BILL ANALYSIS
SB 633
Page 1
Date of Hearing: June 29, 2009
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Pedro Nava, Chair
SB 633 (Wright) - As Amended: April 27, 2009
SENATE VOTE : 38-0
SUBJECT : Mortgages: impound accounts.
SUMMARY : Creates new exceptions in regards to when an impound
or trust account can be required as a condition of a real
property sales contract, or a mortgage or deed of trust on
single-family, owner-occupied real property. Specifically, this
bill :
1)Specifies that the requirement of an impound or trust
account would not be prohibited for the following reasons:
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.
2)Defines "Regulation Z" as any rule, regulation, or
interpretation promulgated by the Board of Governors of the
Federal Reserve System and any interpretation or approval
issued by an official or employee duly authorized by the
board to issue interpretations or approvals dealing with
respectively, consumer leasing or consumer lending pursuant
to the Federal Truth in Lending Act (TILA), as amended (15
U.S.C. Sec. 1601 et seq.).
EXISTING FEDERAL LAW authorizes federally-chartered financial
institutions to engage in the business of mortgage lending,
brokering, servicing, and governs the rules under which such
activities may be conducted under a wide variety of laws,
including, but not limited to, the Home Ownership and Equity
Protection Act (HOEPA), Real Estate Settlement Procedures Act
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(RESPA), TILA, Home Mortgage Disclosure Act (HMDA), and
regulations that interpret those acts (most notably Regulation
C, which interprets the Home Mortgage Disclosure Act and
Regulation Z, which interprets the Truth in Lending Act).
EXISTING STATE 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, 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: [Civil
Code Section, 2954 et seq.]
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
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borrower, at any time, but clarifies that the invalid account
does not otherwise affect the validity of the loan or sale.
FISCAL EFFECT : None
COMMENTS :
This bill is sponsored by the California Banker's Association.
The sponsor states, "Beginning April 1, 2010, Regulation Z will
require escrow accounts on higher-priced mortgage loans.
Determination of whether a loan is a higher-priced mortgage is a
calculation based upon the annual percentage rate (APR). Because
a loan's APR is typically not known to a certainty until after
the underwriting process has been completed and the interest
rate has been locked, the Federal Reserve Board (FRB) has
recognized that creditors might build in a "cushion" against
this uncertainty by voluntarily setting their internal threshold
lower than the threshold in the regulation.
However, in California, there are restrictions on a creditor's
ability to escrow, so over-inclusiveness to ensure compliance
with Regulation Z is not an option, because requiring escrow on
a non-higher-priced mortgage loan potentially violates state
law. To eliminate this compliance conflict, we support language
amended into SB 633 that the escrow restrictions not apply where
the mortgage loan is made in compliance with requirements
applicable to higher-priced loans, whether or not the loan is a
higher-priced loan."
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.
The FRB acknowledged 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 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
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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.
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.
The law regarding impound accounts was enacted when many
believed that these accounts could harm consumers, if
administered improperly. For that reason, the law prohibits
impound accounts, except in certain circumstances. However, 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. Many believe impound accounts
can not only help borrowers understand the true costs of owning
a home.
REGISTERED SUPPORT / OPPOSITION :
Support
California Bankers Association
California Mortgage Bankers Association
Opposition
None on file.
Analysis Prepared by : Kathleen O'Malley / B. & F. / (916)
319-3081