BILL ANALYSIS
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|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,
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
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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
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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
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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
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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
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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
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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
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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
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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
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JJA:do 9/2/09 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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