BILL ANALYSIS
AB 764
Page 1
ASSEMBLY THIRD READING
AB 764 (Nava)
As Amended April 20, 2009
Majority vote
BANKING & FINANCE 8-3 BUSINESS & PROFESSIONS 6-3
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|Ayes:|Nava, Evans, Fong, |Ayes:|Hayashi, Hernandez, Nava, |
| |Fuentes, Mendoza, Ruskin, | | |
| |Swanson, Torres | |John A. Perez, Price, |
| | | |Ruskin |
|-----+--------------------------+-----+--------------------------|
|Nays:|Gaines, Anderson, Tran |Nays:|Emmerson, Niello, Smyth |
| | | | |
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APPROPRIATIONS 11-5
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|Ayes:|De Leon, Ammiano, Charles | | |
| |Calderon, Davis, Krekorian, | | |
| |Hall, John A. Perez, Price, | | |
| |Skinner, Solorio, Torlakson | | |
| | | | |
| | | | |
|-----+----------------------------+---+--------------------------|
|Nays:|Nielsen, Duvall, Harkey, | | |
| |Miller, Audra Strickland | | |
| | | | |
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SUMMARY : Prohibits any person from claiming, demanding,
charging, receiving, collecting or contracting for advance fees
for performing services for borrowers in connection with the
modification of the terms of a mortgage loan. Specifically,
this bill :
1)Prohibits any person from claiming, demanding, charging,
receiving, collecting or contracting for any fee for
performing services for borrowers in connection with the
modification of the terms of a mortgage loan, unless the
person is a licensed real estate broker.
2)Prohibits licensed real estate brokers from collecting advance
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fees for modifying the terms of a mortgage loan.
3)Requires the Commissioner of the California Department of Real
Estate (DRE) to determine the form of advance fee agreements
and loan modifications agreements and mandates the submission
of the advance fee agreement and loan modification agreement
materials prior to their use for approval.
4)Prohibits advertisements used in obtaining advance fee
agreements or loan modifications agreements from using words,
letters, initials, symbols, or other devices that are similar
to those used by a governmental agency or nonprofit entity.
5)Increases the fine for publishing advertisements discussed in
4) above without approval from the commissioner's approval
from $1,000 to $2,500.
6)Defines "loan modification agreement" as a contract by a
licensed real estate broker for the performance of services
for a borrower in connection with the modification of the
terms of a loan secured directly or collaterally by a lien on
single-family residential real property.
7)Authorizes the commissioner to adopt rules and regulations to
implement provisions related to loan modification agreements.
8)Exempts licensed residential mortgage lenders from the fee
prohibition.
9)Increases the fines from $10,000 to $20,000 for an individual
and $50,000 to $60,000 for a corporation.
EXISTING LAW :
1)Allows the commissioner to look at all materials used in
obtaining advance fee agreements, including but not limited to
the contract forms, letters or cards used to solicit
prospective sellers, and radio and television advertising be
submitted to him or her at least 10 calendar days before they
are used. [Business and Professions Code, Section 10085]
2)Allows the commissioner to determine the form of the advance
fee agreements, and all material used in soliciting
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prospective owners and sellers. [Business and Professions
Code, Section 10085]
3)Prohibits any person from claiming, demanding, charging,
receiving, collecting, or contracting for an advance fee for
soliciting lenders on behalf of borrowers or performing
services for borrowers in connection with loans to be secured
directly or collaterally by a lien on real property, before
the borrower becomes obligated to complete the loan or, for
performing any other activities for which a license is
required, unless the person is a licensed real estate.
[Business and Professions Code Section 10085.5]
FISCAL EFFECT : DRE indicates that, since it is already
approving most agreements used by mortgage brokers for loan
modifications services, new costs will be minor and absorbable.
Costs are supported by license fees charged to the industry.
COMMENTS :
1)Need for this bill : The Author believes, first and foremost,
all homeowners in fear of facing foreclosure can receive help
for free either through their lender or through an approved
United States (U.S.) Housing and Urban Development (HUD)
counseling agency. Homeowners do not need to pay a dime for a
loan modification. Unfortunately, many loan modification
companies are charging homeowners $1,000 to $4,000 for little
to no work. In most cases, companies ask for the money
upfront and lure homeowners in with false promises and
guarantees.
Currently, the DRE is investigating over 500 complaints of
fraudulent loan modification companies. DRE does have a
process in place to handle advance fees. For example, a
licensed real estate broker is supposed to fill out an advance
fee agreement for approval by the DRE before accepting advance
fees, and once a real estate broker receives an advance fee,
this money is put into a trust account. Although, a process
is in place for the acceptance of advance fees under the DRE,
the question remains, why is it ever necessary to collect an
advance fee for modifying a loan? First, most often, licensed
real estate brokers are collecting an advance fee without even
knowing if a loan can actually be modified. AB 764 will
eliminate this issue and require a licensed real estate broker
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to actually look at the complexities of the loan and then
determine whether or not it can be modified before taking any
money rather than going through the process of the trust
account. Licensed real estate brokers will actually get paid
for work completed and will most likely filter more cases
rather than accepting all cases and then determining if it is
possible. In addition, a number of loan modification
companies are advertising that the upfront fee is
non-refundable. AB 764 will eliminate this concern. Second,
President Barack Obama, among others, just announced that
consumers should not pay an upfront fee for modifying a loan.
AB 764 finds a middle ground for licensed real estate brokers
while eliminating the acceptance of any fees by anyone for
modifying a loan, licensed real estate brokers will still be
able to collect a fee with the approval from the DRE, based on
performance.
California continues to rate very high with the number of
foreclosures filed. This problem makes the state more
susceptible to foreclosure scams. Homeowners are desperate to
save their home and willing to go in further debt by paying an
advance fee to modify their home. California needs action now
to curb further abuse and prevent these scam artists from
finding ways to make money off a very sad situation.
2)Advertising : This bill contains provisions prohibiting
advertising from using words, letters, initials, symbols, or
other devices that are similar to those used by a governmental
agency or nonprofit entity. A main resource for these "loan
modification consultants" is through advertising which all too
often is misleading. A lot of the time the advertising looks
like it is government approved through the use of logos or
wording which lures homeowners into believing the company is
government sponsored. The Federal Trade Commission (FTC)
recently surveyed online and print advertising for mortgage
foreclosure rescue operations nationwide and identified
approximately 71 distinct companies running suspicious ads.
On the civil enforcement side, the FTC filed five new cases to
halt the illegal practices of individuals and companies
offering loan modification or foreclosure scams - including
one company that spent $9 million dollars on TV and radio ads
in less than one year. Recently, in hope of further
addressing fraudulent advertising, the Chair of the Assembly
Banking and Finance Committee wrote a letter to the Chair of
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the FTC, Jon Leibowitz asking him to investigate all
advertising related to loan modifications and also wrote a
letter to California Attorney General, Jerry Brown, asking
that he place an injunction on all loan modification
advertising. In addition, Attorney General Brown made an
announcement warning the public that scam artists have "sunk
to a new low" and have used the forged letterhead of major
lenders to con worried Californians into paying thousands of
dollars for non-existent loan modification services.
3)Advance fees vs. foreclosure consultants : There is an
assumption that current law already prohibits the acceptance
of advance fees in relation to loan modifications. This is
not the case. Homeowners are approached before they have
defaulted on their home and after a notice of default has been
recorded. Under existing law, foreclosure consultants can not
come into the picture until after a notice of default has been
recorded on a home. If there is an outstanding notice of
default, an advance fee cannot be accepted rather a person is
paid for the work completed. The law does not prohibit the
acceptance of an advance fee if there is no outstanding notice
of default. In addition, a foreclosure consultant does not
include any of the following: a person licensed to practice
law; a licensed prorater; a licensed real estate broker, as
specified; a licensed accountant; a person or his or her agent
acting under express authority of or written approval from HUD
or other federal department or agency; a person who holds or
is owed an obligation secured by a lien on any residence in
foreclosure, when the person performs services in connection
with that obligation or lien; a licensed finance lender, as
specified; a licensed depository institution; a licensed
escrow agent or other licensed person authorized to conduct a
title or escrow business; and, a licensed residential mortgage
lender or servicer.
Illegitimate loan modification companies have also evolved into
no-up front loan modification groups to get by the
restrictions that currently exist under the business and
professions code. Under existing law, licensed real estate
brokers do not need to go through DRE for approval if they do
not collect an advance fee. The bill addresses these concerns
by prohibiting anyone from collecting any fee unless you are a
licensed real estate broker but the bill does add a provision
allowing licensed real estate brokers to collect a fee for
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work completed if approved by DRE. Under AB 764, licensed
real estate brokers who want to remain in the loan
modification business will need to seek approval from DRE
before collecting a fee. Similar to the foreclosure
consultant law, licensed real estate brokers will only receive
money after work is accomplished. While this provision may
dry up the unnecessary profitable loan modification market and
discontinue the growing number of licensed real estate brokers
creating loan modification companies this most likely is not a
bad progression. As stated before, homeowners get loan
modification services free through a HUD approved counseling
agency or their lender. In reality, a homeowner has the same
capability and opportunity as a licensed real estate broker
when it comes to modifying their own home loan.
4)Other states and federal level action : Earlier this year,
President Obama's Administration launched the Making Home
Affordable Program in an effort to stabilize the housing
market and ensure responsible homeowners can afford to stay in
their homes by assisting eligible homeowners with refinancing
or modifying their mortgages. It is estimated the plan will
help up to seven to nine million families restructure or
refinance their mortgages to lower their monthly payments and
make their mortgages affordable now and in the future - an
opportunity for relief that unfortunately also brings greater
opportunity for criminal actors to prey upon consumers seeking
assistance.
On April 6, 2009, President Obama's Administration along with
the U.S. Department of the Treasury, the U.S. Department of
Justice (DOJ), HUD, the FTC, and the Attorney General of
Illinois announced an effort to coordinate information and
resources across agencies to maximize targeting and efficiency
in fraud investigations, alert financial institutions to
emerging schemes, step up enforcement actions and educate
consumers to help those in financial trouble avoid becoming
the victims of a loan modification or foreclosure rescue scam.
A key part of the announcement emphasized borrowers should
never pay any up-front fees for loan modifications.
Currently, the Federal Bureau of Investigation has targeted
2,100 companies suspected of defrauding troubles homeowners
with "rescue scams." This number is up 400% from the caseload
five years ago.
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Treasury's Financial Crimes Enforcement Network also conducted
recent studies on mortgage fraud that found that between July
2002 and June 2008, depository institutions filed nearly
180,000 mortgage fraud suspicious activity reports (SARs),
with those involved in mortgage fraud often involved in other
types of crime as well.
California Attorney General Jerry Brown has made a number of
arrests in regards to those involved in foreclosure scams.
The Illinois Attorney General announced the initiation of more
than 20 cases targeting mortgage fraud, including a case
against one company targeting a Latino community with radio
ads.
Illinois, Maryland, Minnesota along with California are carrying
legislation in hopes of stopping loan modification scams.
5)Related legislation : SB 94 (Calderon) would prohibit persons
from charging advance fees to borrowers in connection with the
modification of the terms of the borrower's loan, require
those who wish to charge a fee for loan modification services
(after performing them) to provide a specified notice to
borrowers regarding other options available to the borrower,
and prohibit servicers from imposing any interest or charge
for performing services for borrowers in connection with loan
modifications or other forms of loan forbearance of
forgiveness.
6)Previous legislation :
AB 1448 (Scott), Chapter 156, Statutes of 2008, increased the
maximum fine for an unlicensed person acting or advertising
themselves as a real estate broker or a real estate
salesperson from $10,000 to $20,000 and for an unlicensed
corporation from $50,000 to $60,000.
AB 180 (Bass), Chapter 278, Statutes of 2008, added protections
to the foreclosure consultant law, effective July 1, 2009.
These protections include a requirement for foreclosure
consultants to register with the California Department of
Justice and obtain a surety bond; increase the length of time
an owner may rescind a contract with a foreclosure consultant;
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and, require contracts with foreclosure consultants to be
translated into foreign languages in certain circumstances.
Analysis Prepared by : Kathleen O'Malley / B. & F. / (916)
319-3081
FN: 0000691