BILL ANALYSIS �
AB 1770
Page 1
Date of Hearing: April 28, 2014
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Roger Dickinson, Chair
AB 1770 (Dababneh) - As Amended: March 28, 2014
SUBJECT : Real property liens: request to terminate home equity
line of credit.
SUMMARY : Specifies a process for termination of a Home Equity
Line of Credit (HELOC). Specifically, this bill :
1)States that on receipt of a written request from an authorized
person to terminate a HELOC (revolving line of credit secured
by a mortgage or deed of trust), the lender shall do all of
the following:
a) Terminate the borrower's right to obtain funds from the
HELOC;
b) Apply all sums subsequently paid by or on behalf of the
borrower in connection with the HELOC to the satisfaction
of the HELOC and other sums secured by the related
revolving line security instrument; and,
c) When the balance becomes zero on the HELOC which is
secured by the security instrument, satisfy the related
revolving line security instrument.
2)Provides that the equity line of credit shall contain, at
least, the following:
a) Name of each borrower;
b) The account number; and,
c) Street address of the property.
3)Defines "authorized person" as a licensed title insurance
company, underwritten title company, or escrow company.
4)Provides that "receipt of written request" includes
confirmation by fax, email, or paper copy sent by certified
mail.
AB 1770
Page 2
5)Requires that the written request to terminate the HELOC shall
be provided to the borrower and shall be accompanied by
language explaining the reason for the cancelation and the
rights and responsibilities of the borrower.
EXISTING LAW requires, under Civil Code Section 2941, for
execution and recordation of a reconveyance in order to show
that the lien has been satisfied.
FISCAL EFFECT : None
COMMENTS :
According to the author's office this bill is needed for the
following reasons:
Right now, if a borrower has a home equity line of credit
(HELOC) secured by a lien on his house, he/she is supposed
to shut down the HELOC loan and not draw down any money on
the loan if he/she is selling or refinancing his/her house.
If the lender fails to close the HELOC during escrow and
money is drawn on the HELOC, the underlying lien and loan
become the debt of the innocent buyer.
Many sellers don't realize their line of credit (HELOC) is
secured by a lien on their home. Wanting money they
sometimes draw on the HELOC loan during escrow or
immediately following sale of their house, resulting in the
underlying HELOC loan and lien becoming the obligation of
the new buyer because the lien follows the real property
unless it is extinguished.
Other sellers are unscrupulous and draw on the HELOC and
run up the debt knowing that once they sell the house and
move it will be difficult if not impossible to locate them
and secure repayment, especially if the borrower no longer
has any appreciable assets. Chasing down and collecting on
these debts is very costly and problematic for new
homebuyers, HELOC lenders and title companies.
Further complicating matters, since many HELOC lenders are
large corporations and unaware that their HELOC borrowers
are in escrow, some HELOC lenders are actually marketing to
AB 1770
Page 3
their customers to draw on the HELOC at the very same time
the title company is attempting to help the borrower sell
his or her house and shut down the HELOC. Thus, HELOC
borrowers sometimes draw on the HELOC in escrow when they
shouldn't. AB 1770 will create a standardized written
request that also helps to educate the borrower that they
cannot draw on the HELOC loan.
A HELOC is secured by the borrower's property and the lien
associated with that loan will follow the property until it is
paid back. Currently, when title and escrow companies handle
the escrow they contact the HELOC lender for a payoff statement
that will tell the title company the amount of money needed in
escrow to pay off the HELOC loan. Often this process is
automated by the larger financial institutions so that the
payoff statement is automated but the HELOC is not automatically
shut down.
A potential problem with a home sale that involves a HELOC is
that the borrower could draw down from their HELOC during the
escrow or immediately after the home is sold, but the liability
for the loan would follow the new purchaser of the property.
This could be a result of confusion on the part of the HELOC
borrower who may not understand that the loan follows the
property. In other cases it could be an outright purposeful
decision on the part of the HELOC borrower. AB 1770 is intended
to provide a standardized process to terminate a HELOC when the
home is in escrow so that the HELOC will not inadvertently
become the liability of the subsequent homeowner.
According to the latest Equifax National Consumer Credit Trends
Report the total number of new HELOCs is 71,600, an increase of
10% from same time a year ago. The balance of newly originated
HELOCs was up 18.4%, from $6.2 billion to $7.3 billion. The
total outstanding balance of existing HELOCs in March 2014
decreased 6.5% from same time a year ago, the report says. Of
total severely delinquent balances, 69% are from loans
originated from 2005-2007. The total balance of severely
delinquent loans in March 2014 is slightly more than $8 billion,
a five-year low. This current market of HELOCs is quite small
compared to pre-foreclosure crisis numbers. Many of the HELOCs
issued prior to the foreclosure crisis are close to coming due.
Most HELOCs allow the borrower to take out money against their
home for the first ten years without making any payments. Over
AB 1770
Page 4
the next 20 years that balance must be paid off. For HELOCs
issued during the housing price appreciation boom that peaked in
2006 those loans are coming due between 2014 and 2018. This
surge accounts for $208 billion in HELOCs. This wave is so
large that the Office of Comptroller of Currency has urged
national banks to adopt policies to address this onslaught.
Many institutions are reaching out to borrowers in advance of
due dates to discuss refinance options.
Amendments:
As currently drafted, AB 1770 may lead to more confusion. The
language uses terms and phrases that are not common in this area
of code. In order to clarify the intent of the bill and remove
unclear terms committee staff recommends the following
amendments:
1 SECTION 1. Section 2941.8 is added to the Civil Code,
to read:
2 2941.8. (a) Upon receipt of a written request from an
3 authorized person to terminate a revolving equity line of
credit secured
4 by a mortgage or deed of trust , the lender shall do all of
the
5 following:
6 (1) Terminate the borrower's right to obtain advances
under
7 the borrower's revolving equity line of credit.
8 (2) Apply all sums subsequently paid by or on behalf of
the
9 borrower in connection with the revolving equity line of
credit to the
10 satisfaction of the revolving equity line of credit. and
other sums secured
11 by the related revolving line security instrument.
12 (3) When the balance of all outstanding sums secured
by the
13 related revolving line security instrument becomes zero,
satisfy
14 the related revolving line security instrument.
(3) Reconvey the mortgage or deed of trust when the equity line
AB 1770
Page 5
of credit
has zero balance outstanding.
15 (b) No particular phrasing is required in the The
written request
16 provided to the lender to terminate an equity line of
credit, but
17 shall contain at least the following:
18 (1) The name of each borrower.
19 (2) The account number of the equity line of credit.
20 (3) The street address of the property, if
appropriate.
21 (c) For purposes of this section "authorized person"
includes
22 a licensed title insurance company, underwritten title
company,
23 or controlled escrow company, as defined in Sections
12340.4,
24 12340.5, and 12340.6, respectively, of the Insurance Code,
or an
25 escrow company as used in the Financial Code who is acting
on behalf
of the borrower.
26 (d) For purposes of this section, "receipt of a written
request" includes confirmation delivered by first-class mail,
registered or certified mail, express mail, overnight delivery
by an express service carrier, electronic mail, facsimile, or
other electronic means. fax, email, or paper copy sent by
certified mail.
(e) For purposes of this section "equity line of credit"
means a
revolving line of credit secured by a mortgage or deed of
trusts.
29 (e) A written request to terminate a revolving an
equity line of credit
30 secured by a mortgage or deed of trust from an authorized
person
1 shall be provided to the borrower and be accompanied by the
2 following language:
3
4 "NOTICE TO BORROWER"
5 You have a home equity line of credit with _____,
secured by a
6 mortgage or deed of trust, and lien, on real property
AB 1770
Page 6
located at
7 ______________.
8 Our company is handling the escrow for your
transaction. We
9 are sending the attached notice to your lender, requesting
cancelation that
10 of your home equity line of credit . be terminated . Our
reason for
11 making this request is: ________________________.
12 When your lender receives our request, your lender will
13 terminate and close your home equity line of credit, and
you will
14 no longer be able to obtain credit advances. However, this
notice to cancel termination
15 of your home equity line of credit does not release you
from liability
16 for amounts owed under the account. All sums your lender
17 subsequently receives in connection with your home equity
line of
18 credit , Any funds sent to your lender in connection with
your home equity line of credit,
including any sums funds we may send to your lender, shall will
be
19 applied by your lender to the satisfaction of your account.
When
20 the balance of your account becomes zero, your lender will
be
21 required to remove the lien against the property that is
connected to the
home equity line of credit. mortgage or deed of trust as a
matter of
22 public record.
23 If you have questions about this notice or our action,
or believe you have received this notice in error
please
24 contact ___________ by calling us at __________________ or
25 writing to us at ______________.
26 __________________________
27 (Name of Company)
Outstanding Issues:
AB 1770
Page 7
Staff believes that the aforementioned amendments should assist
with clarification and operational issues. Should AB 1770
move forward the author and sponsor need to resolve an
additional outstanding issue not addressed in the amendments.
In the event that escrow falls apart for the borrower the
language in AB 1770 does not contemplate how to unwind the
cancellation of the HELOC. For example, John Doe wants to sell
his home and in the process payoff his HELOC. He finds a buyer
and they enter escrow. At some point during escrow one of the
parties backs out of the deal. The wording of AB 1770 does not
address this scenario so it is unclear what would happen if the
request to cancel the HELOC has already begun to be processed.
Would the HELOC cancellation process unwind itself if escrow
fell apart? It is unclear based on the current language and
given the automation of large national banks it is very likely
that once this process has started that it would be very
difficult to unwind.
REGISTERED SUPPORT / OPPOSITION :
Support
California Land Title Association (Sponsor)
Opposition
None on file.
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081