BILL ANALYSIS
AB 529
Page 1
Date of Hearing: January 14, 2008
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Ted Lieu, Chair
AB 529 (Torrico) - As Amended: December 13, 2007
SUBJECT : Mortgages: adjustable interest rates: notification.
SUMMARY : Requires a lender who provides a loan secured by
property improved by four or fewer residential units, with an
interest rate that is initially fixed and then becomes
adjustable, to notify the borrower of specified items of
information 180 days prior to an interest rate adjustment.
Specifically, this bill :
1)Includes specified items as:
a) Current interest rate and an estimate of the change
in the interest rate resulting from the adjustment;
b) Current loan payment and an estimate of the new
payment resulting from the adjustment in the interest
rate;
c) Options available to the borrower for modifying or
refinancing the terms of the existing loan; and,
d) Information on who the borrower may contact to seek
additional advice regarding their existing loan.
2)Requires the notification to be provided at least twice, once
by telephone call and once by mail.
EXISTING LAW :
State Law
1)"Adjustable-rate residential mortgage loan" means any loan or
credit sale which is primarily for personal, family, or
household purposes which bears interest at a rate subject to
change during the term of the loan, whether predetermined or
otherwise, and which is made upon the security of real
property containing not less than one nor more than four
dwelling units. [Civil Code (CC), Section 1921, all further
references are to the Civil Code]
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2)"Lender" means any person, association, corporation,
partnership, limited partnership, or other business entity
making, in any 12-month period, more than 10 loans or credit
sales upon the security of residential real property
containing not less than one nor more than four dwelling
units. [Section 1921]
3)An obligee may not accelerate the maturity date of the
principal and accrued interest on any loan secured by a
mortgage or deed of trust on residential real property solely
by reason of any one or more of the following transfers in the
title to the real property:
a) A transfer resulting from the death of an obligor
where the transfer is to the spouse who is also an
obligor;
b) A transfer by an obligor where the spouse becomes a
coowner of the property;
c) A transfer resulting from a decree of dissolution of
the marriage or legal separation or from a property
settlement agreement incidental to such a decree which
requires the obligor to continue to make the loan
payments by which a spouse who is an obligor becomes the
sole owner of the property;
d) A transfer by an obligor or obligors into an inter
vivos trust in which the obligor or obligors are
beneficiaries;
e) Such real property or any portion thereof is made
subject to a junior encumbrance or lien;
f) Any waiver of the provisions of this section by an
obligor is void and unenforceable and is contrary to
public policy;
g) For the purposes of this section, "residential real
property" means any real property which contains at least
one but not more than four housing units; or,
h) This act applies only to loans executed or
refinanced on or after January 1, 1976. [Section 2924.6]
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4)The term of the loan shall not be less than 29 years,
repayable in monthly installments amortized over a period of
not less than 30 years. At least 60 days prior to the due
date of a monthly installment to be revised due to a change in
the interest rate, notice shall be mailed to the borrower of
the following: [Section 1916.7]
a) The base index;
b) The most recently published index at the date of the
change in the rate;
c) The interest rate in effect as a result of the
change;
d) The amount of the unpaid principal balance;
e) If the interest scheduled to be paid on the due date
exceeds the amount of the installment, a statement to
that effect, including the amount of excess and extent of
borrower options as described in paragraph (4) of
subdivision (b);
f) The amount of the revised monthly installment;
g) The borrower's right to prepayment under paragraph
(8) of subdivision (b); or,
h) The address and telephone number of the office of
the lender to which inquiries may be made.
Federal Law :
1)Under the Truth in Lending Act (TILA) Regulation Z [Section
226.20(c)] an adjustment to the interest rate with or without
a corresponding adjustment to the payment in a variable-rate
transaction subject to 226.19(b) is an event requiring new
disclosures to the consumer. At least once each year during
which an interest rate adjustment is implemented without an
accompanying payment change, and at least 25, but no more than
120, calendar days before a payment at a new level is due, the
following disclosures, as applicable, must be delivered or
placed in the mail:
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a) The current and prior interest rates;
b) The index values upon which the current and prior
interest rates are based;
c) The extent to which the creditor has foregone any
increase in the interest rate;
d) The contractual effects of the adjustment, including
the payment due after the adjustment is made, and a
statement of the loan balance; and,
e) The payment, if different from that referred to in
paragraph (c)(4) of this section, that would be required
to fully amortize the loan at the new interest rate over
the remainder of the loan term
1)Provides that except where applicable by Federal law, state
laws that obstruct, impair, or condition a national bank's
ability to fully exercise its federally authorized real estate
lending powers do not apply to national banks. [12 C.F.R.
34.4(a)]
FISCAL EFFECT : None.
COMMENTS : The subprime crisis is severe and is not expected to
improve this year. This past quarter had the highest number of
foreclosures in American history. Estimates show there will be
3.5 million more foreclosures nationwide over the next two and a
half years.
RealtyTrac, which publishes the largest and most comprehensive
national database of foreclosure and bank-owned properties found
that California foreclosure activity decreased nearly 2 percent
in November but the state's foreclosure rate of one foreclosure
filing for every 258 households still ranked second highest
among the states. A total of 50,401 foreclosure filings were
reported in the state for November, more than triple the number
reported in October 2006.
According to a survey released in October, 2007, nearly half of
homeowners with adjustable rate mortgages (ARM) admit that they
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do not know how their ARMs adjust or reset, and nearly three-
quarters do not know how much their monthly mortgage payments
will increase when they do.
The survey, conducted Sept. 13-25, 2007 by Peter D. Hart
Research Associates for the American Federation of
Labor-Congress of Industrial Organizations (AFL-CIO), reveals
that ARM holders are generally not concerned about mortgage
payments until their rates reset. Then anxiety sets in as they
realize their payments have risen substantially. The use of ARMs
for home financing has grown dramatically over the past few
years and particularly among higher risk subprime borrowers.
The survey shows that many homeowners simply are not prepared
for the steep rise in mortgage payments that this market
inflicts on ARM holders.
Nearly four out of 10 homeowners in the poll say they wouldn't
know who to turn to for help if they had difficulty paying their
mortgage. Two in three (64%) of those whose rate has reset do
not recall their lender telling them how much more their payment
would increase, and 32% don't recall being told when their
interest rate would increase. Twenty-three percent of all
respondents said they had been late making a mortgage payment at
least once in the past 12 months. And that proportion jumps to
37% among those whose rate has increased.
Notification gives customers an opportunity to try to work out
loan modifications. As written, the bill covers both prime and
subprime borrowers. Although, statistics show the majority of
borrowers in default are subprime, those who are considered
prime borrowers are also at risk if in an ARM scheduled to
reset. The distinction between the two is not important when
related to the notification process of informing borrowers of
their soon to be inflated interest rate.
Although, several lenders already practice the act of informing
borrowers months in advance of a scheduled ARM reset, this bill
will encourage good practice across the board requiring any and
all lenders with customers with ARMs to notify them in a timely
manner. Allowing a customer the opportunity to "workout" their
loan with the lender will prevent future foreclosures.
In September, 2007, Department of Corporations (DOC),
Commissioner DuFauchard released a press release that stated,
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"Servicers should attempt to contact subprime (ARM)
borrowers prior to the loan reset to determine whether
the borrower can afford the new, higher payments, or
whether the higher payments create a reasonable risk of
default. If it is clear, after reviewing all the
available facts and circumstances, that the borrower
will be unable to make the new payment when the loan
resets, then the servicer may presume that default on
the mortgage is reasonably likely to occur. This
conclusion may permit the servicer to modify the loan."
In October, 2007, Countrywide announced a program to work on
identifying and contacting prime and subprime borrowers who are
current but unable to qualify for a refinance and are likely to
have difficulty affording an upcoming reset. Countrywide put in
place an early notification letter to borrowers by calling no
later than three months prior to the reset to determine their
financial circumstances and develop affordable solutions. As a
result of this initiative, Countrywide will successfully modify
$4.0 billion in loans for approximately 20,000 borrowers in an
existing ARMs through the end of 2008.
In November, 2007, Bay Area officials asked institutions such as
Bank of America, Wells Fargo, Citigroup and Washington Mutual to
agree to contact borrowers at risk of default, or who have
already defaulted on their loans, at least six months before
their interest rates are scheduled to go up.
Other companies such as JPMorgan notifies customers by mail and
phone, two to five months in advance when mortgage rates reset,
as well as, what their rates and monthly payments might be.
Only a few borrowers fully understand their mortgage options. A
2006 Federal Reserve study found that 20% of all ARM borrowers
did not know their original loan rate and 35% had no idea how
much their monthly payment could increase with each adjustment.
Forty-one percent didn't even know the maximum interest rate for
their loans.
In a 2007 study, the Federal Trade Commission (FTC) came to
similar conclusions:
1)Current mortgage cost disclosures failed to convey key
mortgage costs to many consumers.
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2)Both prime and subprime borrowers failed to understand key
loan terms when viewing the current disclosures, and both
benefited from improved disclosures.
3)Improved disclosures provided the greatest benefit for more
complex loans, where both prime and subprime borrowers had the
most difficulty understanding loan terms.
Notification should be part of every loan application, whether
subprime or prime. As the FTC found, better disclosures and
notification has the potential to help all borrowers, regardless
of their credit standing.
Preemptive Concern : This measure, as written, carries a
preemptive issue relative to TILA under Regulation Z. The
amendments suggested below will cure this issue by requiring
notification at 120 days, 60 days, and 30 days prior to an
interest rate adjustment. These time lines fall under 120 days
but more than 25 days allowed under Regulation Z.
Telephone Requirement : How will the lender be able to prove
they made the phone call? Should the lender leave a voicemail?
What if English is not the first language of the borrower? Is
the purpose of the phone call to let them know their interest
rate is increasing or to ask if they received a letter?
Suggested Amendments :
1)On page 2, line 2, strike out "A lender who" and insert, "If a
lender"
2)On page 2, line 4, after the comma insert, "the lender"
3)On page 2, line 5 strike out "180 days prior to an interest
rate adjustment" in line 6, strike out "of" and insert, ", at
the times specified in subdivision (b), of at least"
4)On page 2, line 9, strike out "and" and insert a comma
5)On Page 2, line 10, after "rate" insert, "and whether the
estimate of the new payment includes insurance and property
tax."
6)On page 2, lines 11-12, strike out, "Options available to the
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borrower for modifying or refinancing the terms of the
existing loan." and insert "The duration of the new payment
before the next interest rate adjustment. (4) The frequency of
future interest rate adjustments.
7)On page 2, line 13, strike out "(4)" and insert "(5)
8)On page 2, strike out line 14 and insert, "additional
assistance regarding modifying or refinancing their existing
loan."
9)On page 2, strike out lines 15 and 16, and insert, (b) The
lender shall provide the notification specified in subdivision
(a) on all of the following dates before an interest rate
adjustment takes effect: (1) One hundred twenty days before
the interest rate adjustment takes effect. (2) Sixty days
before the interest rate adjustment takes effect. (3) Thirty
days before the interest rate adjustment takes effect. (c) The
notification requirements of this subdivision shall be deemed
satisfied if the lender does the following: (A) delivers or
places in the mail, on or before the dates specified in
subdivision (b), the notice required by subdivision (a). The
notice shall be delivered or mailed to the borrower's last
known address, as contained in the lender's records.
Pending Legislation :
State :
SB 926 (Perata, Corbett & Machado) would require notification at
120, 90, and 45 days prior to any projected change in a mortgage
payment amount.
Federal :
H.R. 3705 (Sutton) Fair Disclosure for Homeowners Act would
amend TILA to require notice to consumers of an upcoming
adjustment or reset date with respect to hybrid adjustable rate
mortgages, and for other purposes.
REGISTERED SUPPORT / OPPOSITION :
Support
AFSCME
Center for Responsible Lending
Greenlining Institute
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Opposition
California Bankers Association
California Chamber of Commerce
California Financial Services Association
California Independent Bankers
California Mortgage Bankers Association
Analysis Prepared by : Kathleen O'Malley / B. & F. / (916)
319-3081