BILL ANALYSIS
------------------------------------------------------------
|SENATE RULES COMMITTEE | SB 633|
|Office of Senate Floor Analyses | |
|1020 N Street, Suite 524 | |
|(916) 651-1520 Fax: (916) | |
|327-4478 | |
------------------------------------------------------------
CONSENT
Bill No: SB 633
Author: Wright (D)
Amended: 4/27/09
Vote: 21
SENATE BANKING, FINANCE, AND INS. COMMITTEE : 11-0, 5/6/09
AYES: Calderon, Cogdill, Correa, Cox, Florez, Harman,
Kehoe, Liu, Lowenthal, Padilla, Wolk
NO VOTE RECORDED: Runner
SEN. BUS. & PROF. & ECON. DEVEL. COM. : Prior vote not
relevant
SUBJECT : Mortgages: impound accounts
SOURCE : Author
DIGEST : This bill creates two new exceptions to the law
that prohibits persons from requiring an impound or trust
account as a condition of a real property sales contract,
or a mortgage or deed of trust on single-family,
owner-occupied real property.
ANALYSIS :
Existing law:
1. Provides that no impound, trust, or other type of
account for payment of taxes on the property, insurance
premiums, or other purposes relating to the property,
CONTINUED
SB 633
Page
2
may be required as a condition of a real property sale
contract or a loan secured by a deed of trust or
mortgage on real property containing only a
single-family, owner-occupied dwelling, except:
A. Where required by a state or federal regulatory
authority.
B. Where a loan is made, guaranteed, or insured by
a state or federal governmental lending or insuring
agency.
C. Upon a failure of the purchaser or borrower to
timely pay two consecutive tax installments on the
property.
D. Where the original principal amount of the loan
is 90 percent or more of the sales price, if the
property is sold, or 90 percent or more of the
appraised value of the property securing the loan,
if the property is not sold (i.e., if the property
is being refinanced).
E. Whenever the combined principal amount of all
loans secured by the real property exceed 90
percent of the appraised value of the property
securing the loans.
2. Provides that nothing in existing law precludes
establishing such an account on terms mutually agreeable
to the parties to the loan, if, prior to executing the
loan or sale agreement, the seller or lender furnishes
to the purchaser or borrower a statement in writing,
informing the purchaser or borrower that establishing
the account is not a condition of the loan or sale
agreement, and stating whether or not interest will be
paid on the funds in the account
3. Provides that an account created in violation of the law
described above is voidable, at the option of the
purchaser or borrower, at any time, but clarifies that
the invalid account does not otherwise affect the
validity of the loan or sale.
CONTINUED
SB 633
Page
3
This bill:
1. Adds two new exceptions to the five listed above in
Existing Law 1a through 1e, as follows:
A. Where a loan is made in compliance with the
requirements for higher priced mortgage loans
established in Regulation Z, whether or not the
loan is a higher-priced mortgage loan.
B. Where a loan is refinanced or modified in
connection with a lender's homeownership
preservation program or a lender's participation in
such a program sponsored by a federal, state, or
local government authority or a nonprofit
organization.
Background
Impound accounts are accounts established by mortgage
servicers, to set aside money that the servicers use to pay
a borrower's homeowner's insurance and property tax
payments. If a borrower has an impound account, the
borrower pays an extra amount to his or her servicer each
month (over and above mortgage interest and principal), to
cover the servicer's prorated estimate of the borrower's
homeowner's insurance and property tax obligations.
California's law regarding impound accounts was enacted
when many believed that these accounts could harm
consumers, if administered improperly. For that reason,
California's law prohibits impound accounts, except in
certain circumstances. However, California's (and the
nation's) recent mortgage problems have contributed to a
significant change in attitude toward impound accounts.
Because many borrowers who obtained loans during the height
of the lending boom failed to understand their
property-related obligations, popular opinion now views
impound accounts as a potential benefit to a borrower.
Impound accounts, the logic goes, can not only help
borrowers understand the true costs of owning a home, but
can also help borrowers set aside money for their property
tax and homeowner's insurance obligations.
CONTINUED
SB 633
Page
4
As discussed below, this change in public opinion is
reflected in recent changes to consumer protection laws and
in the rules which apply to federally-sanctioned home
preservation programs. Unfortunately, California's impound
account law has failed to keep up, and requires updating.
On July 30, 2008, the Federal Reserve Board (FRB) finalized
changes to Regulation Z, the regulation which implements
the Truth in Lending Act and Home Ownership Equity
Protection Act. The changes to Regulation Z (Federal
Register Volume 73, No. 147, pp. 44522-44614) are generally
effective October 1, 2009, and apply to all federal and
state licensees who engage in the activities covered by the
regulation, including mortgage lending, brokering, and
servicing. California need not take any action to apply
the Regulation Z changes to our licensees; the regulations
will apply automatically to all federally-regulated and
state-regulated lenders, when the regulation changes become
operative.
Regulation Z defines a higher-priced mortgage loan as a
consumer-purpose, closed-end loan secured by a consumer's
principal dwelling, with an annual percentage rate (APR)
that exceeds the average prime offer rates for a comparable
transaction published by the FRB by at least 1.5 percent
for first lien loans and three and five-tenth percent for
subordinate lien loans. The definition includes home
purchase loans, refinancings, and home equity loans; it
excludes home equity lines of credit, reverse mortgages,
construction loans, and bridge loans.
One of the changes to Regulation Z requires lenders to
establish impound accounts for property taxes and
homeowners insurance on loans defined as higher-priced
under the regulation. Borrowers are allowed to opt out of
the requirement to have an impound account after one year.
In its discussion accompanying Regulation Z, the FRB
acknowledges that, because a loan's APR is typically not
known with certainty until after the underwriting is
completed and the interest rate is locked, lenders may
build in a cushion against this uncertainty by voluntarily
setting their internal thresholds lower than the threshold
in the regulation. (In other words, to avoid the
CONTINUED
SB 633
Page
5
possibility that a lender will be in violation of Reg. Z by
falsely classifying a loan as not higher-priced, when it is
higher-priced, lenders may internally classify more loans
as higher-priced than may ultimately be higher-priced, once
the final APR is known). Lenders who classify a loan as
higher-priced will establish an impound account for the
borrower who holds that loan, to ensure compliance with
Regulation Z. Some financial institutions are concerned
that California's existing law prohibiting impound accounts
in certain circumstances is not sufficiently flexible to
cover these situations.
These financial institutions are also seeking an exception
to California's existing impound account law, to reflect
the existence of certain impound account requirements,
which are part of foreclosure avoidance plans being
championed at the local, state, and federal levels. If a
financial institution offers to modify or refinance a
borrower's mortgage as part of a foreclosure avoidance
effort, and is required by that foreclosure avoidance
program to establish an impound account in connection with
that modified or refinanced mortgage, the financial
institution should not trigger a violation of California
law through its actions. The financial institutions are
concerned that, because the refinance and modification
programs are seldom codified in statute or regulation,
California's exceptions might not apply.
Prior/Related Legislation
AB 1830 (Lieu), of 2007, would have enacted the
Higher-Priced Mortgage Loan Law, effective July 1, 2009, as
specified, codified a fiduciary duty for mortgage brokers,
effective January 1, 2009, and authorized California's
mortgage regulators to apply specified federal mortgage
lending laws and regulations to their licensees, effective
January 1, 2009. Vetoed by Governor Schwarzenegger.
AB 260 (Lieu), of 2009, virtually identical to AB 1830, but
with delayed operative dates.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No
Local: No
CONTINUED
SB 633
Page
6
SUPPORT : (Verified 5/6/09)
California Bankers Association
JJA:do 5/8/09 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
**** END ****
CONTINUED