BILL ANALYSIS �
SB 978
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Date of Hearing: August 8, 2012
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Felipe Fuentes, Chair
SB 978 (Vargas) - As Amended: June 18, 2012
Policy Committee: Banking and
Finance Vote: 11-0
Urgency: No State Mandated Local Program:
Yes Reimbursable: No
SUMMARY
This bill enacts several changes to the Real Estate Law and
Corporations Code, by increasing real estate investor
protections, and requiring the Department of Corporations (DOC)
to focus greater regulatory scrutiny on, and provide greater
transparency regarding, the activities of those who solicit
investors in connection with real estate investments.
Specifically, this bill:
1)Requires that loans for which investors are sought cannot exceed
loan-to-value (LTV) ratios specified in the statute. These
LTVs vary from 35% to 80%, depending on the type of property
and its intended use (i.e., developed single-family residence,
developed commercial, construction, undeveloped, etc.).
2)Interests in loans could not be sold, unless the real estate
broker soliciting the investor ensures that the investor meets
at least one of the following two requirements:
a) The investment does not exceed 10% of the investor's net
worth, as defined.
b) The investment does not exceed 10% of the investor's
adjusted gross income for federal income tax purposes, as
specified.
3)Requires every real estate broker and any issuers, as specified,
that solicit investors for privately-funded loans to make
reasonable effort to ensure the purchaser understands the
investment and it is suitable for the investor.
4)Requires the DOC Commissioner to annually prepare a report, as
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specified, for publication on the DOC's Internet Web site,
summarizing data collected from persons to which it issues
securities permits.
5)Authorizes the DOC Commissioner to examine those persons to which
it issues permits, review compliance with the conditions of
the permits and other applicable state law, and disqualify an
offering if the Commissioner finds that the issuer materially
violated the provisions of their permit.
FISCAL EFFECT
The Department of Corporations anticipates the need for two PYs
to conduct regulatory examinations at a cost of approximately
$250,000 (special fund).
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COMMENTS
1)Purpose . According to the author, SB 978 would implement a
series of recommendations stemming from a joint informational
hearing held by Senate Banking and Financial Institutions
Committee and Senate Business, Professions and Economic
Development Committee on hard money lending on January 18,
2012. The author argues SB 978 would increase the reporting
requirements on those who seek to raise money from investors
pursuant to Corporations Codes securities law exemptions. The
author concludes that SB 978 would increase the protections
available to people who invest their savings with entities
soliciting funds for real estate investments.
2)Background . The provisions of this bill are designed to
address issues related to what is commonly referred to as
"hard money lending," which is the lending of money by private
individuals and small pension plans to other private
individuals and/or businesses. Interest rates are higher as
the risk taken by the lender is usually higher and the loan is
more likely to be secured by the asset than the
creditworthiness of the borrower. Most hard money lenders lend
solely based upon the deal or property at hand.
As with all lending, hard money lending has two parts, raising
money from investors and lending that money out. The funds
usually come from private individuals, not a lending
institution. Generally speaking, a license or permit is not
required to solicit investors to invest in real estate
securities. Investor solicitation may be conducted by
licensed real estate brokers, or it may be conducted pursuant
to state and federal securities laws.
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 money
lending happens in lower-middle class neighborhoods where
property values are relatively stable and blighted properties
are available to purchase at significant discounts. Because
of the nature of the transactions and the risks, hard money
lending is done at high interest rates.
3)Previous legislation .
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a) SB 53 (Calderon and Vargas), Chapter 717, Statutes of
2011 enacted several changes to California's Real Estate
Law, including a requirement that hard money lenders inform
their investors about which provision or provisions of the
Real Estate Law or the Corporate Securities Law govern
their transactions.
b) AB 2288 ((Blakeslee) of 2010) would have implemented
specific criteria for issuers involved in hard money
lending. This bill failed passage in Assembly Banking and
Finance Committee.
Analysis Prepared by : Roger Dunstan / APPR. / (916) 319-2081