Bonding for Agents of Equity Purchasers September 18, 2006Real Estate Finance LegislativeThis material is for discussion purposes only and has not been approved by the Real Estate Finance, Legislative, or Executive CommitteesIssue: Should C.A.R. sponsor legislation in the 2007-2008 session to modify the bonding requirement imposed upon agents of equity purchasers by Civil Code Section 1695.17?Action: OptionalOptions: 1. Sponsor legislation attempting to repeal the bond requirement for licensees.
2. Sponsor legislation attempting to allow alternative forms of consumer protection such as access to the Real Estate Recovery Fund or maintenance of "E&O" insurance as a substitute for the bond.
3. Seek to sponsor similar provisions as amendments to related bills of others on a "target of opportunity" basis.
4. Continue status quo
5. Other.Status/Summary: In response to predatory foreclosure practices, the legislature has enacted a number of provisions designed to restrict so-called "equity purchasers" that purported to rescue homeowners who were under threat of foreclosure. The statute contains an unworkable bonding requirement for agents that effectively precludes a legitimate agent from representing an investor to purchase a property subject to a notice of default. C.A.R. sponsored legislation to repeal the bond soon after enactment, but the legislation was defeated.
For additional information please see the Legal Q&A Home Equity Sales Contracts, updated September 15, 2005).Individual homeowners who have been served a notice of default are in a vulnerable position. In defaulton their mortgage loan, they are likely in other debt trouble as well and often not financially sophisticated enough to evaluate their alternatives. They have historically been preyed upon by "foreclosure consultants" and other predators that strip themof their remaining equity while purporting to "rescue" them from foreclosure. The Civil Code contains a considerable body of regulation for foreclosure consultants; however, that law also contains an exception for real estate licensees arranging a sale or alternate financing to stave off foreclosure. In the early 1990s the legislature attempted to restrict a new brand of equity predator (the so-called "equity purchaser") that preyed upon the homeowner by tricking them into selling their remaining equity in a home for a fraction of its value. Often the scheme would involve a complicated lease-back agreement or a "friendly" deed in lieu of foreclosure. An important part of the new regulation involved new disclosures by equity purchasers, expanded rights for consumers to rescind the transaction, and a requirement that the previously unregulated agents of the equity purchasers obtain both a real estate license and a bond equal to twice the value of the real property involved in the transaction. Unlike its predecessor law governing foreclosure consultants, the equity purchaser law did not exempt real estate licensees. Unfortunately for the regulatory scheme, and the real estate licensees swept up in it, the required bond is not commercially available. Even if it was, the cost would be prohibitive -- indeed, the premium for the individual bond could exceed the commission earned in the transaction.The net effect has been to drive legitimate agents out of the niche market of representing investor purchasers who might buy the distressed property and rehabilitate it for subsequent sale or rental. The property will still be sold, but in foreclosure instead of a private sale, and the owners will lose any remaining equity.Why nooutcry for reform until now? Three factors have combined to reduce demand for reform:First, the sustained "up" market has reduced the numbers of properties in foreclosure and supplied increased equity to fuel workouts of many distressed properties.Second, the law contains several exceptions that have allowed some legitimate sales to go forward. The two most important of these are that a purchaser intending to be an owner-occupant is excluded from the definition of "equity purchaser;" and a licensee that represents only the seller is (necessarily) not the agent of the equity purchaser and thus also not covered.Finally, the sellers' ability to escape a transaction is based upon rescission, which carries with it the obligation to return the purchase monies. Since the victims of such schemes were already financially desperate, they are unlikely to have the funds to "unwind" the transaction. This factor is of increasingly less importance as legal assistance providers have begun using the illegality of a sale (including the lack of a licensed agent or lack of bond) to bring court action to invalidate the sale. Possible SolutionsOutright Repeal - Simply repealing the bond requirement would let any licensee in good standing representinvestor purchasers of foreclosure properties and make available a broader pool of buyers able to purchase the property before it goes to foreclosure. This will be particularly important if the volume of foreclosures increases and they are less attractive in an increasingly balanced or even buyer-oriented market. Alternate Coverage - Allowing a licensee to substitute access to the Real Estate Recovery Fund (which is available to customers of all licensees in good standing), or to substitute the possession of an errors and omissions (malpractice) policy in the required amounts would have practically the same effect as a repeal of the bond. It has the added virtue of preserving the existing bond language (should the bond product ever become available) and not looking like the repeal of a consumer protection.Sponsored Amendments to bills of others is an appropriate strategy if the reform is not perceived to be of top importance, or not perceived to be of high urgency. It is highly likely that foreclosure relief legislation or anti-predatory lending legislation will be introduced in the upcoming legislative session and would provide a logical bill on which to piggyback. While such an amendment approach conserves legislative resources,it comes at the price of loss of some control over the final product and might come at the price of neutrality on legislation we would otherwise oppose.Maintaining Status Quo is a viable option if the committee concludes that existing "work arounds"using existing law and its built in exceptions is acceptable (even if not ideal).Should C.A.R. sponsor legislation to change the Agents of Equity Purchasers Law?