BILL ANALYSIS                                                                                                                                                                                                    


          |SENATE RULES COMMITTEE            |                   AB 260|
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                                 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,  
          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,  
          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  


                                                                AB 260

          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  

           Senate Floor Amendments  of 9/2/09 made a technical  
          correction and avoided chaptering out issues with SB 94  

           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  

          This bill enacts various restrictions with respect to  


                                                                AB 260

          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  

          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

          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

          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  

          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

          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.



                                                               AB 260

          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  

           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

           2011-12   Fund  

          Admin/enforcement                            approximately  
          $400 to $600 annually                        Special*
                              $700      $1,400    $1,400Special**
                              $125      $  250         $   

          *Corporations Fund
          **Real Estate Fund
          ***Financial Institutions Fund

           SUPPORT  :   (Verified  9/2/09)

          California Labor Federation (co-source) 
          California ACORN (co-source)
          California State Employees Association
          California Teamsters Public Affairs Council
          California Conference Board of Amalgamated Transit Union
          United Food and Commercial Workers Union, Western States  
          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

          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

          JJA:do  9/2/09   Senate Floor Analyses 

                         SUPPORT/OPPOSITION:  SEE ABOVE

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