BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  SB 980
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          Date of Hearing:   June 26, 2012

              ASSEMBLY COMMITTEE ON BUSINESS, PROFESSIONS AND CONSUMER 
                                     PROTECTION
                                 Mary Hayashi, Chair
                  SB 980 (Vargas) - As Introduced:  January 23, 2012

           SENATE VOTE  :   39-0
           
          SUBJECT  :   Mortgage loans.

           SUMMARY  :   Extends the sunset date on the state's prohibition 
          against the collection of up-front fees in connection with 
          mortgage loan modifications and other forms of mortgage loan 
          forbearance, from January 1, 2013, to January 1, 2017.

           EXISTING LAW  

          1)Provides that, notwithstanding any other provision of law, it 
            is unlawful for any person 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 person has fully performed 
               each and every service the person contracted to perform or 
               represented that he, she, or it would perform;

             b)   Take any wage assignment, any lien of any type on real 
               or personal property, or other security to secure the 
               payment of compensation; and,

             c)   Take any power of attorney from the borrower for any 
               purpose.

          2)Applies the prohibition described in 1), above, only to 
            mortgages and deeds of trust secured by residential real 
            property containing four or fewer dwelling units, and applies 
            the prohibition only until January 1, 2013.

          3)Provides that a violation of the prohibition described in 1), 
            above, is a misdemeanor, punishable by a fine not exceeding 
            $10,000 ($50,000 if the party violating the law is a 








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            corporation), imprisonment in a county jail for up to one 
            year, or by both a fine and imprisonment, and provides that 
            those penalties are cumulative to any other remedies or 
            penalties provided by law.

           FISCAL EFFECT  :   Unknown

           COMMENTS  :   

           Purpose of this bill  .  According to the author, "SB 980 proposes 
          to extend the sunset date on the provisions of a 2009 urgency 
          bill (SB 94, Calderon, Chapter 630, Statutes of 2009), which 
          cracked down against unscrupulous individuals and businesses who 
          were preying on troubled borrowers by charging them up-front, 
          often nonrefundable, fees under the guise of helping the 
          borrowers obtain loan modifications or other forms of mortgage 
          forbearance from their lenders.  

          "All too frequently, these fees were charged for services that 
          were never provided, leaving thousands of troubled borrowers 
          worse off than they had been before seeking help.  SB 94 
          addressed that problem, by prohibiting those who sought to 
          charge borrowers a fee for helping negotiate a loan modification 
          or other form of mortgage loan forbearance from collecting their 
          fee until they performed all agreed-upon services.  SB 94 also 
          required those who sought to charge for these services to 
          clearly inform their potential customers that similar services 
          were available, free of charge, from non-profit housing 
          counseling agencies.  

          "Although early versions of SB 94 lacked a sunset date, the 
          Schwarzenegger Administration requested that a January 1, 2013, 
          sunset date be added to the loan modification advance fee ban 
          provision of the bill.  Because of that sunset date, the needed 
          protections added to California law by SB 94 will sunset at the 
          end of 2012, unless the Legislature acts to extend them.  The 
          author of SB 980 is concerned that failure to extend the sunset 
          date on SB 94 will re-open the door to unscrupulous individuals 
          and businesses bent on duping borrowers into paying unnecessary 
          fees."

           Background  .  In 2009, the Legislature passed and the Governor 
          signed SB 94 (Calderon), Chapter 630, Statutes of 2009, which 
          was an urgency measure prohibiting persons from charging advance 
          fees to borrowers in connection with a loan modification, and 








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          requiring those who wish to charge a fee upon the completion of 
          loan modification services to first provide a specified notice 
          to borrowers regarding other options available to the borrower.  
          These provisions sunset on January 1, 2013.

          SB 94 was enacted in response to widespread problems of 
          foreclosure-related scams taking advantage of delinquent 
          homeowners.  Many of these scams involved a promise to 
          renegotiate a delinquent borrower's loan in exchange for a 
          significant up-front fee.  Homeowners were often instructed to 
          not communicate with their lenders and to stop making mortgage 
          payments.  Often, the services related to the loan modification 
          were not performed, and many borrowers lost their homes. 

          Since enactment of SB 94, the State Bar, the Department of Real 
          Estate (DRE), and the State Attorney General have taken a 
          significant number of enforcement actions against unscrupulous 
          providers of loan modification services.  

          The State Bar has received more than 8,600 complaints alleging 
          misconduct in loan modification matters by attorneys, and has 
          conducted approximately 6,250 investigations against about 800 
          attorneys.  Roughly 2,500 of those complaints have resulted in 
          some form of disbarment of, resignation from the Bar by, or 
          discipline against an attorney.  Another 450 cases are pending 
          before the State Bar Court.  About 700 complaints are still 
          under investigation by the Bar or in the early stages of a 
          pending disciplinary action.  All told, approximately 110 
          attorneys have been disciplined, 50 attorneys are awaiting 
          discipline by the Supreme Court, and another 50 attorneys' cases 
          are pending before the State Bar Court.  

          DRE has filed more than 1,100 administrative actions against 
          loan modification scammers.  It has issued more than 300 desist 
          and refrain orders, revoked or accepted the surrender of 
          approximately 100 licensees, and suspended the licenses of 
          another 20 licensees.  

          The State Attorney General has filed approximately one dozen 
          civil cases, involving approximately 40 defendants, and seven 
          criminal cases involving more than 50 defendants.  An additional 
          16 criminal investigations are pending.

          After passage of SB 94, the Federal Trade Commission (FTC) 
          issued a rule in December 2010 governing mortgage assistance 








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          relief services (MARS Rule).  The FTC defines MARS as "any 
          service, plan, or program, offered or provided to the consumer 
          in exchange for consideration, that is represented, expressly or 
          by implication, to assist or attempt to assist the consumer in 
          negotiating a modification of a dwelling loan that reduces the 
          amount of interest, principal balance, monthly payments, or 
          fees; stopping, preventing, or postponing a foreclosure or 
          repossession; or, obtaining any of the following types of 
          relief: a forbearance or repayment plan; an extension of time to 
          cure a default, reinstate a loan, or redeem a property; a waiver 
          of an acceleration clause or balloon payment; or, a short sale, 
          deed in lieu of foreclosure, or any other disposition of the 
          property except a sale to a third party that is not the loan 
          holder." 

          Under the MARS Rule, any for-profit company that, in exchange 
          for a fee, offers to work on behalf of consumers to help them 
          obtain a mortgage loan modification or otherwise avoid 
          foreclosure must disclose certain information about their 
          proffered services to the consumer, must not make false or 
          misleading claims about their proffered services, must not 
          collect advance fees for those services, and must not provide 
          assistance or support to another person they know is engaged in 
          a violation of the MARS Rule.  

          The MARS Rule does not pre-empt California law; instead, it 
          overlays California law.  Thus, California law in this area 
          governs when it is more protective of borrowers than the federal 
          MARS rule, and the MARS rule governs when it is more protective 
          of borrowers than California law.  Because the MARS definition 
          of covered services is broader than the SB 94 definition of 
          these services, and because the list of required and prohibited 
          activities under the MARS Rule is longer than the list of 
          required and prohibited activities under SB 94, the FTC's MARS 
          Rule adds a layer of consumer protection to California law, 
          which supplements and adds to SB 94.

          However, the FTC chose to apply its MARS Rule less stringently 
          to attorneys than it did to all other parties subject to the 
          MARS Rule.  SB 94 treated real estate licensees, attorneys, and 
          unlicensed persons identically, because all three groups were 
          preying on unsophisticated homeowners.  The FTC took a different 
          approach.  Because of the way in which it is written, the MARS 
          Rule is more stringent than SB 94 as it pertains to real estate 
          licensees, and less stringent than SB 94 as it pertains to 








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          attorneys.  Thus, SB 94 governs the behavior of attorneys who 
          offer to help borrowers obtain loan modifications in California, 
          while the MARS Rule governs the behavior of real estate 
          licensees and unlicensed persons who offer to help borrowers 
          with those services.  If SB 94 is allowed to sunset, the less 
          stringent provisions of the MARS Rule that apply to attorneys 
          will govern the behavior of attorneys in California.   

          According to the author, an extension of SB 94 is needed if 
          California wishes to continue applying uniform rules to all 
          persons who offer to assist borrowers in obtaining loan 
          modifications or other forms of mortgage loan forbearance for a 
          fee paid by the borrower.  Absent any action to extend the 
          provisions of SB 94, attorneys will be able to collect advance 
          fees from borrowers in connection with offers to help avoid 
          foreclosure, effective January 1, 2013, but real estate 
          licensees and unlicensed persons will be prohibited from doing 
          so.  

           Support  .  The Western Center on Law and Poverty states, 
          "Prohibiting the up-front fees (for loan modification services) 
          has eliminated the worst forms of abuses, where the fees were 
          often nonrefundable and the homeowner was at the mercy of what 
          the negotiator might or might not do for them in the future.  SB 
          980 will ensure that those protections stay in place."

           Related legislation  .  AB 1950 (Davis) of 2012 extends the 
          provisions of SB 94 permanently and extends the statute of 
          limitations on loan modification and certain other real 
          estate-related offenses to four years, as specified.  This bill 
          is pending in Senate Banking and Financial Institutions 
          Committee.

           Previous legislation  .  SB 94 (Calderon), Chapter 630, Statutes 
          of 2009, enacts the provisions whose sunset date this bill would 
          extend, and makes other consumer-protection changes to the Real 
          Estate Law and Finance Lenders Law.

           REGISTERED SUPPORT / OPPOSITION  :

           Support 
           
          American Federation of State, County, and Municipal Employees
          California Bankers Association
          California Mortgage Bankers Association








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          California Public Interest Research Group
          California Rural Legal Assistance Foundation
          Center for Responsible Lending
          Consumer Federation of California
          Western Center on Law and Poverty
           
            Opposition 
           
          None on file.

           Analysis Prepared by  :    Angela Mapp / B.,P. & C.P. / (916) 
          319-3301