BILL ANALYSIS
SENATE COMMITTEE ON BANKING, FINANCE,
AND INSURANCE
Senator Ronald Calderon, Chair
SB 94 (Calderon) Hearing Date: April 1, 2009
As Amended March 23, 2009
Fiscal: Yes
Urgency: No
SUMMARY 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, 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; and close a loophole in the California Finance
Lenders Law.
DIGEST
Existing law
1. Prohibits real estate licensees from charging a borrower an
advance fee in connection with a residential real estate loan,
before the borrower becomes obligated on the loan (Business and
Professions Code Section 10085.5);
2. Allows licensed real estate brokers to charge borrowers an
advance fee for helping negotiate a loan modification on a
borrower's behalf, as long as the broker's fee agreement has
been reviewed by the Department of Real Estate (DRE), and DRE
has no objections to it. DRE interprets existing law as
prohibiting brokers from collecting an advance fee once a notice
of default has been recorded, but neither the Real Estate Law,
nor the foreclosure consultant law, contains explicit language
in this regard;
3. Is silent regarding the fees that may be charged by licensed
banks, credit unions, finance lenders and brokers, and
residential mortgage lenders and servicers in connection with
loan modifications and other forms of mortgage loan forbearance
SB 94 (Calderon), Page 2
or forgiveness;
4. Provides for the foreclosure consultant law (Civil Code Section
2945 et seq.), which defines a foreclosure consultant as one who
makes any solicitation, representation, or offer to any owner of
a property on which a notice of default has been recorded, to
perform any of the following services for compensation:
a. Stop or postpone a foreclosure sale, or save the owner's
residence from foreclosure;
b. Obtain any forbearance from any beneficiary or
mortgagee;
c. Help the owner exercise his or her right of
reinstatement, or extend the period within which the owner
may reinstate his or her mortgage obligation;
d. Obtain any waiver of an acceleration clause in any
mortgage, as specified;
e. Help the owner obtain a loan or advance of funds;
f. Avoid or ameliorate the impairment of the owner's
credit, resulting from the recordation of a notice of default
or the conduct of a foreclosure sale;
g. Help the owner obtain remaining proceeds from a
foreclosure sale of the owner's residence;
5. Exempts the following individuals and businesses from the
foreclosure consultant law: 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 the
U.S. Department of Housing and Urban Development 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;
6. Makes it a violation of law for a foreclosure consultant to do
SB 94 (Calderon), Page 3
any of the following, and subjects violators to a fine of not
more than $10,000, imprisonment in the county jail or in state
prison for up to one year, or by both a fine and imprisonment:
a. Claim, demand, charge, collect, or receive any
compensation until after the foreclosure consultant has fully
performed each and every service he or she contracted to
perform or represented that he or she would perform;
b. Claim, demand, charge, collect, or receive any fee,
interest, or any other compensation for any reason which
exceeds 10% per annum of the amount of any loan the
foreclosure consultant may make to the property owner;
c. Take any wage assignment, any lien of any type on real
or personal property, or other security to secure the payment
of compensation;
d. Receive any consideration from any third party in
connection with services rendered to an owner, unless that
consideration is fully disclosed to the owner;
e. Acquire any interest in a residence in foreclosure from
an owner with whom the foreclosure consultant has contracted,
as specified;
f. Take any power of attorney from any owner for any
purpose;
g. Induce or attempt to induce any owner to enter into a
contract that is not in compliance with the foreclosure
consultant law;
h. Enter into an agreement to obtain the release of surplus
funds after a trustee's sale is conducted;
7. Pursuant to the foreclosure consultant law:
a. Gives borrowers a five day right to rescind a contract
with a foreclosure consultant, and requires foreclosure
consultants to provide copies of their contracts to their
potential customers in the language in which the contract is
negotiated, as specified;
b. Requires foreclosure consultants to register with the
California Department of Justice and maintain a surety bond
SB 94 (Calderon), Page 4
of $100,000, and punishes persons who violate this provision
with a fine of between $1,000 and $25,000, and by
imprisonment in the county jail for not more than one year,
or by both a fine and imprisonment;
8. Authorizes an owner to bring an action against a foreclosure
consultant for any violation of the foreclosure consultant law,
and provides that judgment shall be entered for actual damages,
reasonable attorneys' fees and costs, and appropriate equitable
relief. Also provides that a court may, in its discretion,
award exemplary damages, as specified, in addition to any other
award of actual damages;
9. Provides that some of the provisions of the foreclosure
consultant law described above are operative July 1, 2009; the
remainder are currently operative.
This bill
1. Would prohibit any natural person or entity who solicits
customers for the purpose of helping negotiate a mortgage
loan modification or other form of mortgage loan forbearance
for a fee or other compensation, or otherwise offers to
perform these services for a borrower for a fee or other
compensation, from doing any of the following:
a. Claiming, demanding, charging, collecting, or
receiving any compensation until after the person has
fully performed each and every service the person
contracted to perform or represented that he or she would
perform;
b. Taking any wage assignment, any lien of any type on
real or personal property, or any other security to
secure the payment of compensation;
c. Taking any power of attorney from the borrower for
any purpose;
2. Would require any natural person or entity who solicits
customers for the purpose of helping negotiate a mortgage
loan modification or other form of mortgage loan forbearance
for a fee or other form of compensation, or who otherwise
offers to perform these services for a borrower for a fee or
other form of compensation, to provide the following notice
to the borrower, as a separate statement, in not less than
SB 94 (Calderon), Page 5
14-point bold type, prior to entering into any fee agreement
with the borrower:
IT IS NOT NECESSARY TO PAY A THIRD PARTY TO ARRANGE FOR A LOAN
MODIFICATION OR OTHER FORM OF FORBEARANCE FROM YOUR MORTGAGE
LENDER OR SERVICER. YOU MAY CALL YOUR LENDER DIRECTLY TO
ASK FOR A CHANGE IN YOUR LOAN TERMS. NONPROFIT HOUSING
COUNSELING AGENCIES ALSO OFFER THESE AND OTHER FORMS OF
BORROWER ASSISTANCE FREE OF CHARGE. A LIST OF NONPROFIT
HOUSING COUNSELING AGENCIES APPROVED BY THE UNITED STATES
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT (HUD) IS
AVAILABLE FROM YOUR LOCAL HUD OFFICE OR BY VISITING
WWW.HUD.GOV.
3. Would require a translated copy of the notice shown
immediately above to be provided to a borrower, if the loan
modification or other mortgage loan forbearance services are
offered to or negotiated with the borrower in one of the
foreign languages set forth in Section 1632 of the Civil
Code (Spanish, Korean, Vietnamese, Tagalog, and Chinese).
4. Would authorize DRE to enforce violations of the sections
of the Civil Code relating to mortgages (Civil Code Section
2920 et seq.) by real estate licensees, and would provide
that a violation of the advance fee provisions described in
Number 1 above by a real estate licensee is a public
offense, punishable by a fine not exceeding $10,000 for an
individual or $50,000 for a corporation, or by imprisonment
in a county jail for up to six months, or by both a fine and
imprisonment;
5. Would make technical changes to the foreclosure consultant
law, to more clearly describe the entities that are exempt
from that law;
6. Would provide, under the Banking Law, Credit Union Law,
California Finance Lenders Law, and California Residential
Mortgage Lending Act, that no licensee shall directly or
indirectly charge, contract for, or receive any interest or
charge of any nature for performing services for a borrower
in connection with either of the following:
a. The actual or attempted modification of the terms of
a residential mortgage loan;
b. The actual or attempted negotiation of another form
SB 94 (Calderon), Page 6
of forbearance or forgiveness in connection with that
loan;
7. Would provide that, notwithstanding Number 6 above, no
bank, credit union, finance lender, finance broker,
residential mortgage lender, or residential mortgage
servicer licensee is prohibited from doing either of the
following:
a. Collecting interest or other charges pursuant to the
terms of a loan that has been modified;
b. Accepting payment from a federal agency in
connection with the federal Homeowner Affordability and
Stability Plan or other federal plan intended to help
reduce foreclosures;
8. Would prohibit any California Finance Lender Law licensee
from making a false, deceptive, or misleading statement,
representation, or omission in connection with his or her
lending or brokering activities.
COMMENTS
1. Purpose of the bill To prohibit the charging of advance
fees by persons offering to help a borrower negotiate a loan
modification or other form of mortgage loan forbearance or
forgiveness from the institution servicing that borrower's
residential mortgage loan, educate borrowers who are being
solicited to pay for loan modification services about
no-cost options available to them, prohibit lenders and
servicers from charging borrowers in connection with loan
modifications and other forms of mortgage loan forbearance
and forgiveness, and strengthen the California Finance
Lenders Law by prohibiting false, deceptive, and misleading
statements, representations, or omissions.
2. Background SB 94 has four provisions, discussed below.
Ban on Advance Fees, Multilingual Borrower Notification: The
first two provisions of the bill are a response to a cottage
industry that has sprung up to exploit borrowers who are
having trouble affording their mortgages, and are facing
default, and possible foreclosure, if they are unable to
negotiate a loan modification or other form of mortgage loan
SB 94 (Calderon), Page 7
forbearance with their lender.
Although some loan modification consulting companies are
reportedly acting in a reputable manner and providing
significant value to their customers, there is significant
anecdotal evidence that others are preying on borrowers'
fears of losing their homes and their ignorance of the
options available to them, and charging these borrowers fees
(often up-front, nonrefundable fees) for services the
borrowers could obtain elsewhere, free-of charge.
Unscrupulous individuals and businesses seeking to take
advantage of troubled borrowers can be found outside every
mortgage fair, trying to drum up business. Their
advertisements abound in neighborhoods that have been
hardest hit by foreclosure.
California does have a law regulating the activities of
foreclosure consultants, but that law contains numerous
exemptions from its requirements, including exemptions for
legal professionals, real estate brokers, and several types
of lenders. SB 94 closes loopholes in existing law, which
have allowed an unscrupulous loan modification industry to
spring up. It does so by prohibiting individuals and
businesses from accepting up-front fees for helping
negotiate a loan modification or other form of loan
forbearance or forgiveness on a borrower's behalf. This
prohibition is intended to prevent persons from charging
borrowers an up-front fee, providing limited services that
fail to help the borrower, and leaving the borrower worse
off than before he or she engaged the services of a loan
modification consultant.
Under the provisions of the bill, persons exempt from the
foreclosure consultant law would be allowed to help
negotiate loan modifications on a borrower's behalf for a
fee, paid after services were rendered. However, every
person that offers to help negotiate a loan modification for
a borrower, for a fee, would have to inform that borrower
that he or she may obtain the same or similar services, free
of charge, from a non-profit housing counseling agency. SB
94 is intended to ensure that borrowers who agree to pay
someone for help in negotiating a loan modification on their
behalf fully understand that similar services are available
elsewhere, free of charge. The bill contains a translation
requirement to help achieve this intent.
SB 94 (Calderon), Page 8
Prohibition Against Loan Modification Fees By Servicers: The
third provision of SB 94 addresses two issues - first,
whether servicers may charge borrowers fees in connection
with the modification of loans they are servicing (they may
not under the provisions of this bill), and second, whether
servicers may act as foreclosure consultants, and offer to
help borrowers negotiate loan modifications or other forms
of mortgage loan forbearance or forgiveness from other
servicers (they may act in this capacity under the
provisions of the bill, but may not charge for these
services).
The logic behind this provision is that borrowers who are
having trouble affording their loans are unlikely to be able
to shoulder fees imposed on them by servicers in connection
with a loan modification. This provision of SB 94 is
consistent with the recently-announced, federal Home
Affordable Modification plan. Under Home Affordable
Modification plan guidelines, no modification fees or other
charges may be imposed on a borrower who participates in the
Home Affordable Modification program. Unpaid late fees owed
by the borrower must be waived. Modification fees and
charges incurred by servicers (such as notary fees, property
valuation fees, and other required fees) must be reimbursed
by investors. Servicers must cover the cost of credit
reports pulled in connection with Home Affordable loan
modifications.
Although SB 94 does prohibit servicers from collecting fees for
the purpose of, or in connection with the modification of a
borrower's loan, the bill does not prohibit financial
institutions from collecting interest or other charges by
servicing modified loans, nor from collecting incentive
payments from the federal government through participation
in the Home Affordable Modification plan or another, similar
federal plan designed to encourage loan modifications and
prevent foreclosures. SB 94 also allows financial
institutions to charge borrowers to refinance the borrowers'
loans.
Strengthening the California Finance Lenders Law: The final
provision of SB 94 closes what many consider to be a
loophole in the CFLL. Although that law bans false,
deceptive, or misleading advertising, it does not expressly
forbid false, deceptive, or misleading statements,
representations, or omissions. SB 94 would expressly ban
SB 94 (Calderon), Page 9
these inappropriate practices.
3. Support . ByDesign Financial Solutions, the Coalition for
Quality Credit Counseling, the Consumer Credit Counseling
Service of Orange County, Novadebt, and Consumer Credit
Counseling Service, Twin Cities, all non-profit credit and
housing counseling agencies, support SB 94, because of its
prohibition against advance fees and its requirement that
borrowers be informed of their no-cost options for obtaining
loan modification assistance. All of these organizations
write that their counselors have seen the damage done to
homeowners by real estate licensees and mortgage lenders,
who charge large, up-front fees to homeowners for services
that could be provided for free through a non-profit housing
counseling organization. According to these agencies, "the
elimination of any pre-performance compensation and
requirement of the notification to the borrower that
counseling and other services are available free of charge
from HUD counseling agencies would help to protect
vulnerable borrowers."
Consumers Union (CU) supports the bill as an example of
legislation that gets to the heart of many of the problems
plaguing California at the present time. In its letter of
support, CU notes that California has the highest number of
foreclosures in the country, a problem which provides a huge
market opportunity for new businesses that purport to serve
the needs of the hundreds of thousands of Californians in
some stage of the foreclosure process. CU has heard from
consumers, who report being barraged with mailed offers and
telephone calls from individuals referencing the
availability of "new government programs" and soliciting the
payment of an up-front fee to help the consumer access the
programs and/or engage in a direct negotiation with the loan
servicer on behalf of the consumer. The consumers receiving
these solicitations are desperate, and thus extremely
susceptible to falling for offers of help that may never
deliver any value.
According to CU, "SB 94 gets to the heart of the matter by
addressing the practice of demanding an advance fee in
connection with offering loan modification or foreclosure
rescue services?To address other elements of the problem, SB
94 prohibits finance lenders and brokers, residential
mortgage lenders and servicers, [and] state-chartered
commercial banks and credit unions, from contracting for,
SB 94 (Calderon), Page 10
receiving any interest or charge for performing loan
modification or foreclosure rescue services for a borrower
where the loan is secured by a lien on single family
residential real property. SB 94 does not prohibit the
ability of individuals to offer legitimate services."
CU also directly contradicts the position of the California
Association of Realtors (see below), by asserting that DRE's
current practice of reviewing loan modification advance fee
agreements submitted by real estate licensees "is simply not
enough to provide the level of protection the public needs
against this growing problem."
The California Reinvestment Coalition and several of its member
organizations would support SB 94, if it were amended to
prohibit fee-for-service loan modification services
altogether (i.e., if the ban on advance fees was extended to
a ban on all fees). Short of that, these groups would like
a list of amendments, including the following: 1) remove
the exemptions in the foreclosure consultant law for
attorneys, real estate licensees, and finance lenders; 2)
outlaw the process by which DRE approves fee agreements, 3)
provide borrowers who are sold services in violation of the
bill a private right of action, including recovery of
attorney's fees, and subject violators to a fine of between
$1,000 and $25,000, imprisonment for up to one year, or
both; 4) require detailed data reporting for each licensee
that shows how many fee-for-service loan modification
contracts were entered into, how much was charged, and what
result was obtained; and 5) require DRE to report to the
Legislature every three months on these data, and on the
number of licensees that have violated the provisions of the
bill, and the enforcement actions taken against them.
4. Opposition The California Association of Realtors (CAR)
is opposed to the bill, because it prohibits the collection
of advance fees by real estate licensees. CAR suggests that
if a broker concludes it is appropriate to include an
advance fee in his or her business model, submits its fee
contract to DRE, receives approval from DRE for its
contract, and abides by all of the disclosures and
protections in SB 94, the advance fee contract ought to be
allowed.
5. Prior Legislation
SB 94 (Calderon), Page 11
a. 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 Department of Justice and obtain a surety
bond, increase the length of time an owner may rescind
a contract with a foreclosure consultant, and require
contracts with foreclosure consultants to be
translated into foreign languages in certain
circumstances.
POSITIONS
Support
ByDesign Financial Solutions
Coalition for Quality Credit Counseling
Consumer Credit Counseling Service of Orange County
Consumer Credit Counseling Service, Twin Cities
Consumers Union
Los Angeles County District Attorney's Office
Novadebt
Oppose
California Association of Realtors
Consultant: Eileen Newhall (916) 651-4102