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With the state budget in the red somewhere north of $25 billion, you might think that fiscal issues would overwhelm consideration of any other policy questions in the California Legislature this year. Surprisingly, though, the total number of bills introduced in 2003 is actually up from last year. All told, over 3000 new bills The process of reading the new bills is now complete, although amendments will continue throughout the year, and nearly four dozen have been identified of interest to CEA. The evaluation of the bills is currently underway in the Bill Review Committee, under the leadership of Bette Hamby of Long Beach. It is clear that many of the subjects important in recent years, including privacy and electronic recording, are addressed in new legislation for this year. It is additionally clear already, however, that the two big issues for the year will be the “lien protection” product offered by Radian Guarantee from Pennsylvania, and proposed amendments to the Cal-FIRPTA law. The lien protection issue will be particularly contentious. Readers will remember that the last column provided a short introduction to the issue: Radian had been offering a product in California and a small number of other states, on refinances only, which provided coverage to lenders in the event of a default on loans because of undisclosed liens. Radian contended that this coverage fell under their mortgage insurance license from the Department of Insurance, but the Department took the position that the coverage was, in fact, title insurance. The Department issued a cease and desist order, which Radian appealed, and the issue went before an Administrative Law Judge (ALJ). The ALJ found for the Department, agreeing that the product was title insurance; because Radian has no title insurance license, and because California law precludes companies from simultaneously having both a title insurance and mortgage insurance license, they were precluded from selling the lien protection product. In response, Radian caused the introduction of SB 344 (Speier), which would permit a mortgage insurance licensee to sell the lien protection product without the necessity of a title insurance license. A coalition of CLTA, CEA, various title insurers, and surprisingly, other mortgage insurers, has formed to oppose the bill. As this column is written, the first policy committee hearing on the bill is approaching, and a close vote is expected. As the hearing is in the Senate Insurance Committee, whose chair is the author of the bill, SB 344 may very well pass the committee and be contested in later hearings. The CEA message on SB 344 is very simple. On a policy level, escrow practitioners spend much of their days helping clear title to real estate, which often involves paying off liens and judgments, including delinquent child support. If this “curative” work is not done, because of a “quick and dirty” process where sellers essentially self-report their liens, the entire system, including government who must support parents not receiving child support, will suffer. It also appears that SB 344 will encourage the migration of closing services out of state, which is bad on many levels for the California economy. The situation on SB 344 was complicated very recently when Insurance Commissioner Garamendi, in a surprise move, rejected the decision of the Administrative Law Judge and indicated that the matter would be further considered under the authority of the Department of Insurance. He left the cease and desist order in place while the proceedings continue, probably for another four months. The actions of the Commissioner means that the Legislature will be considering a matter presently under litigation, which usually they are reluctant to do, but the exact effect of the Commissioner’s action on SB 344 is unclear. With respect to Cal-FIRPTA, no fewer than four different bills have been introduced to amend the changes enacted last year. The most far-reaching is AB 1338, described below, but the basic situation is this: last year’s expansion of the withholding program to California residents was done almost entirely for revenue reasons, so amendments which retreat from last year’s changes will, at least on paper, reduce state revenue at a time when California can least afford it. Thus, a proposal introduced to roll back the law to pre-2003 withholding, and another to exempt all residences from withholding, principal and otherwise, and yet another to exempt new homes from withholding, will have difficulty passing. The big news on Cal-FIRPTA for this year is AB 1338 (Chavez). The bill is presently undergoing revisions, but at one point allowed taxpayers to elect between 3 1/3% withholding on total sales price or 9.3% just on gain; made escrow officers jointly and severally liable with buyers for failing to withhold; applies withholding to principal residences to the extent that gain exceeds federal tax exclusion thresholds, and other changes. AB 1338 is motivated by a desire to reduce withholding amounts where taxpayers are selling property with little or no gain, and thus will owe little or no tax when the return is filed. CEA is very concerned about taxpayers needing to make complicated gain calculations in the closing hours of an escrow, however, and we are vehemently opposed to becoming jointly and severally liable with buyers when the law does not presently require escrow officers to become involved in the withholding function at all. A coalition of real estate associations, including CEA, CLTA, CAR, and others has formed over AB 1338 and recently met with the author, Assembly Member Ed Chavez from La Puente. Mr. Chavez was very open to our input, and following the meeting, agreed to make many of the changes we suggested. While the bill is still undergoing changes, for example, the joint and several liability feature will be deleted. We will know more very soon, but AB 1338 certainly seems to be moving in a positive direction, thanks to Assemblyman Chavez. The next few months will be critical on SB 344, AB 1338, and a host of other issues. CEA members will be receiving communications requesting action on bills, particularly relating to SB 344, and we ask that you respond immediately. Please also watch your CEA News for updates on these critical issues. |
by Michael D. Belote
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