Real Estate Finance Committee

Hyatt Regency

Shoreline Room A/B

Long Beach, CA

Thursday, October 16, 2008

9:00 AM – 11:30 AM

Presiding:

Patricia Bouie-Hinds, Chair

Jimmy La Peter, Vice Chair

Quincy Virgilio, Vice Chair

Malcolm Bennett, Executive Committee Liaison

Beth Peerce, NAR Committee Representative
Diane Carlton, GAD Liaison

Staff:

Matt Roberts, Federal Governmental Affairs Manager

Stan Wieg, Legislative Advocate

I. Opening Comments

III. State Issues  

A. C.A.R. Sponsored Legislation

1. AB 1356 (Houston) Agents of Equity Purchasers; Westminster case - Existing law, prior to the decision in Schwitzer vs. Westminster Inv., effectively (and inappropriately) precluded legitimate agents from representing investor purchasers of properties in foreclosure because buyers’ agents were required to purchase a bond, that is not available, for twice the value of the property. As introduced, this bill would have allowed an alternate means of demonstrating financial responsibility that included maintenance E&O insurance, with coverage up to $1 million, and a certification that the licensee was in good standing with the DRE. In early 2007, Schwitzer vs. Westminster Inv. which has overturned the bond requirement became final, thus making this bill unnecessary.  C.A.R. requested that the author not move the bill forward.

2. SB 1737/1054 (Machado) Mortgage broker disclosure of dual roles - SB 1054 failed to pass the Assembly Banking and Finance Committee due to a political dispute between the Assembly and Senate Banking Committees. In response, SB 1737 was “gutted and amended” in August 2008 to move the contents of SB 1054 forward. SB 1737 grants the DRE commissioner the authority to suspend or revoke a real estate license if the licensee generates an inaccurate broker price opinion for a short sale with the intent of manipulating the lienholder into rejecting the proposed sale so that the licensee may acquire a business advantage. More importantly, SB 1737 contains C.A.R.-sponsored language that would require a prominent disclosure to all parties whenever a licensee represents a buyer and originates a loan in a “1-4” transaction.

B.  Legislation of Others

[Please see Legislative Program bill report on the C.A.R. website for a more complete listing of California legislation on which C.A.R. has taken active positions.]

1. SB 1137 (Perata) Mortgage foreclosure rules - The bill is designed to encourage lenders to offer borrowers additional opportunities to work out loan defaults before initiating foreclosure.  After amendments that made the bill more practical, the coalition of opposition that included C.A.R. withdrew its opposition.  The bill passed and is effective as an urgency measure.  The net effect is that for the next five years a foreclosing lender will be delayed by an additional 30 days in its ability to record a notice of default while attempting to contact the borrower. Besides the "front end" notice, the bill also requires that tenants of foreclosed property receive notice and cannot be evicted for 60 days after foreclosure. The bill is in effect, and will sunset in 2013.

2. SB 1240/1053 (Machado) Mortgage broker registration, reporting and enforcement - SB 1053 failed to pass the Assembly Banking and Finance Committee due to a political dispute between the Assembly and Senate Banking Committees. SB 1240 was selected as an alternate vehicle and was “gutted and amended” in August 2008 to move the concepts in SB 1053 forward. As amended, SB 1240 requires real estate licensees acting as mortgage brokers to notify The Department of Real Estate (DRE), in writing, upon commencing or discontinuing that activity. Brokers will be required to file reports annually with the DRE that include a review of compliance and a review of trust fund financial statements by a licensed independent public accountant. Finally, SB 1240 will require brokers to keep all documents and records related to a loan transaction for 3 years. C.A.R. supports SB 1240 because it seeks to improve the supervision of mortgage brokers, without creating a special license. The bill was vetoed by the Governor.

3. SB 1448 (Scott) Increased penalties for unlicensed real estate practice - As introduced, SB 1448 would have authorized the Department of Real Estate (DRE) to issue citations containing a maximum fine of $5,000 or an order of abatement to unlicensed individuals acting as a real estate licensee. As amended, C.A.R. supports SB 1448 with the adopted amendments that increase the existing penalties and fines to be sought by district attorneys when unlicensed practice occurs.

4. SB 1675 (Cox) Calif VA refinancing of veterans' loans - This bill makes a technical change in the law to ensure that the committee overseeing VA loan refinancing has the authority to set the rate to facilitate the loan.

5. AB 1830 (Lieu) Mortgage loan origination and brokerage - AB 1830 would impose new interest rate tests and definitions for ”higher priced”  loans in an effort to be consistent with the new federal “Reg. Z” law on subprime loans. The bill also allows California regulators to punish violations of federal lending law. C.A.R. opposed a previous version of the bill which would have attempted to create a codified set of fiduciary duties for real estate licensees that would have caused needless compliance burdens, inappropriately restricted mortgage refinances, and worsened the current liquidity crisis that is making home loans so difficult to obtain.  As amended in the Senate, C.A.R. renewed its opposition to AB 1830 because it restored previously opposed language and would create a new one-sided attorney fee rule that would only allow successful plaintiffs to collect attorney fees. AB 1830 will also create a double standard that does not hold ALL loan officers to the same rules and restrictions by only imposing new restrictions on mortgage brokers originating loans and not on residential mortgage lenders like Countrywide when they originate loans. The bill would restrict loans which will further restrict credit liquidity in California making home loans more difficult to obtain for legitimate, qualified, borrowers.  The bill was vetoed by the Governor.

6. AB 2880 (Wolk) Bonding and new duties for DRE-licensed mortgage brokers - This bill attempted to create new regulatory restrictions for mortgage loan originators by requiring real estate brokers to carry a bond ranging from $100,000 to $500,000 based upon their volume of business. After consummation of the loan, AB 2880 would have imposed a ban of one year on any direct marketing or communication to the borrower with regard to refinancing that consumer loan. C.A.R. opposed AB 2880 because it would have created an impossibly ambiguous standard for licensees to abide by, and inappropriately limited a mortgage broker’s ability to help borrowers re-finance loans when their circumstances improved. Additionally, C.A.R. opposed the imposition of a bond requirement upon mortgage brokers because they are of limited utility and very costly.  Bill died in Senate Appropriations Committee.

7.  AB 2105 (DeSaulnier) Mandatory reporters of suspected elder abuse - The Elder Abuse and Dependent Adult Civil Protection Act established procedures for the reporting, investigation, and prosecution of elder and dependent adult abuse. These procedures require persons, defined as “mandated reporters,” to report known or suspected instances of elder or dependent adult abuse.  Under current law, only care custodians of dependent adults, local law enforcement agencies and some financial institutions are classified as mandated reporters. As introduced, AB 2105 would have expanded the category of mandated reporters for financial abuse to include both real estate brokers and residential mortgage lenders. C.A.R. opposed AB 2105 because real estate licensees engage in a broad array of customer services within the scope of their licensed activities and it would have been impossible for them to reasonably comply with the mandates of the bill without massive over reporting. C.A.R. obtained amendments that exclude real estate brokers from the requirements of this bill. As amended, the bill only pertains to Real Estate Mortgage Lenders (RMLs) and California Finance Lenders (CFLs). The bill was ultimately vetoed.

8. AB 2359 (Jones) Assignee liability for mortgages - The bill as originally drafted attempted to change the so-called "holder in due course" rule, and impose new liability on secondary market purchasers of California loans for misconduct of mortgage loan originators.  C.A.R. (along with lender groups) opposed the bill as detrimental to loan availability and cost. The bill was amended to remove the provision in Assembly Banking Committee.

9 .AB 2187 (Caballero) Foreclosures - This bill would have imposed new foreign language translation requirements for home mortgages. The bill was held in committee.

10. AJR 45 (Coto) Conforming loan limits - The resolution urges congress and the President to permanently increase the federal loan limits consistent with the housing stimulus legislation of 2008.

IV. Federal Issues

A. Action Items

1. Seller Funded Downpayment Assistance Programs (Please See IBP)

H.R. 3221, the Housing and Economic Recovery Act, which Congress passed back in July, will prevent FHA from insuring mortgages that utilize seller funded downpayment assistance programs.  Congress is expected to revisit the issue prior to adjournment or early next session.

B. Discussion/Reporting Items

1. Emergency Economic Stabilization Act (Please see IBP)

On September 18, 2008, the U.S. Treasury, Federal Reserve Board, and Congressional Leaders from both parties announced the government was officially stepping in to bail out the financial industry as it sat upon the edge of collapsing.  Being termed as the “nuclear” option, these actions are unprecedented and rival that of those taken during the Great Depression.

2. Future of Fannie Mae and Freddie Mac (Please See IBP)

Now that the Treasury has placed both Fannie Mae and Freddie Mac under conservatorship, Congress needs to begin the discussion of what the long term mission and role for the government sponsored enterprises (GSE’s) should be.  When Congress meets again for their 111^th Session, Congressman Barney Frank and Senator Christopher Dodd will discuss and are likely to introduce legislation to address the future structure of the GSE’s.

3. Housing and Economic Recovery Act of 2008 (Please See IBP)

In response to the recent housing crisis, credit crunch and weakening economy, Congress passed and the President signed the Housing and Economic Recovery Act of 2008 in July.  The purpose of this legislation was to stabilize the housing market and prevent a full economic recession.

4. Energy Efficient Mortgages (Please See IBP)

The FHA and VA currently offer energy efficient mortgages that allow homeowners to finance modifications to their homes at the time of purchase.  While these loans have gone all but unnoticed, the issue of energy efficiency has gained momentum and the time may be appropriate for Congress to alter these programs in a manner that would make them more appealing to homebuyers and have a meaningful impact on the environment.

5. FHA Flipping Rule

On June 9, 2008, HUD announced it is expanding the categories of properties exempt from its 90-day anti-flipping rule. Under the current rule, FHA requires that 1) only owners of record may sell properties that will be financed with FHA insured mortgages; 2) any resale of a property may not occur 90 or fewer days from the date of the last sale to be eligible for FHA financing; and 3) that for resales occurring between 91-180 days after the original sale where the new sales price exceeds the previous sales price by 100% or more, FHA will require additional documentation to validate the property's value. HUD exempted from the property flipping rules properties sold by HUD through its Real Estate Owned activities, new homes being sold by builders and properties being sold by relocation companies and the property owner's employer as part of a job relocation. Certain properties were exempted from this rule.

The new waiver allows for properties acquired by foreclosure by mortgagees that are not state-or federally-chartered to become eligible for FHA-insured financing during the 90-day period. REALTORS® support the waiver. In a letter to HUD, NAR President Richard Gaylord urged HUD to exempt from the time restrictions all REO properties sold by any entity that has as its principal business activity the lending or investment of funds in real estate mortgages. The waiver will expire in one year.

6. Regulation Z

On July 14, 2008, the Federal Reserve published their final rule amending Regulation Z (Truth in Lending).  The intent of the new rule is to curb abusive lending practices that helped lead to the current foreclosure and financial crisis.  The new rule will create a new category of loans known as “higher-priced mortgage loans.”  These loans will be defined as any loan that is secured by a consumer’s principal residence, and has an annual percentage rate that is 1.5 percentage points or more above the average prime offer rate, based on a survey currently published by Freddie Mac.  For second liens the spread will be 3.5 percent. 

Loans that fall into this category will have new protections that include:

 - Prohibiting a lender from making a loan without regard to borrowers' ability to repay the loan from income and assets other than the home's value.  A lender complies, in part, by assessing repayment ability based on the highest scheduled payment in the first seven years of the loan. To show that a lender violated this prohibition, a borrower does not need to demonstrate that it is part of a "pattern or practice."

 - Requiring creditors to verify the income and assets they rely upon to determine repayment ability.

 - Banning any prepayment penalty if the payment can change in the initial four years.  For other higher-priced loans, a prepayment penalty period cannot last for more than two years. This rule is substantially more restrictive than originally proposed.

•  - Requiring creditors to establish escrow accounts for property taxes and homeowner's insurance for all first-lien mortgage loans.
  

There are also new rules that will impact ALL loans securitized by a consumer’s principal residence.They are:

•  - Creditors and mortgage brokers are prohibited from coercing a real estate appraiser to misstate a home's value.
•  - Companies that service mortgage loans are prohibited from engaging in certain practices, such as pyramiding late fees.  In addition, servicers are required to credit consumers' loan payments as of the date of receipt and provide a payoff statement within a reasonable time of request.
•  - Creditors must provide a good faith estimate of the loan costs, including a schedule of payments, within three days after a consumer applies for any mortgage loan secured by a consumer's principal dwelling, such as a home improvement loan or a loan to refinance an existing loan.  Currently, early cost estimates are only required for home-purchase loans.  Consumers cannot be charged any fee until after they receive the early disclosures, except a reasonable fee for obtaining the consumer's credit history.
  
  

You may find more information on this rule at the Federal Reserve’s Website.

7. Banks in Real Estate

On December 26, 2007, President Bush signed into law the FY2008 omnibus appropriations bill which includes a two-year provision prohibiting banks from entering the real estate brokerage, property leasing and management business. NAR was well position to secure a permanent ban. However, due to a last minute objection by Senator Robert Byrd (D-WV), Chairman of the Senate Appropriations Committee, the permanent language was struck and replaced with a two-year ban.  REALTORS® will push for a permanent moratorium to be included in next year’s budget.

8. HUD RESPA Proposal

On May 7, 2008 the Department of Housing and Urban Development (HUD) announced a 30-day extension, to June 12, 2008, for the public to comment on the proposed Real Estate Settlement Procedures Act (RESPA) rule. The announcement came just six days before the initial comment period was to end on May 13, 2008 and two days after HUD received a Congressional written request for a 60-day extension signed by 149 members of Congress. The Congressional letter, organized by Rep. Ruben Hinojosa (D-TX) and Rep. Judy Biggert (R-IL), referred to the extensive nature of the RESPA reform proposal and the fact that some aspects had not previously been the subject of public comment. In addition, the letter stated that further analysis was needed on the proposed rule's interaction with state and federal laws and regulations including the Federal Reserve Board's proposal to amend its Truth in Lending Act (TILA) regulations. REALTORS® worked closely with the offices of Representatives Hinojosa and Biggert to help collect signatures for the letter. The fact that HUD provided a 30-day extension rather than the 60-days requested by Congress will be revisited in the future and another extension request may be made if warranted.

REALTORS® have been working with its members and industry partners to analyze and determine the proposal's impact on association members and the settlement service industry. REALTOR® Gary Thomas, along with other settlement service industry representatives participated in a Small Business Roundtable on April 24, 2008 and expressed REALTORS®’ concerns about the proposed rule, including the comprehensive nature of the proposal which goes well beyond the anticipated reform narrowly focused on improved disclosures, the timing of provisions requiring significant changes to the real estate settlement process, and comments directed at specific provisions including volume discounts, average cost pricing, price tolerances, a new definition of "required use" and a new "closing script" which must be read aloud at closings.

REALTORS® have recommended that HUD develop a one-page summary GFE to help buyers comparison shop, accompanied by a full GFE that includes all closing costs to reduce confusion. REALTORS® also supports improved disclosures of mortgage terms and settlement services.

On September 16, 2008, the House Financial Services Committee held a hearing about the implementation of HUD’s proposed RESPA rule where T. Anthony Lindsey, a REALTOR® broker-owner from Charlotte, N.C., spoke on behalf of NAR.

VII. Other Business

VIII. Adjournment