BILL ANALYSIS �
SENATE JUDICIARY COMMITTEE
Senator Hannah-Beth Jackson, Chair
2013-2014 Regular Session
AB 1770 (Dababneh)
As Amended June 19, 2014
Hearing Date: June 24, 2014
Fiscal: No
Urgency: No
TMW
SUBJECT
Real Property Liens: Revolving Lines of Credit: Suspend and
Close
DESCRIPTION
This bill would provide a procedure by which a borrower, lender
in first or subordinate position, or the escrow or title company
handling a property escrow can, with the approval of the
borrower, request the suspension and closure of a home equity
line of credit.
(This analysis reflects author's amendments to be offered in
Committee.)
BACKGROUND
A home equity line of credit (HELOC) is a type of home loan that
allows a borrower to open up a line of credit using his or her
home as collateral. A HELOC allows the homeowner to borrow up
to a pre-determined amount set by the mortgage lender and is
similar to a credit card in that it is a revolving line of
credit.
Under existing law, the borrower may draw funds from a HELOC
while the home is in escrow for sale to a new purchaser, and,
depending on the timing of the withdrawal, the resulting HELOC
lien may not be fully paid off as part of the sale of the home.
In addition, the borrower may request multiple HELOCs from
different lenders, and the borrower may draw funds from one
HELOC while another HELOC is being requested. In this scenario,
the second or third lenders may not receive updated information
(more)
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that the first HELOC has an outstanding balance, creating loan
priority problems for the subsequent lenders.
This bill would, upon the borrower's instruction to close out
the loan, direct a lender to suspend (freeze) the home equity
line of credit for a minimum of 30 days, and close the account
completely upon payment of a payoff demand. This bill has a
delayed implementation date of July 1, 2015, and would sunset on
July 1, 2019.
This bill was heard by the Senate Banking and Financial
Institutions Committee on June 18, 2014, and passed out on a
vote of 9-0.
CHANGES TO EXISTING LAW
Existing law requires, within 30 calendar days after an
obligation secured by a deed of trust has been satisfied, the
beneficiary or its assignee to execute and deliver to the
trustee the original note, deed of trust, request for a full
reconveyance, and other documents necessary to reconvey the deed
of trust. (Civ. Code Sec. 2941(b)(1).)
Existing law requires the trustee to execute the full
reconveyance and record it or cause it to be recorded in the
office of the county recorder in which the deed of trust is
recorded within 21 calendar days after receiving the documents
listed immediately above. (Civ. Code Sec. 2941(b)(1)(A).)
Existing law provides that if a trustee fails to execute and
record the full reconveyance within 60 calendar days after an
obligation secured by a deed of trust is satisfied, the
beneficiary, upon receipt of a written request from the trustor
or the trustor's heirs, successor in interest, agent, or
assignee, shall execute a certificate of discharge and record or
cause to be recorded a release of the obligation in the office
of the county recorder in which the mortgage is recorded. (Civ.
Code Sec. 2941(b)(2).)
Existing law provides that if a full reconveyance has not been
executed and recorded within 75 calendar days after an
obligation secured by a deed of trust is satisfied, a title
insurance company may prepare and record a release of the
obligation, as specified. (Civ. Code Sec. 2941(b)(3).)
Existing law authorizes the trustee, beneficiary, or mortgagee
to charge a reasonable fee to the trustor or mortgagor for all
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services involved to prepare, execute, and record the full
reconveyance, and provides that if the fee does not exceed $45,
it is conclusively deemed to be reasonable. (Civ. Code Sec.
2941(e).)
Existing law provides that a violation of the above provisions
makes the violator liable to the person affected by the
violation for all damages that person sustains as a result of
the violation, plus a sum of $500, and a willful violation is a
misdemeanor, punishable by a fine between $50 and $400, or by
imprisonment in a county jail for up to six months, or by both a
fine and imprisonment. (Civ. Code Secs. 2941(d), 2941.5.)
Existing law defines an "entitled person" to mean a borrower,
lender in first or subordinate position, and as the escrow or
title company handling the property escrow. (Civ. Code Sec.
2943(a)(4).)
Existing law defines a "payoff demand statement" to mean a
written statement, prepared in response to a written demand made
by an entitled person or authorized agent, setting forth the
amounts required as of the date of preparation by the
beneficiary, to fully satisfy all obligations secured by the
loan that is the subject of the payoff demand statement, and the
statement must include information necessary to calculate the
payoff amount on a per diem basis for the period of time, not to
exceed 30 days, during which the per diem amount is not changed
by the terms of the note. (Civ. Code Sec. 2943(a)(5).)
Existing law requires a beneficiary or his or her authorized
agent, to prepare and deliver a payoff demand statement to the
person demanding it within 21 days of receipt of the demand, and
authorizes the beneficiary to charge up to $30 per statement,
except as specified. (Civ. Code Sec. 2943(c).)
Existing law provides that a payoff demand statement may be
relied upon by the entitled person or his or her authorized
agent, in accordance with its terms, for the purpose of
establishing the amount necessary to pay the obligation in full.
(Civ. Code Sec. 2943(d)(1).)
Existing law provides that a willful violation of the above
provision requires the beneficiary to pay the entitled person
$300 and renders the beneficiary liable to the entitled person
for all damages he or she may sustain. (Civ. Code Sec.
2943(e)(4).)
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This bill would additionally require a payoff demand statement
issued by a beneficiary in connection with an equity line of
credit to include an email address, fax number, or mailing
address designated by the beneficiary for delivery of the
Borrower's Instruction to Suspend and Close Equity Line of
Credit by the entitled person.
This bill would require, upon receipt from an entitled person of
a Borrower's Instruction to Suspend and Close Equity Line of
Credit that has been prepared and presented to the borrower by
the entitled person and signed by a borrower, a beneficiary to
suspend the equity line of credit for a minimum of 30 days.
This bill would prescribe the form of the Borrower's Instruction
to Suspend and Close Equity Line of Credit and provide that an
alternate form is acceptable, if it is made in substantially the
same form as the example provided in statute. The wording of
that form asks for the identities of the lender, borrower, and
escrow or settlement agent; the property address; and the
account number of the equity line of credit. By signing the
form, a borrower acknowledges that:
the escrow or settlement agent named on the form has requested
a payoff demand statement for the revolving line of credit;
the borrower's ability to use the line of credit will be
suspended for at least 30 days to accommodate the pending
transaction;
the line of credit will be closed once payment is made in
accordance with the payoff demand statement;
if any amounts remain due after payment is made in accordance
with the payoff demand statement, the borrower understands
that he or she will remain personally liable for those
amounts; and
the borrower is instructing the beneficiary to close his or
her line of credit and cause the secured lien against the
subject property to be released, when the lender is in receipt
of the signed instruction and payment in accordance with the
lender's payoff demand statement.
This bill would require, when a beneficiary is in receipt of
both a Borrower's Instruction to Suspend and Close Equity Line
of Credit and payment in accordance with the payoff demand
statement, the beneficiary to close the equity line of credit
and release or reconvey the property securing the equity line of
credit.
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This bill would provide that the beneficiary may conclusively
rely on the Borrower's Instruction to Suspend and Close Equity
Line of Credit provided by the entitled person as coming from
the borrower.
This bill would provide the following definitions:
"beneficiary" means a mortgagee or beneficiary of a mortgage
or deed of trust, or his or her assignees;
"Borrower's Instruction to Suspend and Close Equity Line of
Credit" means the instruction provided under this bill, signed
by the borrower or borrowers under an equity line of credit;
"entitled person" means a borrower, lender in first or
subordinate position, and as the escrow or title company
handling the property escrow;
"equity line of Credit" means a revolving line of credit used
for consumer purposes, which is secured by a mortgage or deed
of trust encumbering residential real property consisting of
one to four dwelling units, at least one of which is occupied
by the borrower;
"payoff demand statement" means a written statement, prepared
in response to a written demand made by an entitled person or
authorized agent, setting forth the amounts required as of the
date of preparation by the beneficiary, to fully satisfy all
obligations secured by the loan that is the subject of the
payoff demand statement, and the statement must include
information necessary to calculate the payoff amount on a per
diem basis for the period of time, not to exceed 30 days,
during which the per diem amount is not changed by the terms
of the note; and
"suspend" means to prohibit the borrower from drawing on,
increasing, or incurring any additional principal debt on the
revolving line of credit.
This bill would become operative on July 1, 2015, and remain in
effect until July 1, 2019.
COMMENT
1. Stated need for the bill
The author writes:
Under existing practice, new homebuyers, title companies,
purchase money mortgage lenders and refinancing lenders are
finding that [home equity line of credit (HELOC)] lenders are
not always shutting down the HELOC loans and executing the
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reconveyance to eliminate the HELOC lien. If the HELOC is not
properly shut down and the HELOC borrower is able to keep
using his or her HELOC after escrow closes, it creates a
serious problem for those parties in the escrow process,
including new homebuyers, purchase money mortgage lenders,
refinancing lenders, and title companies.
In many cases, title companies have encountered HELOCs, which
should have been shut down during the escrow process, can run
into the hundreds of thousands of dollars. As a result,
innocent new homebuyers are threatened with foreclosure by the
HELOC lender for a debt over which they have no control and
should not be responsible for.
AB 1770 attempts to address that issue through clarity and
tighter procedures created for lenders and "entitled persons"
(title companies) in the escrow process.
2. Providing protection to subsequent purchasers and subsequent
HELOC lenders
This bill would proscribe a process through which a HELOC lender
would be required to suspend and close a HELOC when a homeowner
borrower transfers the home to a new owner.
The California Land Title Association (CLTA), sponsor, asserts
that "[t]his legislation would clarify the process for closing a
[HELOC] loan when the home is being sold or an existing loan
refinanced. Currently, existing practice results in some HELOC
loans not being shut down to the detriment of new homebuyers,
purchase money mortgage lenders, refinancing lenders, and title
companies." CLTA notes that this bill would replicate a process
that already works for consumers, HELOC lenders, and title
companies in Arizona, and is written so that HELOC lenders are
provided with a written request signed by the HELOC borrower to
shut down his or her HELOC loan in conformity with their
existing HELOC contracts and federal regulations.
This bill would require a HELOC borrower to affirm in the
required form prescribed in this bill that the HELOC borrower is
aware that he or she is responsible for outstanding amounts on
the HELOC loan. In this way, this bill would provide notice to
the HELOC borrower that he or she is responsible for outstanding
amounts owed on the HELOC that is not satisfied from the sale of
the home. Further, this bill seeks to protect subsequent home
purchasers from being liable for outstanding amounts on the
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prior homeowner's HELOC loan.
Additionally, this bill would, upon the borrower's instruction
to close out the loan, direct the HELOC lender to suspend the
home equity line of credit for a minimum of 30 days, and close
the account completely upon payment of a payoff demand. These
provisions seek to protect subsequent HELOC lenders from
unknowingly approving a HELOC to the borrower without adequate
information on amounts the borrower draws on the first HELOC
after the borrower has applied for the subsequent HELOCs, which
would put subsequent HELOC lenders in jeopardy of recovering
from the borrower the amounts loaned.
This bill would also require the instruction form to include the
name of the HELOC lender, borrower, account number, property
address associated with the HELOC, and name of the escrow or
settlement agent. These provisions would provide critical
contact information for title companies and escrow companies
forwarding payments to HELOC lenders from the sale proceeds.
3. Author's amendments
The author offers the following technical and conforming
amendments.
Author's amendments :
1. On page 3, in line 11, strike "45" and insert "30"
2. On page 3, in line 32, strike "account" and insert
"equity line of credit"
Support : None
Opposition : None
HISTORY
Source : California Land Title Association
Related Pending Legislation : None Known
Prior Legislation : None Known
Prior Vote :
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Senate Committee on Banking and Financial Institutions (Ayes 9,
Noes 0)
Assembly Floor (Ayes 76, Noes 0)
Assembly Committee on Judiciary (Ayes 11, Noes 0)
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