BILL ANALYSIS AB 1762 Page 1 Date of Hearing: March 23, 2010 ASSEMBLY COMMITTEE ON BUSINESS AND PROFESSIONS Mary Hayashi, Chair AB 1762 (Hayashi) - As Introduced: February 9, 2010 SUBJECT : Real estate. SUMMARY : Redefines "advance fee" to exclude fees charged or collected for advertising or promotion, for referral fees to other real estate brokers or salespersons in connection with mortgage loan origination, or fees associated with prepaid rental listings. EXISTING LAW : 1)Provides for the regulation and licensure of real estate brokers and salespersons by the Department of Real Estate (DRE). 2)Defines "advance fee" as a fee, regardless of the form, claimed, demanded, charged, received, or collected by a licensee from a principal before fully completing each and every service the licensee contracted to perform, or represented would be performed. FISCAL EFFECT : Unknown. This bill is keyed non-fiscal. COMMENTS : Purpose of this bill . According to the author's office, recent legislation [SB 94 (Calderon), Chapter 630, Statutes of 2009] "prohibited persons from charging advance fees to borrowers in connection with a loan modification. Loan modification companies were increasingly charging homeowners thousands of dollars in advance fees without following through on services. "However, following the enactment of SB 94, DRE began receiving numerous questions regarding the effect, scope, and applicability of the bill. For example, the advance fee has most commonly been an issue in loan modification or loan brokerage contracts, but can apply to other arrangements such as a Prepaid Rental Listing Service. Unfortunately, SB 94 can be broadly interpreted to include a real estate listing agreement or any contract involving progressive or 'fee for service' AB 1762 Page 2 payment, as a prohibited advance fee, even though the transactions are legitimate. AB 1762 resolves these unintended consequences." Background . SB 94 prohibited any person, including real estate licensees and attorneys, from demanding or collecting advance fees for loan modification or mortgage loan forbearance services affecting residential dwellings with four units or less. Prior to SB 94's enactment, attorneys and real estate brokers with DRE-approved agreements were able to collect advance fees. As of October 2009, DRE was investigating over 1,300 loan modification complaints. DRE issued nearly 400 desist and refrain orders and accusations against individuals for illegally collecting advance fees for the prior year. Most of these cases involved a person who fraudulently collected an advance fee in exchange for a promise that the homeowner would receive a sustainable loan modification. However, once the fee was paid, little or nothing was done to get the borrower's loan modified. Support . According to the sponsor, the California Association of Realtors, "The bill is needed to make it clear that so-called 'fee for service' or 'cafeteria' real estate services contracts are not advance fee arrangements requiring advance review. These non-traditional marketing arrangements will become more and more common as home buyers and sellers become increasingly sophisticated and the marketplace continues to put downward pressure on commission-based services?.It should be noted that this legislation does not change the special prohibition on advance charges for loan modification that was enacted last year, nor does it change the substance of any of the pre-existing exceptions to the rule such as tenant security deposits or pass through fees." The Orange County Association of Realtors state, "AB 1762 would clarify the law established through SB 94, to make clear that fee for service contracts, such as the listing agreement, do not trigger the advance fee requirements." Prior Legislation . SB 94 (Calderon), Chapter 630, Statutes of 2009, prohibited persons from charging advance fees to borrowers in connection with a loan modification, and requires those who wish to charge a fee for loan modification services to provide a notice to borrowers regarding other options available to the AB 1762 Page 3 borrower. AB 2384 (Kuykendall), Chapter 469, Statutes of 1996, excluded from the definition of "advance fee", the terms "security" and "screening fee." REGISTERED SUPPORT / OPPOSITION : Support California Association of Realtors (C.A.R.) (sponsor) Orange County Association of Realtors Opposition None on file. Analysis Prepared by : Joanna Gin / B. & P. / (916) 319-3301