BILL ANALYSIS ------------------------------------------------------------ |SENATE RULES COMMITTEE | SB 94| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ UNFINISHED BUSINESS Bill No: SB 94 Author: Calderon (D), et al Amended: 8/31/09 Vote: 27 - Urgency SENATE BANKING, FINANCE, AND INS. COMMITTEE : 7-2, 4/1/09 AYES: Calderon, Correa, Florez, Kehoe, Liu, Lowenthal, Padilla NOES: Runner, Cox NO VOTE RECORDED: Harman, Vacancy SENATE JUDICIARY COMMITTEE : 3-2, 4/21/09 AYES: Corbett, Florez, Leno NOES: Harman, Walters SENATE APPROPRIATIONS COMMITTEE : Senate Rule 28.8 SENATE FLOOR : 21-14, 5/21/09 AYES: Alquist, Calderon, Corbett, Correa, DeSaulnier, Ducheny, Florez, Hancock, Kehoe, Leno, Liu, Lowenthal, Negrete McLeod, Padilla, Pavley, Simitian, Steinberg, Wiggins, Wolk, Wright, Yee NOES: Aanestad, Ashburn, Benoit, Cogdill, Cox, Denham, Dutton, Hollingsworth, Huff, Maldonado, Runner, Strickland, Walters, Wyland NO VOTE RECORDED: Cedillo, Harman, Oropeza, Romero, Vacancy ASSEMBLY FLOOR : 62-10, 9/2/09 - See last page for vote SUBJECT : Mortgage loans CONTINUED SB 94 Page 2 SOURCE : Author DIGEST : This bill prohibits 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 borrower. Assembly Amendments (1) add a January 1, 2013 sunset date to specified actions that a licensed real estate broker may not take, specify an agent acting on that person's behalf, who offers loan modification or other loan forbearance services for a loan owned or serviced by that person from collecting principal, interest, or other charges under the terms of the loan, as specified, (2) redefine the term "advance fee," (3) clarify that the real estate law does not apply to a HUD-certified counseling organization or its employees, when the organization or its employees provides counseling services at no cost to a borrower, and (4) add an urgency clause. ANALYSIS : Existing law 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. Existing law 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. Existing law regulates the activities of foreclosure consultants, which are defined 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 specified services for compensation. Existing law exempts certain individuals and businesses from the foreclosure consultant law, including persons licensed to practice law, a licensed real estate broker, as SB 94 Page 3 specified, a licensed accountant, 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 licensed residential mortgage lenders or servicers. This bill: 1. Prohibits licensed real estate brokers, until January 1, 2013, who negotiate, attempt to negotiate, arrange, attempt to arrange, or otherwise offer to perform a mortgage loan modification or other form of mortgage loan forbearance for a fee or other compensation paid by the borrower in regards to mortgages and deeds of trust secured by residential real property containing four or fewer dwelling units to do any of the following: A. Claim, demand, charge, collect, or receive any compensation until after the licensee has fully performed each and every service the licensee contracted to perform or represented that he/she/it would perform. B. Take any wage assignment, any lien of any type on real or personal property, or any other security to secure the payment of compensation. C. Take any power of attorney from the borrower for any purpose. 2. Requires a licensed real estate broker who negotiates, attempts to negotiate, arranges, attempts to arrange or otherwise offers to perform a mortgage loan modification or other form of mortgage loan forbearance for a fee or other form of compensation paid by the borrower to provide the following notice to the borrower, as a separate statement, in not less than 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. SB 94 Page 4 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." Requires a translated copy of the above notice 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). 3. Provides that a violation of the above fee provision and notice requirements is a public offense, punishable by a fine not exceeding $10,000 for a natural person or $50,000 for a business entity, or by imprisonment in a county jail for up to one year, or by both a fine and imprisonment. Those penalties are cumulative to any other remedies or penalties provided by law. 4. Requires persons including attorneys (with no sunset date) who negotiates, attempts to negotiate, arranges, attempts to arrange, or otherwise offers to perform a mortgage loan modification or other form of mortgage loan forbearance for a fee or other compensation paid by the borrower to provide the following notice to the borrower in regards to mortgages and deeds of trust secured by residential real property containing four or fewer dwelling units, as a separate statement, in not less than 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." SB 94 Page 5 A. Requires a translated copy of the above notice 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). B. Provides that a violation of the above notice requirement is a public offense, punishable by a fine not exceeding $10,000 for a natural person or $50,000 for a corporation, or by imprisonment in a county jail for up to one year, or by both a fine and imprisonment. Those penalties are cumulative to any other remedies or penalties provided by law. C. Specifies that the requirement in #4 above does not apply to a person, or an agent acting on that person's behalf, offering loan modification or other loan forbearance services for a loan owned or serviced by that person. 5. Prohibits persons including attorneys, until January 1, 2013, who negotiates, attempts to negotiate, arranges, attempts to arrange, or otherwise offers to perform a mortgage loan modification or other form of mortgage loan forbearance for a fee or other compensation paid by the borrower to do any of the following: A. Claim, demand, charge, collect, or receive any compensation until after the licensee has fully performed each and every service the licensee contracted to perform or represented that he/she would perform. B. Take any wage assignment, any lien of any type on real or personal property, or any other security to secure the payment of compensation. C. Take any power of attorney from the borrower for any purpose. 6. Provides that a violation of the above fee requirement SB 94 Page 6 is a public offense, punishable by a fine not exceeding $10,000 for a natural person or $50,000 for a business entity, or by imprisonment in a county jail for up to one year, or by both a fine and imprisonment. Those penalties are cumulative to any other remedies or penalties provided by law. 7. Explains that nothing in #5 above precludes a person, or an agent acting on that person's behalf, who offers loan modification or other loan forbearance services for a loan owned or serviced by that person from collecting principal, interest, or other charges under the terms of the loan, as specified. 8. Redefines the term "advance fee" to mean a fee, regardless of the form, that is 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. 9. Clarifies that the real estate law does not apply to a HUD-certified counseling organization or its employees, when the organization or its employees provides counseling services at no cost to a borrower, and in connection with the modification of the terms of a loan secured directly or collaterally by a lien on residential real property containing four or fewer dwelling units. 10.Authorizes the Department of Real Estate (DRE) to enforce violations of the sections of the Civil Code relating to mortgages (Section 2920 et seq. of the Civil Code). 11.Prohibits any California Finance Lender Law licensee from making a materially false or misleading statement or representation to a borrower about the terms or conditions of that borrower's loan, when making or brokering the loan. 12.Makes technical changes to the foreclosure consultant law, to more clearly describe the entities that are exempt from that law. SB 94 Page 7 13.Contains an urgency clause, allowing this bill to take effect immediately upon enactment. Background On March 24, 2009, the Senate Judiciary Committee held an informational hearing that focused on the serious problem of foreclosure related scams facing delinquent homeowners. Many of those scams involve a promise to renegotiate a delinquent borrower's loan in exchange for a significant up-front fee. In arresting three members of a foreclosure fraud ring in Southern California last November, the Attorney General's office reported: The arrests came after an investigation into First Gov, also operating as Foreclosure Prevention Services, uncovered that the company was soliciting hundreds of homeowners with mail flyers offering to help them stop the foreclosure process on their homes. The scammers falsely told homeowners that they would renegotiate their mortgages, reduce monthly payments, and transfer any delinquent loan amounts to the renegotiated principle [sic]. The company demanded an up-front fee, ranging from $1,500 to $5,000, to participate in the loan-modification program. The company also told the victims to stop any mortgage payments or communications with their lender, claiming they would interfere with the company's effort to negotiate the loan modification. When victims complained that they were still receiving delinquency or foreclosure notices from their lenders, fraud-ring members told the victims that the mortgage loans had been renegotiated, but the lenders needed a "good faith" payment to secure the new accounts. Homeowners made payments to accounts under business names such as "Reinstatement Department" or "Resolution Department" that made it appear as if the payment had been applied toward the loan. Bank records indicate that more than $700,000 was stolen from homeowners who fell victim to this scheme. The Attorney General reported the arrest of two women last month who ran a similar foreclosure scam ring. The SB 94 Page 8 Attorney General noted: The two women operated a company called Foreclosure Freedom, which sent hundreds of fliers to Californians promising help in stopping the foreclosure of their homes. The fliers read: "FINAL NOTICE - Respond only to this notice immediately." This is similar to First Gov scam, which the Attorney General stopped late last year. When homeowners called the number on the flyer, they were told their mortgages could be renegotiated to a lower monthly payment. Victims, however, were required to pay thousands of dollars in up-front fees and were instructed not to contact their lenders. Victims were assured the company had "private lenders and specialists exclusive to their company who are very experienced in the options and methods used to renegotiate home loans," yet neither of the women who operated the company had real estate licenses, legal training, or any experience in the home mortgage market. Investigators found no evidence of any successful loan modifications and most of the victims were either forced into bankruptcy or lost their homes to foreclosure. FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes Local: Yes SUPPORT : (Verified 9/3/09) AARP American Federation of State, County and Municipal Employees ByDesign Financial Solutions California ACORN [Association of Community Organizations for Reform Now] California Association of Mortgage Brokers California Association of Realtors California Labor Federation California State Bar Center for Responsible Lending City and County of San Francisco District Attorney Kamala Harris Cities of Los Angeles and Oakland Coalition for Quality Credit Counseling SB 94 Page 9 Consumer Credit Counseling Service of Orange County Consumer Credit Counseling, Twin Cities Consumers Union Los Angeles County District Attorney's Office Novadebt OPPOSITION : (Verified 9/3/09) PARSA Law Group ARGUMENTS IN SUPPORT : The author's office notes that the bill has four provisions. The first two provisions regarding advance fees and multilingual borrower notification "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 forbearance with their lender." The third provision, a prohibition against loan modification fees by servicers, "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 author's office notes that the final provision would strengthen the California Finance Lenders Law by expressly banning false, deceptive, or misleading statements, representations, or omissions. ASSEMBLY FLOOR : AYES: Ammiano, Arambula, Beall, Bill Berryhill, Tom Berryhill, Block, Blumenfield, Brownley, Caballero, Charles Calderon, Carter, Chesbro, Conway, Davis, De La Torre, De Leon, Eng, Evans, Feuer, Fletcher, Fong, Fuentes, Fuller, Furutani, Gaines, Galgiani, Garrick, SB 94 Page 10 Gilmore, Hagman, Harkey, Hayashi, Hernandez, Hill, Huber, Huffman, Jeffries, Jones, Krekorian, Lieu, Bonnie Lowenthal, Ma, Mendoza, Monning, Nava, Niello, Nielsen, John A. Perez, V. Manuel Perez, Portantino, Ruskin, Salas, Saldana, Silva, Skinner, Solorio, Swanson, Torlakson, Torres, Torrico, Villines, Yamada, Bass NOES: Adams, Anderson, Blakeslee, DeVore, Knight, Miller, Nestande, Smyth, Audra Strickland, Tran NO VOTE RECORDED: Buchanan, Cook, Coto, Duvall, Emmerson, Hall, Logue, Vacancy JJA:mw 9/4/09 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END ****