HOUSE BILL REPORT

SSB 6096

BYSenate Committee on Financial Institutions & Insurance (originally sponsored by Senators von Reichbauer, Smitherman, Moore, Gaspard, Johnson and Rasmussen)

Prohibiting a pattern of equity skimming.

House Committe on Financial Institutions & Insurance

Majority Report:  Do pass.  (12)

      Signed by Representatives Lux, Chair; Zellinsky, Vice Chair; Anderson, Betrozoff, Chandler, Crane, Dorn, Ferguson, P. King, Nutley, Silver and Winsley.

House Staff:John Conniff (786-7119)

AS PASSED HOUSE FEBRUARY 29, 1988

BACKGROUND:

Equity skimming practices are used to obtain title to properties for the purpose of either taking the equity out of the property or obtaining rents or payments on the property without ever satisfying any of the underlying obligations that may exist on a property.  There are two methods used to engage in equity skimming.

Rent Skimming:  Rent skimming is accomplished by convincing a property owner who is experiencing financial difficulty to deed a property to the equity skimmer with the assurance that the equity skimmer will assume the underlying indebtedness on the property.  The property owner often pays a fee to the equity skimmer as consideration for the assumption.  The equity skimmer then either quickly rents or sells the property at an attractive price.  The equity skimmer never assumes the underlying debt as promised and applies all payments received for his or her personal use. This continues until the property is foreclosed. The original owner's credit has been damaged by the foreclosure that has been processed in his or her name.  The original owner also may be liable for a deficiency owing on the loan when the property is sold after foreclosure if the underlying loan was guaranteed by the federal government.

Equity Skimming:  True equity skimming is accomplished when the equity skimmer offers to purchase a property which is owned free and clear or has a great deal of equity.  The equity skimmer convinces the seller to finance the purchase with a real estate contract carried by the seller and a small down payment.  The equity skimmer then convinces the seller to subordinate his or her interest in the property so that the equity skimmer may obtain a loan on the property.  The equity skimmer then procures the largest loan possible often at avery high interest rate. After the loan proceeds are received by the equity skimmer, he or she then defaults on the contract with the seller and on the loan on the property.

The seller can foreclose on the contract to regain the property; however, it is now encumbered by a large loan.  At this point the equity skimmer cannot be reached.

There is no state law that prohibits either form of equity skimming.  There is a federal law that imposes a fine and/or prison sentence but only affects properties that are financed by the Veterans Administration or by a mortgage or deed of trust insured or held by the Secretary of Housing and Urban Development.  The federal law only applies to the practice of renting a house obtained through equity skimming.

SUMMARY:

Equity skimming is defined.  Any person who wilfully engages in a pattern of equity skimming is guilty of a class B felony punishable by a maximum fine of $10,000 and/or confinement in a state correctional institution for up to ten years under the Sentencing Reform Act, which is equivalent to first degree theft, second degree burglary, and first degree possession of stolen property,among others.  Each act of equity skimming included in the pattern is considered a current offense for sentencing purposes.

A single act of equity skimming or a pattern of equity skimming is declared an unfair or deceptive act or practice in violation of the Consumer Protection Act.

A pattern of equity skimming is included as a criminal offense that is subject to the provisions of the criminal profiteering act, Chapter 9A.82.

Fiscal Note:      Not Requested.

Effective Date:This bill takes effect on July 1, 1988.

House Committee ‑ Testified For:    Jay Uchida, Assistant Attorney General and Dick Barrett, Washington Association of Realtors.

House Committee - Testified Against:      None Presented.

House Committee - Testimony For:    Existing criminal statutes are inadequate to cover equity skimming.  Equity skimming hurts the original homeowner, any subsequent tenant, the lending institution and others.  This new criminal penalty will enable local prosecutors to pursue those currently engaged in equity skimming.

House Committee - Testimony Against:      None Presented.