BILL ANALYSIS
AB 180
Page 1
Date of Hearing: January 15, 2008
ASSEMBLY COMMITTEE ON JUDICIARY
Dave Jones, Chair
AB 180 (Bass) - As Amended: January 7, 2008
SUBJECT : MORTGAGES: FORECLOSURE CONSULTANTS
KEY ISSUE : Should existing regulations governing contracts and
related issues between homeowners and "Foreclsoure" Consultants"
be strenghtened, especially in light of the recent increase in
residential foreclosures?
SYNOPSIS
This is one of a number of measures that reflects concern with
the much publicized sub-prime lending "crisis" and the
corresponding explosion in residential foreclosures. This bill
seeks, in particular, to address the problem of so-called
"foreclosure consultants" who, having identified homeowners
facing foreclosure from the public record, purport to provide
various services to those homeowners. No doubt many of these
consultants provide valuable and legitimate information to
persons who may not be fully aware of their options, but there
have been many reports of persons taking advantage of distressed
homeowners and, in some cases, even acquiring title to homes by
means of fraud, deceit, or misrepresentation. The Legislature
has recognized this problem on other occasions, as in the Home
Equity Sales Contract Act (Civil Code Sections 1695 et seq.), as
well as related provisions dealing specifically with mortgage
foreclosures consultants (Civil Code Sections 2945 through
2945.11). This bill strengthens the latter provisions by
permitting the homeowner to cancel the contract at any time,
giving the homeowner more time to review the contract, and
requiring that the contract be written in the homeowner's
principal language if the owner's English is inadequate. In
addition, this bill, as currently in print, would prohibit the
foreclosure consultant from taking any power of attorney from
the homeowner for any purpose, and it would require the
consultant to register with the Department of Justice and obtain
and maintain a surety bond of $25,000. There is no registered
opposition at the time of this writing. This bill was
double-referred to Banking & Finance, which heard the bill one
day prior to this hearing. That Committee considered proposed
amendments offered by the Attorney General's office and passed
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the bill with the understanding that the author would take those
amendments in this Committee. Amendments proposed by the
Banking & Finance Committee and the Attorney General's office,
and an explanation of them, are discussed below. Due to time
constraints, these author's amendments will technically be taken
in the Appropriations Committee.
SUMMARY : Strengthens existing regulations governing contracts
made between homeowners and foreclosure consultants, as defined.
Specifically, this bill :
1)Allows a homeowner to cancel a contract with a foreclosure
consultant at any time by mail, facsimile, or electronic mail,
as specified.
2)Requires that the contract between the foreclosure consultant
and the homeowner be in the language principally used by the
owner if the owner's spoken or written English is inadequate.
3)Provides that the owner shall have at least 24 hours from the
time he or she receives the proposed contract to review the
contract terms. Further provides that the owner may consult
an attorney, tax advisor, or other advisor prior to signing
the contract.
4)Prohibits a foreclosure consultant from taking any power of
attorney from an owner for any purpose.
5)Requires the foreclosure consultant to register as a
foreclosure consultant with the Department of Justice and
obtain and maintain a surety bond in the amount of $25,000.
EXISTING LAW :
1)Provides generally, under the Home Equity Sales Contract Act,
various measures designed to protect homeowners facing
foreclosure from certain unscrupulous individuals who attempt
to acquire title to such homes by means of fraud, deceit,
misrepresentation, or other forms of unfair dealing. (Civil
Code Section 1695 et seq.)
2)Makes findings and declarations that homeowners whose
residences are in foreclosure are sometimes subject to fraud,
deception, harassment, and unfair dealing by foreclosure
consultants from the time that a Notice of Default is recorded
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until the time of the foreclosure sale and distribution of
funds. (Civil Code Section 2495(a).)
3)Defines "foreclosure consultant" as any person who, for
compensation, offers a homeowner any services relating to a
pending foreclosure, including, among other things,
representations that the consultant will stop or postpone the
foreclosure sale; obtain any forbearances from any beneficiary
or mortgagee; assist the owner to obtain a loan or advance of
funds; assist the owner in exercising or extending the right
of reinstatement; ameliorate damage caused to the homeowners
credit as a result of the foreclosure; or assist the owner in
obtaining any remaining proceeds from a foreclosure sale.
Excludes from the definition of "foreclosure consultant"
certain licensed professionals, such as attorneys or mortgage
lenders, engaged in the practice of their profession. (Civil
Code Section 2945.1(a).)
4)Allows the homeowner to cancel the contract with the
foreclosure consultant up to three business days after the
signing of the contract. (Civil Code Section 2945.2.)
5)Requires that every contract be in writing and fully disclose
the exact nature of the foreclosure consultant's services and
the total amount and terms of compensation. Requires further
than the contract be accompanied by a notice of the right of
cancellation. (Civil Code Section 2945.3.)
6)Requires that the contract shall be written in the same
language as principally used by the foreclosure consultant to
describe his or services or to negotiate the contract. (Civil
Code Section 2945.3 (c).)
7)Limits the manner, amount, and form of compensation that the
foreclosure consultant may claim or demand, and generally
prohibits the foreclosure consultant from acquiring any
interest in the residence subject to foreclosure. (Civil Code
Section 2945.4 (a)-(e).)
8)Prohibits a foreclosure consultant from taking any power of
attorney from an owner for any purpose, except to inspect
documents as provided by law.
FISCAL EFFECT : As currently in print this bill is keyed
fiscal.
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COMMENTS : According to the author, the recent prevalence of
sub-prime lending practices, including adjustable rate interest
loans, has led to record numbers of defaults and foreclosures.
Consequently, the increasing number of foreclosures has
increased the opportunities for so-called "foreclosure
consultants" who promise to assist homeowners facing foreclosure
in various ways. The author concedes that "many of these
consultants are legitimate and operate with the true intent of
helping the distressed property owner," but others, she claims,
"use this terrible time to defraud homeowners out of the very
home they are trying to save."
According to the author, "fraudulent consultants" often do the
following:
"Promise to negotiate with the homeowner's lender in exchange
for one month's mortgage payment. Typically, the crook takes
the money and runs;"
"Promise to save the residence from foreclosure if the
homeowner will turn over the title to him for a year or two.
During the interim, the homeowner can live in the house and
pay rent. But often, unknown to the homeowner, the house is
sold to an investor; the equity is stripped out, and the
homeowner is evicted;"
"Promise to save the residence from foreclosure by letting the
foreclosure 'rescuer' take over the mortgage payments."
"At present," the author claims, "there is very little oversight
of these consultants and the law provides for an insufficient
amount of consumer protection."
Background : The Legislature first enacted provisions
regulating foreclosure consultants in 1979, as part of the
broader Home Equity Sales Contract Act (Chapter 1029, Stats. of
1979). Although the Home Equity Sales Act proper (Civil Code
Sections 1695 et seq.) regulated the activities of the "equity
purchaser" - a person who buys properties facing foreclosure
prior to foreclosure sale - existing Civil Code Sections 2945
through 2945.11 regulate the activities of the "foreclosure
consultant," persons who do not buy the home but purport to
assist troubled homeowners. In both sections, the Legislature
made findings and declarations that too often homeowners facing
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foreclosure find themselves subject to machinations of
"unscrupulous" persons who take advantage of the homeowner
during a particularly stressful time. Moreover, many of the
more questionable equity purchasers and "consultants" targeted
what they believed to be the most vulnerable populations: the
elderly, the poor, and the financially unsophisticated.
Clearly exploitation of homeowners facing foreclosure is an old
problem, but according to the author the sub-prime lending and
foreclosure crisis is greatly expanding the opportunities for
exploitation. This bill seeks, in particular, to address the
problem of so-called "foreclosure consultants" who, having
identified homeowners facing foreclosure from the public record,
purport to provide various services to those homeowners. No
doubt many of these consultants provide valuable and legitimate
information to persons who may not be fully aware of their
options, but there have been many reports of persons taking
advantage of distressed homeowners. It appears that in many
cases of concern, the foreclosure consultant makes unrealistic
promises for exorbitant fees. In still other cases, the
foreclosure consultants have reportedly acquired title to homes
- even though existing law expressly forbids them from acquiring
any interest in the subject property. (Civil Code Section
2495.4 (c).)
Banking and Finance Committee Approved Amendments and Attorney
General Proposed Amendments : This bill was double-referred to
the Committee on Banking and Finance, which heard this bill the
day before it is being heard by this committee. The Banking and
Finance Committee analysis suggests a number of amendments. In
addition to the amendments suggested by Banking & Finance, the
author's office has been working with the Attorney General's
Office regarding other clarifying and technical amendments. The
following list of proposed author's amendments reflects a
combination of the Banking & Finance Committee suggested
amendments and the Attorney General's amendments.
Finally, because this is a fiscal bill that must be heard in the
Appropriations Committee, the author must technically take the
author amendments listed below in the Appropriations Committee.
Proposed Author Amendments:
Amendment 1
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On page 2, strike out line 7, and insert:
until midnight of the fifth "business day" as defined in
subdivision (e) of Section 1689.5 after the day on which the
owner signs a contract that complies with Section 2945.3.
[ Rationale : The bill in print permits the owner to cancel the
contract "at any time." It is not clear, however, that a
contract that allows one party to cancel at any time is an
enforceable contract. This amendment will increase the right of
cancellation from three days, as it is in existing law, to five
days.]
Amendment 2
On page 2, line 11, strike out "or other materials"
[Rationale : Clarifies that the owner's notice of cancellation
must be sent to an address, fax number, or e-mail address that
appears in the contract, rather than the any number or address
that appears in any "other materials." Amendment 6 below
stipulates that additional fax numbers and e-mail addresses to
which the owner can send a notification must be noted in the
contract.]
Amendment 3
On page 3, strike out lines 28 through 33, inclusive, and
insert:
principally used by the foreclosure consultant to describe the
foreclosure consultant's services or to negotiate the contract.
In addition, the foreclosure consultant shall provide the owner,
before the owner signs the contract, with a copy of a completed
contract written in any other language used in any communication
between the foreclosure consultant and the owner and in any
language that may be requested by the owner as provided in
subdivision (d). The
Amendment 4
On page 4, strike out lines 1 through 5, inclusive, and
insert:
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(d) If English is the language principally used by the
foreclosure consultant to describe the foreclosure consultant's
services or to negotiate the contract, the foreclosure
consultant shall notify the owner orally and in writing before
the owner signs the contract that the owner has the right to ask
for a completed copy of the contract in a language other than
English. If the owner so requests, the foreclosure consultant
shall provide the owner with a copy of a completed contract in
the language requested by the owner before the owner signs the
contract.
[ Rationale: Amendments 3 and 4 modify the bill's existing
requirement that the contract be written in the language
principally used by the owner. Instead, these amendments restore
the requirements in existing law that provides that the contract
be written in the language in which the contract was negotiated.
However, these amendments add an additional requirement that
the owner has a right to request a copy of the contract in a
language requested by the owner, and that the owner must be
informed of his or her right to make such a request.]
Amendment 5
On page 4, strike out lines 25 through 28, inclusive, and
insert:
obligation within five business days from the above date.
To cancel this transaction, mail or deliver a signed and
dated copy of this cancellation notice, or any other written
notice, or send a telegram
[Rationale : Brings content of form into conformity with bill
provisions.]
Amendment 6
On page 4, line 34, insert:
You may also cancel by sending a facsimile (fax) of a
signed and dated copy of this cancellation notice, or any other
written notice, to the following number:
______________________________________________
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(insert facsimile telephone number)
You may also cancel by sending an e-mail canceling this
transaction to the following e-mail address:
__________________________________________
(insert e-mail address)
Amendment 7
On page 5, strike out lines 8 through 40.
[Rationale : This strikes a provision of existing law that
requires the foreclosure consultant to provide the owner with a
notice relating to the owner's right to receive surplus funds
generated from a foreclosure sale. The Attorney General's
office recommended removing this section because it is already
the obligation of the trustee to inform the owner of this right.
This provision was apparently being used by some foreclosure
consultants to charge owners for another "service." But in
fact, this "service" is already required by law to be provided
by the trustee.]
Amendment 8
On page 6, line 39, after "2945.45." insert:
(a)
Amendment 9
On page 7, strike out lines 3 through 6, and insert:
(1) (A) The person registers with, and is issued and
maintains a certificate of registration by _________________.
(B) A person proposing to act as a foreclosure consultant
shall submit a completed registration form, along with
applicable fees, to ____________. The registration form shall
include the name, address, and telephone number of the
foreclosure consultant, identify all of the names, addresses,
telephone numbers, Internet websites, and e-mail addresses used
or proposed to be used in connection with acting as a
foreclosure consultant, a statement that the person has not been
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convicted of, or pled nolo contendere to, any crime involving
fraud, misrepresentation, dishonesty, or a violation of this
article, a statement that the person has not been liable under
any civil judgment for fraud, misrepresentation, or violations
of this article or Section 17200 or 17500 of the Business and
Professions Code, and any additional information required by the
agency maintaining the registry.
(C) The registration form shall be accompanied by a copy of
all print or electronic advertising or promotional material and
scripts of all telephonic or broadcast advertising or other
statements used or proposed to be used in connection with acting
as a foreclosure consultant.
(D) The registration form shall be accompanied by a copy of
the bond required under paragraph (2).
(E) The person files an update of any material change in
the information required by subparagraphs (B) and (C) with
_________________.
(F) The person pays any fee set by ______________ to defray
reasonable costs incurred in connection with that agency's
responsibilities under this article.
(2) The person maintains in force a surety bond issued by
surety insurer admitted to do business in this state. The bond
shall be in the amount of two hundred fifty thousand dollars
($250,000) in favor of the State of California for the benefit
of any person harmed by any violation of this article or by the
foreclosure consultant's failure to perform all services
described in the foreclosure consultant's contract with the
owner. A copy of the bond shall be filed with the Secretary of
State, with a copy provided to the Attorney General.
(b) _______________ may refuse to issue or may revoke a
certificate of registration because of any mistatement in the
registration form, because the foreclosure consultant has been
held liable for the violation of any law described in
subparagraph (B) of paragraph (1) of subdivision (a), or because
the foreclosure consultant has failed to maintain the bond
required under paragraph (2) of subdivision (a).
[ Rationale : The bill in print required the foreclosure
consultant to register with the Department of Justice. Because
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of questions raised by the Attorney General's office, this
amendment leaves it open as to which government entity would be
the most appropriate entity to maintain the registry. This
issue will be resolved as the bill moves forward.]
Remaining Issue: In addition to the above amendments, the
author's office has also been discussing the appropriate level
of the surety bond for foreclosure consultants. Existing law
requires the "representative" of the foreclosure consultant to
obtain a surety bond equal to twice the fair market value of the
subject property. The bill in print proposes a $25,000 surety
bond for the foreclosure consultant, which, as discussed in the
Banking & Finance Committee, seems exceedingly low. In
addition, there is also the question of who should obtain the
surety bond. The bill in print requires the surety bond of the
"foreclosure consultant." A proposed amendment by the Attorney
General, which is not included above, would have amended the
existing requirement as to the "representative" of the
foreclosure consultant, but was silent as to the foreclosure
consultant him- or herself. The author has committed to
clarifying this issue as the bill moves forward .
Pending Related Legislation . AB 1356 (Houston) would permit the
representative of an equity purchaser to demonstrate financial
responsibility by showing proof that he or she has professional
liability coverage equal to twice the value of the property that
is the subject of the contract or $1 million, whichever is less,
so long as the representative also possesses an "unrestricted"
real estate license, as defined. Existing law requires the
representative to possess a real estate license (but not
necessarily "unrestricted") and to provide proof of a surety
bond equal to twice the value of the subject property. This
bill would essentially give the representative the choice of
meeting the financial responsibility requirement by either the
surety bond or the professional liability coverage. To be heard
in this Committee today.
SB 926 (Perata, Corbett, and Machado) would address the
sub-prime lending crisis by modifying the foreclosure process to
require mortgage lenders and servicers to contact the borrowers
and explore mutually agreeable options that could avoid
foreclosure. The bill makes various findings and declarations
about the foreclosure crisis and its potential negative impact
on the California economy. To be heard in Senate Judiciary
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today.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
None on file
Analysis Prepared by : Thomas Clark / JUD. / (916) 319-2334