BILL ANALYSIS Ó
AB 1950
Page 1
Date of Hearing: April 25, 2012
ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT
Cameron Smyth, Chair
AB 1950 (Davis) - As Amended: April 19, 2012
SUBJECT : Prohibited business practices: mortgage loan
modifications.
SUMMARY : Expands protections related to mortgage fraud,
including the imposition of a new $25 recording fee for notices
of default used to fund real estate fraud prosecution.
Specifically, this bill :
1)Removes the January 1, 2013 sunset date on prohibitions
against unlawfully performing mortgage loan modification or
loan forbearance services, as specified, thereby making the
prohibition permanent.
2)Prohibits any person from engaging in the business of, acting
in the capacity of, or advertising or assuming to act as a
mortgage loan originator within this state without being
licensed or without having obtained a license endorsement.
3)Imposes a fee of $25 paid at the time of recording a notice of
default, as specified, which must be transmitted by the county
to the Department of Justice (Department), less the
administrative costs of transmittal.
4)Creates the State Real Estate Fraud Prosecution Account of the
General Fund, into which the new $25 fee must be deposited.
Moneys in the fund shall be available, upon appropriation by
the Legislature, for expenditure by the Department for the
purposes of determining, investigating, and prosecuting real
estate fraud crimes.
5)Extends the statute of limitations for misdemeanor crimes
related to mortgage fraud, as specified, from one year to
three years after discovery of the offense, or within three
years after the completion of the offense, whichever is later.
6)Provides that no reimbursement is required by this act because
the only costs that may be incurred by a local agency or
school district will be incurred because this act creates a
AB 1950
Page 2
new crime or infraction, eliminates a crime or infraction,
changes the penalty for a crime or infraction, or changes the
definition of a crime.
EXISTING LAW :
1)Provides that, in addition to other recording fees and upon
adoption of a resolution by the county board of supervisors, a
fee of up to $3 shall be paid at the time of recording of
specified real estate instruments, to be placed in the Real
Estate Fraud Prosecution Trust Fund and to be expended to fund
programs for the local police and prosecutors to prosecute
real estate fraud crimes.
2)Defines "real estate instrument" as a deed of trust, an
assignment of deed of trust, a reconveyance, a request for
notice, or a notice of default, and specifies that a "real
estate instrument" does not include any deed, instrument, or
writing subject to the imposition of a documentary transfer
tax, nor any document required to facilitate the transfer
subject to the documentary tax.
3)Requires that funds in the Real Estate Fraud Prosecution Trust
Fund be expended to fund programs to enhance the capacity of
local police and prosecutors to deter, investigate, and
prosecute real estate fraud crimes.
4)Specifies that funds, after deduction of the actual and
necessary administrative costs, be divided in the following
manner:
a) 60% of the funds shall be distributed to DAs; and,
b) 40% of the funds shall be distributed to local law
enforcement agencies within the county.
5)Prohibits any person from engaging in the business, acting in
the capacity of, advertising or assuming to act as a real
estate broker or a real estate salesman without first
obtaining a real estate license, as specified.
6)Provides that any person advertising or holding himself or
herself out as practicing or entitled to practice law or
otherwise practicing law who is not an active member of the
State Bar, or any person acting or advertising themselves as a
AB 1950
Page 3
real estate broker, real estate salesperson, or mortgage loan
originator without a license or license endorsement, is guilty
of a misdemeanor.
7)Requires that a prosecution for these offenses be commenced
within one year of the commission of the offense.
8)Requires any person, including a person licensed to practice
law, who performs a mortgage loan modification or other form
of mortgage loan forbearance for a fee or other compensation,
as specified, to provide a specified notice to the borrower
concerning 3rd parties arranging loan modifications.
9)Prohibits certain conduct by that person including, among
other things, demanding compensation before service is fully
performed, taking a lien on property or a wage assignment, or
taking a power of attorney from the borrower.
10)Prohibits, until January 1, 2013, any person who negotiates
or arranges residential mortgage loan modifications, as
specified, for a fee, from demanding or receiving
pre-performance compensation, as specified, or requiring
security as collateral or taking a power of attorney from the
borrower and makes a violation of that prohibition a
misdemeanor subject to specified fines.
11)Prohibits, until January 1, 2013, certain conduct by a real
estate licensee in connection with a mortgage loan
modification or forbearance, including demanding compensation
before service is fully performed, taking a lien on property
or wage assignment, or taking a power of attorney from the
borrower, and provides that a violation of those prohibitions
is a misdemeanor.
12) Requires, pursuant to the California Constitution,
the state to reimburse local agencies and school districts for
certain costs mandated by the state, and pursuant to statutory
provisions, establishes procedures for making that
reimbursement.
FISCAL EFFECT : Unknown. This bill is keyed fiscal and a state
mandate.
COMMENTS :
AB 1950
Page 4
1)This bill is intended to expand consumer protection related to
mortgage fraud by making permanent certain prohibitions on
mortgage loan origination, increasing the power of the
California Office of the Attorney General to prosecute alleged
fraud, and imposing a new $25 recordation fee on notices of
default to fund further anti-fraud efforts by the Attorney
General. This measure is sponsored by the Attorney General.
2)According to the author, "İb]ecause of the complicated nature
of the mortgage crisis, it is often a while before misconduct
is discovered, at which point there is little to no time left
in the statute of limitations for the Attorney General to
investigate. Furthermore, due to the inevitable budget cuts,
there is a need to insulate the Attorney General's Mortgage
Fraud Strike Force."
3)This bill contains a variety of different measures related to
enhancing consumer protection and increasing the Attorney
General's power to punish mortgage fraud. Those provisions
include removing the sunset date on prohibitions against
unlawful loan originations and modifications, a ban on acting
as an unlicensed mortgage loan originator, and expanding the
statute of limitations for prosecuting misdemeanor mortgage
fraud.
However, the most important provision for the purposes of this
Committee is the imposition of an additional fee of $25 for
recording a notice of default on real property with the county
recorder. That fee, less administrative costs, would be
deposited in a newly-created fund, the State Real Estate Fraud
Prosecution Account (the Prosecution Account). Subject to
appropriation by the Legislature, the Prosecution Account
would be available for expenditure by the Department of
Justice for the purpose of determining, investigating, and
prosecuting real estate fraud crimes, which would currently
include the work of the Mortgage Fraud Strike Force.
The Attorney General's Office estimates that 500,000 notices of
default will be issued in the next 12-18 months, meaning that
the fee created by this bill would raise roughly $12.5 million
per year, minus administrative costs.
4)According to the author, "İi]n May 2011, the Attorney
General's Office established a Mortgage Fraud Strike Force to
investigate and prosecute civil and criminal violations of
AB 1950
Page 5
California's mortgage and foreclosure laws. A widespread
investigation of misconduct is required, due to the depth and
breadth of the crisis, and the degree to which scam artists
have gravitated towards homeowners in distress. To be
effective, the Mortgage Fraud Strike Force will need resources
and adequate time to investigate and prepare prosecutions.
That is, misdemeanor violations of California laws that
protect homeowners in the foreclosure process are subject to a
one-year statute of limitations. For example, Civil Code
sections 2944.6 and 2944.7, which prohibit charging up-front
fees for loan modification services, a practice which has been
the hallmark of mortgage scams, are subject to only a one-year
statute of limitations. Additionally, the crimes of acting as
a real estate broker or salesperson without a license, acting
as a mortgage loan originator without a license, and
practicing law
without a license are all misdemeanor offenses that are subject
to a one-year statute of limitations. The Attorney General's
Office has successfully brought charges against and shut down
a number of mortgage-related scams. However, the one-year
limitations period has inhibited a number of prosecutions
because the foreclosure process is a protracted one, and
victims often do not discover the scam and refer their case to
the Attorney General before it is too late for prosecution."
According to the author, "İt]he Attorney General's Mortgage
Fraud Strike Force monitors and prosecutes violations at every
step of the mortgage process, from the origination of mortgage
loans, the servicing of those loans, the foreclosure process,
scams and other predatory behavior associated with mortgages,
and the marketing of mortgage-backed securities to the
investing public. Today, the Strike Force has over 40 members
and is simultaneously engaged in several critical mortgage
fraud investigations and prosecutions."
5)The authority to charge recording fees on real estate
instruments was established by SB 537 (Hughes), Chapter 942,
Statutes of 1995, which created the Real Estate Fraud
Prosecution Trust Fund and allowed up to a $2 fee to be
imposed upon the adoption of a resolution by the county board
of supervisors. The intent of the original legislation was to
fund prosecution of real estate fraud involving the largest
number of victims, with respect to those individuals whose
residences were in danger of, or were already in, foreclosure.
AB 1950
Page 6
6)A coalition of financial groups has indicated that they will
support the bill on the condition that the $25 recording fee
be deleted. With its removal, "the measure would no longer
impose a new TAX that will ultimately be paid for by housing
market participants already reeling from a market in crisis,
including financially distressed homeowners. It's notable
that not every notice of default results in a final
foreclosure. In fact, many foreclosure sales are avoided
through efforts like loan modifications, short sales and
deeds-in-lieu."
7)The County Recorders' Association of California (CRAC) opposes
the bill, writing "İc]urrent law already allows for a fee of
up to $3 to be imposed at the discretion of county Boards of
Supervisors on certain real-estate documents to fund the
prosecution of real-estate fraud. This local 'DA fraud fee'
is already being collected and spent on fraud prosecutions in
27 counties across the state. Recorders do not support an
additional $25 recording fee for duplicative efforts."
Furthermore, CRAC contends that the bill would impose "an
undue, and unfunded, burden on county recorders. There is
vague mention in the bill of counties - not Recorders -
deducting unspecified 'transmittal costs' from the amount to
be sent to the state. The legislative platform for İCRAC]
requires a direct cost recovery mechanism for Recorders if
additional tasks are imposed."
The Committee may wish to ask the author whether or not a
technical amendment to explicitly permit full administrative
cost recovery for county recorders would be appropriate.
8)This bill is part of a larger package of reform legislation
sponsored by Attorney General Harris named the California
Homeowner Bill of Rights. That package includes the following
bills:
a) AB 1602 (Eng, Feuer)/SB 1470 (Leno, Pavley and
Steinberg) (The Foreclosure Reduction Act of 2012) would
establish foreclosure guidelines and procedures for
mortgage loan servicers, and provides a framework for
borrowers seeking a modification of their mortgage loan.
AB 1950
Page 7
b) AB 2425 (Mitchell)/SB 1471 (DeSaulnier and Pavley) (Due
Process Reform) would require a mortgage servicer to
provide a delinquent borrower with a single point of
contact for the purpose of expediting loss mitigation
evaluation and activities. Additionally, this bill would
prohibit the use of robosigned documents in the foreclosure
process.
c) AB 2314 (Carter)/SB 1472 (Pavley) (Blight Prevention)
would prevent blight enforcement actions from being taken
against new purchasers of blighted property for 60 days,
require banks that release liens on foreclosed property to
inform local code enforcement agencies of the release, and
increase fines against owners of blighted property from
$1,000 per day to $5,000 per day.
a) AB 2610 (Skinner)/SB1473 (Hancock) (Tenant Protection)
would require purchasers of foreclosed homes to honor the
terms of existing leases and give tenants at least 90 days'
notice before commencing eviction proceedings.
b) AB 1763 (Davis)/SB 1474 (Hancock) (Attorney General
Grand Jury) would authorize the Attorney General to impanel
a special grand jury for the purposes of investigating and
indicting multi-jurisdictional financial crimes against the
state.
9)The mandatory fee increase imposed by this bill would result
in a taxpayer paying a higher tax within the meaning of
Section 3 of Article XIII A of the California Constitution,
and thus would require for passage the approval of 2/3 of the
membership of each house of the Legislature.
10) Support arguments : According to the author, "AB
1950 would?imposİe] a new $25 fee to be paid by servicers upon
the recording of the notice of default. The fee would be
deposited into a real estate fraud prosecution trust fund that
would support the Attorney General's efforts to deter,
investigate, and prosecute real estate fraud crimes."
Opposition arguments : According to a coalition of financial
groups, by removing the $25 fee, "the measure would no longer
impose a new TAX that will ultimately be paid for by housing
market participants already reeling from a market in crisis,
AB 1950
Page 8
including financially distressed homeowners."
11) This bill was double-referred to the Public Safety
Committee, where it was heard on
April 17, 2012, and approved on a 4-2 vote.
REGISTERED SUPPORT / OPPOSITION :
Support
Attorney General Kamala Harris İSPONSOR]
American Federation of State, County and Municipal Employees
(AFSCME)
California Nurses Association
California Professional Firefighters
PICO California
National Asian American Coalition
Support if Amended
California Bankers Association
California Financial Services Association
California Independent Bankers
California Land Title Association
California Mortgage Association
California Mortgage Bankers Association
United Trustees Association
Opposition
County Recorders Association of California
Analysis Prepared by : Hank Dempsey / L. GOV. / (916) 319-3958