BILL ANALYSIS �
AB 1770
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ASSEMBLY THIRD READING
AB 1770 (Dababneh)
As Amended May 8, 2014
Majority vote
BANKING & FINANCE 11-0
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|Ayes:|Dickinson, Allen, |
| |Achadjian, Bonta, Chau, |
| |Gatto, Linder, Perea, |
| |Rodriguez, Weber, |
| |Williams |
| | |
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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,
c) Release the lien against the property when the HELOC has
zero balance.
2)Provides that the written request to terminate the HELOC 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 acting
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on behalf of the borrower.
4)Defines "equity line of credit" as a revolving line of credit
secured by a mortgage or deed or trusts.
5)Provides that "receipt of written request" includes
confirmation by delivered by first-class mail, registered or
certified mail, express mail, overnight delivery by an express
carrier, electronic mail, facsimile, or other electronic
means.
6)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.
A HELOC is secured by the borrower's property and the lien
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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. This bill 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
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 Controller 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.
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Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081
FN: 0003419