BILL ANALYSIS
AB 69
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Date of Hearing: January 14, 2008
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Ted Lieu, Chair
AB 69 (Lieu) - As Amended: January 7, 2008
SUBJECT : Mortgage lending: reporting
SUMMARY : Requires mortgage lenders to report to their
respective regulatory agency information regarding loan loss
mitigation efforts. Specifically, this bill :
1)Requires banks, credit unions, residential mortgage lenders
and finance lenders to report data on subprime, prime and
alternative mortgage products originated and serviced by those
entities.
2)Provides that lenders must provide data on their volume of
loans on a monthly basis that includes the following
information:
a) Loans that are 30 to 59 days past due;
b) Loans that are 60 to 89 days past due;
c) Loans that are 90 days past due or over;
d) Loans from above which were modified in the last 12
months;
e) Loans in process of foreclosure;
f) Loans where a notice of default (NOD) has been sent;
g) Loans where formal foreclosure proceedings have started;
h) Loans where foreclosure has been completed; and,
i) Loans which entered delinquency within 3 payments of
initial rate reset.
3)Requires lenders to report information on the disposition of
loan modifications that resulted in the following:
a) Deed in lieu;
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b) Short sale;
c) Forbearance;
d) Repayment plan;
e) Loans that were Refinanced or paid in full;
f) Modification of the loan terms, such as a principal or
interest rate reduction;
g) Temporary modifications effective for less than the life
of loan;
h) Permanent modification effective for life of loan;
i) Modification by freezing interest rate at the
initial/start rate;
j) Modification by reducing the interest rate below the
initial/start rate;
aa) Modification by reducing the interest rate below
scheduled reset rate, but above start rate;
bb) Modification with extension of loan terms;
cc) Modification with reduction in principal balance; and,
dd) Modification using two or more of above modifications
(e.g. rate reduction and term change).
4)Requires a summation of reports to be posted on the website of
the regulatory agency.
5)Requires the full data results be available to the Legislature
upon request.
EXISTING FEDERAL LAW, under the Home Mortgage Disclosure Act
(HMDA) and implemented by the Federal Reserve Board's Regulation
C (12 CFR 203) requires financial institutions to report certain
types of data regarding home loans.
For each calendar year, a financial institution must report data
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regarding its applications, originations, and purchases of home
purchase loans, home improvement loans, and refinancing, as
defined. Data must also be given for loan applications that did
not result in originations, including applications denied,
withdrawn, or closed for incompleteness, as well as applications
approved by the institution but not accepted by the applicant.
HMDA requires lenders to report the ethnicity, race, gender, and
gross income of mortgage applicants and borrowers. Lenders must
also report information regarding the pricing of the loan and
whether the loan is subject to the Home Ownership and Equity
Protection Act. Additionally, lenders must identify the type of
purchaser for mortgage loans that they sell.
For each application or loan, institutions are required to
identify the purpose (home purchase, home improvement, or
refinancing), lien status, and whether the property relating to
the loan or loan application is to be owner-occupied as a
principal dwelling. Regulation C requires financial
institutions to identify the following general loan types:
conventional, FHA-insured, VA-guaranteed, and FSA/RHS (Farm
Service Agency/Rural Housing Service) guaranteed. Institutions
must report the property type as a one- to four-family dwelling,
multifamily dwelling, or manufactured housing. Financial
institutions must report certain geographic data, as well as,
the applicant's or borrower's ethnicity, race, sex, and gross
annual income.
EXISTING STATE LAW provides for the regulation of residential
mortgage lenders and California finance lenders by the
Department of Corporations (DOC) and for the regulations of
state banks and credit unions by the Department of Financial
Institutions (DFI).
FISCAL EFFECT : Unknown
COMMENTS :
Need for the bill : The intent of the author is to follow up on
the work of DOC and its voluntary collection of loss mitigation
data with a requirement on mortgage lender licensees to provide
the commissioner this data on an ongoing basis. This bill will
provide authority for the commissioner of DOC and DFI to get
this data without the constraints of a voluntary system.
The author has become concerned in recent months that the
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announcements by lenders and servicers to modify loans is not
matching up to the realities on ground. It is also the author's
intent to ensure accountability and transparency on the
servicing of loan and loss mitigation efforts. It is important
that not only can policy makers and regulators have access to
data, but that lenders and servicers can have a public forum to
reveal their efforts to assist consumers. Finally, it is
necessary to gather data to determine the obstacles to loan
modification, so in the future, state and federal regulators and
policy makers can request alterations to the current
modification plans underway.
Background : Early in 2007 all signs pointed to a major storm
brewing in the mortgage market, marked by growing concern with
the performance of securitized adjustable rate mortgages (ARMs).
As ARM loans began to default and underperform several large
lenders filed for bankruptcy, and others saw massive losses on
their balance sheets.
Between 2001 and 2006, ARMs as a share of total subprime loans
increased from 73% to more than 91%. The share of
no-documentation or low-documentation loans increased from 28%
to more than 50% and the percentage of borrowers who took out
interest only payment loans increased from zero to more than
22%. Furthermore, ARM loans accounted for 44% of new
foreclosures in the second quarter of 2007.
In California, lenders filed 72,571 NODs on borrowers in the
third quarter of 2007, eclipsing a record of 61,541 set in 1996,
according to DataQuick Information Systems. Most of the loans
that went into default last quarter were originated between July
2005 and August 2006. Actual losses of homes to foreclosure
statewide totaled 24,209 during the third quarter, the highest
number since DataQuick began recording data in 1988, up 38.7
percent from last quarter and up six-fold year-over-year. (For
a more detailed discussion of the mortgage crisis, please see
the committee's report from November 2007, Impact of Mortgage
Turmoil on California Communities ).
The scale of the problem is so large that many lenders begin to
retool their operations to handle the increase in borrower calls
seeking relief from rapidly rising interest rates. Several
lenders and servicers announced plans to identify, early,
borrowers who are in trouble or who may become in trouble with
the change in their interest rate. However, several press
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reports indicate that borrowers in trouble were not on the
receiving end of the help that was promised. Often borrowers
were on the phone, after hours of trying to find the appropriate
contact, with people at servicing entities that did not have the
expertise to handle their situation, or were not authorized to
make any decisions relative to the loan. Additionally, mortgage
securitization agreements have alot presented obstacles where
the loan servicer has a duty to maximize profits to bond holders
that reduces incentives to engage in modifications (More on this
issue in later sections).
Furthermore, the California Reinvestment Coalition conducted a
survey (available at
http://www.calreinvest.org/system/assets/92.pdf ) 33 of the
roughly 80 mortgage counseling agencies across the state which
are certified by the U.S. Department of Housing and Urban
Development to assist borrowers at risk of foreclosure. The
survey found that servicers were not offering modifications at
the level or rate that was being publicly represented.
Anecdotal evidence provided to the committee from some
counseling agencies finds that the average workout is taking
four months from initiation of a request for loan modification
to a final arrangement. In spite of this disconnect many
lenders and servicers have continually pledged to work with
troubled borrowers.
In September of 2007, the commissioner of DOC designed a
voluntary survey to query the loan modification efforts of loan
servicers. DFI also engaged in a survey of state chartered
banks and credit unions. Subsequent to this survey effort,
Governor Schwarzenegger announced an agreement with five of the
largest loan servicers to streamline the modification process.
In early December 2007, Treasury Secretary Henry Paulson
announced an agreement to streamline and establish standards for
loan modification and in some cases freezing the interest rate
on some loans for five years. This agreement
( http://www.americansecuritization.com/uploadedFiles/FinalASFStat
ementonStreamlinedServicingProcedures.pdf ) was reached in
conjunction with the American Securitization Forum (ASF), an
organization that represents companies that issue mortgage
backed securities, as well as investors, loan servicers and
rating agencies. The ASF modification parameters sorts subprime
borrowers whose rates are about to reset into three categories:
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1)Those who are current on their loans, have decent credit
scores and equity in their homes, and are likely to be
eligible for refinancing. The plan "encourages" servicers to
refinance these loans without prepayment penalties, but there
are no guarantees.
2)Those who are current on their loans but are not eligible to
refinance because of poor credit scores or zero to 3% equity
in their homes. This is the group that could be fast-tracked
into a five-year freeze at the loan's introductory rate, to
prevent their monthly payments from shooting up.
3)Those who are delinquent on their loans even at the
introductory rate and do not qualify for refinancing. This
group could very well end up in foreclosure or have to "short
sell" their home if no other option can be worked out.
The ASF plan also called for voluntary data collection by its
members on loan modifications and workout arrangements. A week
after the plan was announced an article appeared in American
Banker, A Murky Path to Loan-Mod Transparency that, among other
things, questioned the transparency of the plan with "any
reporting will be voluntary and may not present a complete
picture of modification efforts."
Securitized mortgages and loan modifications : As mentioned
previously, securitization of mortgage loans often can make
modification of a mortgage loan very difficult for both borrower
and servicer.
When difficulty arises in making payments on a securitized loan,
the borrower generally will not be dealing with the local banker
with whom there might be an established relationship. Instead,
the borrower will be dealing with a servicer. The servicer has
responsibilities defined in the securitization documents that
are substantially different than those of a lender. The servicer
and the trustee are responsible for taking actions that are in
the best interest of the investors who purchased portions of the
securitization. Protecting the investors means determining the
best alternative that would bring the maximum recovery on a
defaulted loan on a present-value basis. If the servicer
determines that a workout or modification of the loan achieves
that goal, then there is an alignment of the
investor/servicer/borrower relationship. However, if liquidation
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of the collateral (through a foreclosure or other means) results
in the highest net present value of cash flows, the servicer may
be bound by the terms of the securitization to pursue this
approach to the benefit of the investor despite the resulting
detriment to the borrower.
Even if a modification to the loan looks like the right
approach, other factors might limit the servicer's options. Most
securitizations are established as Real Estate Mortgage
Investment Conduits (REMICs). The REMIC structure provides
considerable tax benefits, (i.e., only the investors are subject
to tax, not the conduit itself) but also includes provisions
that could limit the flexibility of a servicer to modify a
borrower's loan terms in a proactive manner. To qualify for
tax-advantaged status, the pool of loans securitized in a REMIC
must generally be treated as a static pool, which usually
precludes modifying loans in the pool. An exception to this
general prohibition allows for modifications when default is
reasonably foreseeable. Once a determination is made that
default is reasonably foreseeable, most securitization
agreements provide significant flexibility for the servicer to
modify terms of the loan. This allows for modification of terms
when a loan has defaulted, but may prohibit changes to loans
that are current.
The Internal Revenue Service (IRS) leaves it to servicers to
determine what "reasonably foreseeable" means as it relates to
default, which makes these determinations dependent upon the
facts and circumstances of each mortgage.
Aside from the restraints imposed on modifications by the REMIC
structure, the personal service agreement (PSA) can also impose
barriers to loan modification. The language in each PSA is
different and each establishes the rules about how a particular
securitization operates or what needs to be done to change those
rules. Many PSAs contain more than 200 pages of dense legal
verbiage. The PSA provides a blueprint as to how cash flows and
losses are allocated and distributed to the various parties, and
establishes the rules that the servicer must abide by in
managing this critical function in the transaction. The PSA sets
forth whether and how a servicer can modify the underlying loans
in a securitization. The documents will also identify the other
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parties in the transaction who might have an important role in
this decision.
If the PSAs terms and conditions regarding modifications prove
to be overly restrictive, changing the PSA can be very difficult
and may require extraordinary actions, such as obtaining the
consent of two-thirds or all of the investors. In some deals,
the PSA is quite explicit in allowing the servicer flexibility
in modifying delinquent loans, while in other transactions the
language is vague.
The accounting rules also play an important role in the
decisions made by the various parties. Securitization is often
used as a balance sheet management strategy, whereby assets sold
into a securitization are removed from the seller's books, thus
freeing up resources such as capital. The implementation of the
ASF plan has opened up this question as to what accounting
principle is required for modified loans. Perhaps to for some a
relief, the SEC issued an advisory letter on January 8, 2008
that some ARMS could be modified without triggering rules
requiring those loans to be moved to their balance sheet. The
easing of this accounting risk may encourage some servicers to
increase their rates of loan modification.
Overall, the ability to securitize pools of such mortgages
certainly helped to make mortgage loans available and has
reduced the cost of credit for borrowers. However, the
securitization structure also has introduced a number of new
participants and complexities into the loan relationship, which
reduces flexibility for addressing the problems of distressed
borrowers.
Securitized subprime mortgage loans : In recent history, banks
funded mortgage loans through their customer's deposits with
mortgage credit dictated by the volume of bank deposits.
Furthermore, banks kept loans on their books. In the last two
decades, this model has changed with financial institutions
selling mortgage loans to other institutions or to investors,
with a mortgage market now dominated by non-depository
institutions, many of whom, are state licensed and regulated.
With this change in lending, many institutions set up loan
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servicing units to collect the mortgage payments and disburse
that money to the holder of the mortgage loan, whether that is
investors in mortgage backed securities or another financial
institutions. The servicer is typically compensated with fees
based on the volume of loans serviced. The servicer is generally
obligated to maximize the payments from the borrowers to the
issuer, and is responsible for handling delinquent loans and
foreclosures. The flow of capitol for subprime lending became
possible through the rise of Mortgage backed securities (MBSs).
MBSs are securities sold to investors like stocks and bonds.
MBS are created when originators or financial intermediaries
pool large volumes of mortgage loans and sell securities backed
by the monthly payments made by borrowers on the underlying
mortgage loans. When a homeowner, whose loan is secured in an
investment pool, makes his or her monthly payment, the payment
combined with the payments of other loans goes into the pool and
forms the basis of cash flows for investors. Investors choose
their position in mortgage pool based on priority of payments
from the pool in the event of a default. The pools typically
have several investment grade tranches, ranging from AAA ratings
down to subprime rated traunches that would absorb the most
losses in the event of default but offer the most return. Bonds
are also structured as tranches that collect only interest on
the underlying mortgage obligation, or trauches that received
payments from the principle payments on the mortgage.
Last year, the US mortgage market amounted to 10,000 billion
dollars, of which sub-prime mortgages represent 13% of the total
market and 9% of nominal gross domestic product (GDP) of the
United States. Most of these sub-prime mortgage loans are
granted by financial institutions that are not deposit-taking
entities and therefore are subject to lower regulatory and
supervision requirements compared with those for other banks and
deposit institutions. Once the customer uses the loan to buy a
house, the debt is noted in the balance sheet of the institution
granting the loan. However, in order to boost their business,
these institutions relieve themselves of these mortgages and
sell them to commercial banks or investment banks. The new
holders, in turn, package the mortgages in blocks and issue
securitization bonds (CDO, or Collateralized Debt Obligations)
using the sub-prime mortgages as security or collateral. That is
to say, based on subprime mortgages, they create a new kind of
asset that is more easily negotiable in the markets and it is
this bond that carries the risk in the operation. To the extent
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that the holders of the mortgages keep paying off their debt
every month, these funds are used to pay those who have bought
these bonds.
The MBS market is the largest fixed income market in the United
States. At the end of 2006, approximately $6.5 trillion of
securitize mortgage-related debt was outstanding compared to
$4.3 trillion of U.S. Treasury securities and $5.4 trillion of
corporate debt.
CDOs are a global phenomenon extending far beyond national
boundaries or domestic capitol controls. JPMorgan estimate that
$1.5 trillion in CDOs exist globally with $500 billion in
structured finance CDOs meaning those made up of bonds back by
subprime mortgages.
Amendments :
In order to clarify the author's intent and to fix some drafting
errors, the committee recommends the following amendments:
1)Clarify that the data being sought is on loans that are
serviced by licensees, not originated.
2)Clarify that the intent of the bill is to capture data
associated with mortgages for residential home loans.
3)Provide clarity by defining ambiguous terms.
4)Eliminate reference to "savings associations" as they no
longer exist in California.
5)Eliminate the current penalty provisions that are inconsistent
and unnecessarily punitive.
6)Change existing requirement for data to be made public in
aggregate form, and instead provide for data to be accessible
on a lender-specific basis.
7)Require reporting, in addition to whether a prepayment penalty
was waived, to also include whether any prepayment penalty was
paid in association with a loan modification.
8)Extend reporting period for delinquencies to those with 6
payments instead of 3.
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9)Include category on ARM reset volume similar to that currently
collected under DOC's voluntary program.
10)Require greater specificity in regard to loss mitigation
efforts that have closed versus those that are in process.
11)Add a data point to determine whether loans are securitized
or unsecuritized.
12)Provide DOC and DFI may accept data submitted voluntarily by
a federally chartered institution that services loans in
California.
REGISTERED SUPPORT / OPPOSITION :
Support
Aaron Myers, Attorney at Law
ByDesign Financial Solutions
California Coalition for Rural Housing
California Reinvestment Coalition (CRC)
Center for California Homeowner Association Law (CCHAL)
Center for Responsible Lending (CRL)
CHARO Community Development Corporation
Chrysalis Consulting Group, LLC
Civic Center Barrio Housing Corporation
Congressman Dennis Cardoza
Consumer Action
EARN
East Bay Asian Local Development Corporation
East Palo Alto Council of Tenants (EPACT)
Fair Housing Council of San Diego
Fair Housing Law Project (FHLP)
Fair Housing of Marin
Gray Panthers
Human Rights/Fair Housing Commission of the City and County of
Sacramento
Just Cause Oakland
Law Center for Families
Mission Community Financial Assistance
Nehemiah Community Reinvestment Fund
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Pacific Asian Consortium in Employment
Predatory Lending Clinic University of San Francisco School of
Law
Project Sentinel HUD Housing Counseling Programs
Public Interest Law Firm
Renaissance Entrepreneurship Center
Sacramento Mutual Housing Association
San Antonio Community Development Corporation
Sierra Planning & Housing Alliance, Inc.
Opposition
California Bankers Association
California Chamber of Commerce
California Financial Services Association
California Independent Bankers
California Mortgage Bankers Association
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081