuting those who
abuse the practice of hard money lending. Hard money lenders
walk away with felony convictions and 20 years if not more in
jail. In addition, most commonly, real estate brokers are those
involved in hard money lending. As written this bill does not
specifically address or bring attention to licensed real estate
brokers. Who would consider themselves as an issuer and fall
under the requirements of this bill? If in fact an issuer is a
real estate broker, a real estate broker already has to comply
with a number of the provisions required in this bill.
In 2009, the Governor enacted legislation conforming state law
to federal law under the Secure and Fair Enforcement for
mortgage licensing act (SAFE Act). This bill required licensing
of all mortgage loan originators, as well as, registration with
the Nationwide Mortgage Licensing System and Registry (NMLSR).
This bill established standards, requirements, prohibitions for
mortgage loan originators operating under the real estate law,
the California finance lenders law (CFLL) and the Residential
Mortgage Lending Act (RMLA) in order to comply with the SAFE Act
(Public Law 110-289). It also prohibits any individual from
engaging in the business as a mortgage loan originator without
first obtaining and maintaining a loan originator's license or
license endorsement and registering with the NMLSR. Due to
these recent enactments, the provisions this bill changes may be
unnecessary since the regulators will have more transparency and
access regarding their licensees involved in lending activities.
The SAFE Act requires every loan originator on residential real
property to register in the national database. Considering the
requirements real estate licensees will be subject to more
strict guidelines making portions of bill potentially obsolete.
The surety bond required under this measure goes above and
beyond typical surety bond requirements under existing law.
Currently, DOC requires financial services licensees to have
surety bonds - the mortgage bankers, finance lenders, payday
lenders, and escrow agents but DOC does not require surety bonds
for licensed broker-dealers or investment advisers. This bill
would require an issuer to have a surety bond but not a licensed
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broker-dealer or investment adviser? Surety bonds usually come
in specified requirements ranging from $10,000-$100,000. As
drafted an issuer would have to have a surety bond in an amount
no less than 10 percent of the amount of the total pool
investment.
AB 2288 amends B&P code section 10239.4 which would require real
estate brokers to provide a copy of information to the person
whom the real estate broker arranges the transaction. The
background provided to committee did not touch upon this
addition; therefore, it is unclear as to why this change is
necessary and what this change would accomplish. It is also
unclear as to what "information" should be included.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file.
Opposition
None on file.
Analysis Prepared by : Kathleen O'Malley / B. & F. / (916)
319-3081