BILL ANALYSIS ------------------------------------------------------------ |SENATE RULES COMMITTEE | AB 260| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ THIRD READING Bill No: AB 260 Author: Lieu (D), et al Amended: 9/2/09 in Senate Vote: 21 SENATE BANKING, FINANCE, AND INS. COMMITTEE : 7-3, 7/9/09 AYES: Calderon, Correa, Florez, Kehoe, Liu, Lowenthal, Padilla NOES: Cogdill, Cox, Runner NO VOTE RECORDED: Harman, Price SENATE JUDICIARY COMMITTEE : 3-2, 7/14/09 AYES: Corbett, Florez, Leno NOES: Harman, Walters SENATE APPROPRIATIONS COMMITTEE : 8-5, 8/27/09 AYES: Kehoe, Corbett, Hancock, Leno, Oropeza, Price, Wolk, Yee NOES: Cox, Denham, Runner, Walters, Wyland ASSEMBLY FLOOR : 50-28, 6/1/09 - See last page for vote SUBJECT : Lending SOURCE : CA ACORN California Labor Federation DIGEST : This bill enacts various provisions with respect to higher-priced mortgage loans, as defined, that are originated on or after July 1, 2010. Specifically, this CONTINUED AB 260 Page 2 bill among other things: (1) provides that a licensed person shall not make any false, deceptive, or misleading statement or representation; (2) requires a mortgage broker to receive the same compensation for providing mortgage brokerage services whether paid by a lender, borrower, or a third party; and (3) prohibits a mortgage broker from steering a borrower to accept a loan at higher cost, as specified. Senate Floor Amendments of 9/2/09 made a technical correction and avoided chaptering out issues with SB 94 (Calderon). ANALYSIS : Existing federal law provides for a number of laws that govern the rules under which mortgage lending, brokering, and servicing may be conducted. These federal laws include the Home Ownership and Equity Protection Act (HOEPA), Real Estate Settlement Procedures Act (RESPA), Truth in Lending Act (TILA), Home Mortgage Disclosure Act (HMDA), and regulations that interpret those acts (most notably federal Reserve Board Regulation C. which interprets HMDA, Federal Reserve Board Regulation Z, which interprets TILA, and U.S. Department of Housing and Urban Development (HUD) Regulation X, which interprets RESPA). Existing state law authorizes residential mortgage lending, brokering, and servicing under five different laws, including the Banking Law, Credit Union Law, California Finance Lenders Law (CFLL), California Residential Mortgage Lending ACT (CRMLA) , and Real Estate Law, and the regulations that interpret those laws. Existing state law generally regulates the entities that engage in mortgage lending, brokering, and servicing under three different departments, including the Department of Financial Institutions (DFI), Department of Corporations (DOC), and the Department of Real Estate (DRE). Existing state law, the Covered Loan Law, imposes prohibitions on persons who make or arrange a covered loan, and provides for administrative and civil penalties and civil damages for failure to comply with the Covered Loan Law. This bill enacts various restrictions with respect to AB 260 Page 3 higher-priced mortgage loans, including preventing licensed persons from: 1. Making or causing to be made any false, deceptive, or misleading statement or representation. 2. Recommending or encouraging default on an existing loan or other debt prior to and in connection with the closing or planned closing of a higher-priced mortgage loan, as specified. 3. Making a higher-priced mortgage loan that contains a provision for negative amortization. This bill provides that a mortgage broker, as specified: 1. Shall not steer, counsel, or direct any borrower to accept a loan at a higher cost than that for which the borrower could qualify based upon the loans offered by the persons with whom the broker regularly does business. 2. Shall not receive compensation, including a yield spread premium (YSP), fee, commission, or any other compensation, for arranging a higher-priced mortgage loan with a prepayment penalty that exceeds the compensation that the mortgage broker would otherwise receive for arranging that higher-priced mortgage loan without a prepayment penalty. 3. Shall receive the same compensation for providing mortgage brokerage services whether paid by the lender, borrower, or a third party. 4. Must disclose if they only arrange higher-priced mortgage loans. This bill applies the provisions of the bill to any licensed person who in bad faith attempts to avoid its application by dividing any loan transaction into separate parts, as specified, or any other subterfuge. This bill provides that a licensed person who makes a higher-priced mortgage loan and who, when acting in good AB 260 Page 4 faith, fails to comply with the above provisions, shall not be liable if the licensed person took specified steps either (1) within 90 days of the loan closing and prior to an action, or (2) within 120 days after the receipt of a complaint or discovery of a compliance failure that was unintentional and the result of a bona fide error. Those steps require the licensed person to: (a) notify the borrower of the compliance failure; (b) tender appropriate restitution; and (c) offer, at the borrower's option, to either make the higher-priced loan comply with the above requirements or change the terms of the loan so that the loan is no longer a higher priced loan, as specified. Existing federal law, under the Federal Reserve Board's Regulation Z effective October 1, 2009, prohibits prepayment penalties on higher-priced mortgage loans and HOEPA loans if loan payments can change during the first four years of the loan. For all other higher-priced loans and HOEPA loans whose payments do not change for the first four years, existing federal law will limit the prepayment penalty period to two years after loan consummation and require that a prepayment penalty may not be imposed if the same creditor or its affiliate refinances the loan. This bill provides that the maximum amount of a prepayment penalty that may be imposed in connection with a higher-priced mortgage loan shall not exceed two percent of the principal balance during the first 12 months or one percent of that balance during the second 12 months following loan consummation. Existing federal law, the Truth in Lending Act, generally prohibits unfair, abusive, or deceptive mortgage lending practices and requires certain disclosures. Existing state law prohibits several specific acts by persons licensed under the Real Estate Law, and allows the commissioner to suspend or revoke the license of any person who is found guilty of various acts. This bill provides that any licensed person who violates any provision of the division shall be deemed to have violated that person's licensing law. The licensing agency may also prohibit licensees from engaging in acts or practices that are unfair, deceptive, or designed to evade AB 260 Page 5 the laws of this state. This bill provides that a violation of Section 2923.1 of the Civil Code (codifying common law fiduciary duty), or a violation of the provisions in Regulation Z relating to prepayment penalties, in connection with a higher-priced mortgage loan, is a violation of this division. This bill provides that a prepayment penalty or yield spread premium provision of a higher-priced mortgage loan that violates the division shall be unenforceable. This bill states that the provisions of the division may be enforced only by the Attorney General or the licensed person's licensing agency. Any licensed person who willfully and knowingly violates any provision of the division shall be liable for a civil penalty of $10,000 per violation. This bill defines "higher-priced mortgage loan" to have the same meaning set forth in the Federal Reserve Board's Regulation Z. That definition, which takes effect October 1, 2009, provides that a "higher-priced mortgage loan" is a consumer credit transaction secured by the consumer's principal dwelling with an annual percentage rate that exceeds the average prime offer rate for a comparable transaction as of the date the interest rate is set by 1.5 or more percentage points for loans secured by a first lien on a dwelling, or by 3.5 or more percentage points for loans secured by a subordinate lien on a dwelling. The definition specifically excludes loans for initial home construction, temporary or "bridge" loans, reverse mortgages, and home equity lines of credit, as specified. This bill also defines licensed person, mortgage broker, and mortgage brokerage services. This bill provides that the provisions described in #1 to #3 apply to higher-priced mortgage loans originated on or after July 1, 2010. Existing case law generally provides that a mortgage loan broker owes a fiduciary duty of the highest good faith toward his/her principal and is charged with the duty of fullest disclosure of all material facts concerning the AB 260 Page 6 transaction that might affect the principal's decision. ( Barry v. Raskov (1991) 232 Cal.App.3d 447, 455; Wyatt v. Union Mortgage Co. (1979) 24 Cal.3d 773, 782.) Existing law, the Residential Mortgage Lending Act, requires a loan brokerage agreement to contain an explicit statement that, when acting as an agent for the borrower, the licensee owes that borrower a fiduciary duty of utmost care, honesty, and loyalty in the transaction, including the duty of full disclosure of all material facts. Existing law, the Covered Loan Law, additionally codifies the duty of a mortgage broker. This bill states that a mortgage broker providing mortgage brokerage services to a borrower is the fiduciary of the borrower, and any violation of the broker's fiduciary duties shall be a violation of the mortgage broker's license law. That fiduciary duty includes a requirement that the mortgage broker place the economic best interest of the borrower ahead of his/her own economic interest, and is owed to a borrower regardless of whether the broker is acting as an agent for any other party in the transaction. This bill, for purposes of that section, defines licensed person, mortgage broker, mortgage brokerage service, and residential mortgage loan. Those definitions limits application of the fiduciary duty provision to loans secured by residential real property that is improved by one to four units, and where the broker is the agent of the borrower or dual agent for the borrower and lender. Existing law, generally regulates the entities that engage in mortgage lending, brokering, and servicing under DFI, DOC, and DRE. This bill provides that a licensee's violation of any of the following federal acts or regulations is a violation of the licensee's licensing law: 1. The Real Estate Settlement Procedures Act. 2. The Truth in Lending Act, as amended. 3. The Home Ownership Equity Protection Act. 4. Any regulation promulgated under the above acts. Background AB 260 Page 7 California, as well as the nation, is facing an unprecedented threat to the economy and housing market due to increasing numbers of foreclosures caused by mortgage payment defaults. Although the crisis is the result of a culmination of various factors (including inflated property values and investor pressure for the sale of certain loan products) there has been an increased focus on instances of fraud and predatory practices that likely contributed to the crisis. With respect to the role of mortgage brokers, the Wall Street Journal, on May 30, 2007, reported: Brokers, most of whom are lightly regulated by state agencies, are involved in originating around 60 percent of all home loans, according to Wholesale Access, a research firm in Columbia, Md. The industry is under scrutiny in Washington and state capitols because rogue brokers have been accused of contributing to the spike in mortgage defaults and foreclosures by encouraging borrowers to take risky loans and by charging excessive fees. Often the broker's incentives run counter to the borrower's interests. Lenders pay [a yield spread premium (YSP)] to the broker when the borrower is paying a higher interest rate than the best he or she could qualify for, which makes the loan more profitable for the lender. The higher the rate, the higher the payment to the broker. (Some lenders put a ceiling on YSP.) Lenders may also pay brokers a bonus for loans with prepayment penalties, which make it expensive for borrowers to refinance within the first few years. Veto of AB 1830 (Lieu), of 2008 . With the exception of enactment dates, this bill is identical to AB 1830 (Lieu), of 2008, which was vetoed by the Governor. FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes Local: Yes According to the Senate Appropriations Committee: Fiscal Impact (in thousands) Major Provisions 2009-10 2010-11 AB 260 Page 8 2011-12 Fund Admin/enforcement approximately $400 to $600 annually Special* $700 $1,400 $1,400Special** $125 $ 250 $ 250Special*** *Corporations Fund **Real Estate Fund ***Financial Institutions Fund SUPPORT : (Verified 9/2/09) California Labor Federation (co-source) California ACORN (co-source) CalPirg California State Employees Association California Teamsters Public Affairs Council California Conference Board of Amalgamated Transit Union United Food and Commercial Workers Union, Western States Council Engineers and Scientists of California Unite Here! California Conference of Machinists Professional and Technical Engineers, Local 21 Strategic Committee of Public Employees, Laborers' International Union of North America Oakland City Council Numerous private citizens OPPOSITION : (Verified 9/2/09) California Association of Realtors California Mortgage Association California Association of Mortgage Brokers California Department of Corporations California Department of Real Estate ARGUMENTS IN SUPPORT : According to the author's office, briefly, the past few years have shown the consequences of a lending system that failed to effectively regulate and reign in the out of control subprime mortgage industry. The problem has, and continues to be, particularly acute in AB 260 Page 9 California, which accounts for one-third of the nations foreclosures. Lenders filed a record number of mortgage default notices against California homeowners during the first three months of the year. Most of these default notices are the result of bad loans that were made in 2005 and 2006. This bill directly addresses the poor lending practices that caused, and continue to cause, a record number of foreclosures in California. ARGUMENTS IN OPPOSITION : The California Association of Mortgage Brokers (CAMB), in opposition, applauds the intent of this bill but expresses concern that its flaws will nullify the bill's positive components. CAMB contends that: (1) the proposed statutory fiduciary duty's economic interest test is vague; (2) the anti-steering clause fails to provide guidance on the definition of "high cost;" and (3) the safe harbor provision cannot be utilized because it requires a broker to change loan terms after a loan has been funded. The California Association of Realtors (CAR), in opposition, contends that this bill is "obsolete before it can become effective" because federal law requires California to separately license, register, or regulate "all mortgage loan originators." ASSEMBLY FLOOR : AYES: Ammiano, Arambula, Beall, Blumenfield, Brownley, Buchanan, Caballero, Charles Calderon, Carter, Chesbro, Coto, Davis, De La Torre, De Leon, Eng, Evans, Feuer, Fong, Fuentes, Furutani, Galgiani, Hall, Hayashi, Hernandez, Hill, Huber, Huffman, Jones, Krekorian, Lieu, Bonnie Lowenthal, Ma, Mendoza, Monning, Nava, John A. Perez, V. Manuel Perez, Portantino, Price, Ruskin, Salas, Saldana, Skinner, Solorio, Swanson, Torlakson, Torres, Torrico, Yamada, Bass NOES: Adams, Anderson, Bill Berryhill, Tom Berryhill, Conway, Cook, DeVore, Duvall, Emmerson, Fletcher, Fuller, Gaines, Garrick, Gilmore, Hagman, Harkey, Jeffries, Knight, Logue, Miller, Nestande, Niello, Nielsen, Silva, Smyth, Audra Strickland, Tran, Villines NO VOTE RECORDED: Blakeslee, Block AB 260 Page 10 JJA:do 9/2/09 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END ****