BILL ANALYSIS Ó SB 980 Page 1 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 SB 980 Page 2 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 SB 980 Page 3 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 SB 980 Page 4 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 SB 980 Page 5 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 SB 980 Page 6 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