Yesterday, Broc Romanek reported that the staff of the SEC's Division of Corporation Finance has issued a new Compliance & Disclosure Interpretation addressing Section 413(a) of the Dodd-Frank Act. Section 413(a) requires the SEC to adjust the definition of "accredited investor" in its rules under the Securities Act of 1933. In the first four years following enactment of the Dodd-Frank Act, an individual's net worth, exclusive of the value of his or her primary residence, must be $1 million or more. Thereafter, the net worth must be more than $1 million, exclusive of the value of the investor's primary residence .
In this C&DI, the staff takes the position that for purposes of determining an individual's net worth, "indebtedness secured by the residence in excess of the value of the home should be considered a liability and deducted from the investor’s net worth".
One of my partners has asked about the effect, if any, of anti-deficiency legislation on this interpretation. California and other states have adopted anti-deficiency laws that can prevent a real estate secured creditor from obtaining a deficiency judgment against a homeowner. California's principal anti-deficiency statute is found in Section 580b of the California Code of Civil Procedure.
If a borrower is protected by anti-deficiency legislation (or agreement), it would be logical to ignore the indebtedness in excess of the value of the collateral in determining an investor's net worth. However, the C&DI did not reach this level of detail.
Of course, there are exceptions and limitations to anti-deficiency statutes. Thus, not every borrower will be protected. In California, for example, the statute primarily protects purchase money borrowers. Earlier this year, Senator Ellen Corbett introduced AB 1178 to extend the protection of Section 580b to subsequent loans but only to the extent that the subsequent loan was used to pay the debt incurred to purchase the real property. The bill is sponsored by the California Association of Realtors (aka "CAR") and appears to be progressing towards passage. Not surprisingly, lenders are opposing the bill, arguing that it "fundamentally alters and impairs the nature of [existing] loan contracts . . . ". Historically, CAR has wielded a great deal of influence in Sacramento. If the bill becomes law, look for a possible constitutional challenge.