BILL ANALYSIS
AB 260
Page 1
Date of Hearing: April 29, 2009
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Kevin De Leon, Chair
AB 260 (Lieu) - As Introduced: February 11, 2009
Policy Committee: Banking and
Finance Vote: 7-3
Judiciary 7-3
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill places restrictions on subprime loans, prohibits
various practices by lenders and brokers, and authorizes state
regulatory agencies to suspend or revoke licenses of real estate
lenders and mortgage brokers that violate lending laws.
FISCAL EFFECT
1)The Department of Corporations and Department of Real Estate
each assert that the bill would require their department to
add more than 10 staffing positions, at a annual cost of more
than $1 million, due to the expanded scope of compliance
audits and enforcement investigations under the bill. Both
departments are funded by licensing and examination fees paid
by the industry.
2)Actual costs will depend on the volume of complaints
investigated by the departments under the new law. Near-term
costs could be lower than the departments' estimates due to
greatly reduced subprime loan activity
.
3)Unknown but potentially significant increase in newly
authorized civil penalties imposed by the licensing agency or
state attorney general.
SUMMARY (Continued)
Key provisions of the bill:
1)Specify that a mortgage broker is a fiduciary of the borrower
AB 260
Page 2
and any violation of that duty is a violation of the mortgage
broker's licensing law.
2)Define a "higher priced mortgage loan" by reference to federal
law - specifically, a home mortgage for which the annual
percentage rate on the loan exceeds the yield on comparable
Treasury securities by at least three percentage points for
first loans, or five percentage points for subordinate loans.
3)Limit prepayment penalties on higher priced loans to 2% of the
principle balance prepaid during the first 12 months or 1% of
the principle balance prepaid during the second 12 months.
4)Prohibit a broker or lender from making a higher priced loan
that contains negative amortization (which occurs when the
payment does not cover the interest due and unpaid interest is
added to the loan balance), but allows negative amortization
to take place if it is for purposes of a loan modification.
5)Prohibits a lender from paying a broker extra for arranging a
higher priced loan with a prepayment penalty, and requires
that the broker receive compensation whether paid by the
lender, borrower or a third party.
6)Prohibit lenders and brokers from making false, deceptive, or
misleading representations in connection with a higher priced
loan. Prohibit a mortgage broker from steering a borrower
toward a higher cost loan when the borrower could qualify for
lower cost loans in the broker's portfolio.
7)Allow the licensing agency or the Attorney General to bring an
enforcement action with a civil penalty of $10,000 per
violation.
8)Allow a borrower to bring a civil action for actual damages
and to recover attorney's fees.
9)Allow a licensed broker or lender to avoid penalties for
non-compliance if the error was unintentional and the person
takes various specified steps within 90 days of the loan
closing and prior to the institution of an action. These steps
include (a) notification of the borrower of the
non-compliance, (b) making appropriate restitution, and/or (c)
offering the borrower the option to modify the terms so that
it conforms with the terms of this measure
AB 260
Page 3
COMMENTS
1)Background - subprime mortgages . A major contributor to the
collapse in the housing market and subsequent economic
downturn has been massive increases in mortgage payment
defaults, mostly on subprime loans. There are numerous factors
behind the defaults, but one area of focus has been problems
relating to incentives and practices by lenders and brokers in
the subprime loan markets. These include payment structures by
lenders that provide incentives to brokers to steer customers
to loans with higher interest yields and larger prepayment
penalties. The result of these incentives is that brokers'
interests often run counter to those of the borrowers they are
supposed to represent.
Financial institutions are regulated by numerous federal
governmental agencies, including the Office of the
Comptroller of the Currency, Federal Reserve Board, Office of
Thrift Supervision, Federal Deposit Insurance Corporation,
Department of Housing and Urban Development. In California,
the Department of Corporations is responsible for licensing
and enforcing provisions of law related to California
lenders. The Department of Financial Institutions is mainly
responsible for regulating credit unions. The Department of
Real Estate is responsible for regulating real estate
mortgage brokers.
2)Rationale . This bill is seeks to address some of the key
deficiencies in the subprime mortgage market by changing
incentives for lenders and brokers to offer high-cost loan
products, regulating high cost loan products issued in
California, increasing regulatory oversight, and making
explicit the fiduciary duty of mortgage brokers to the
borrowers they represent. The measure is complimentary to the
recent changes to the federal Truth in Lending Act.
3)Prior legislation . This bill similar to the final version of
AB 1830 (Lieu) from the 2007-08 session. That bill was vetoed
by the governor, who cited concerns that: (a) the bill only
applied to state regulated entities, creating an uneven
playing field; (b) the provisions allowing borrowers to bring
civil actions would lead to increased litigation for de
minimis violations; and, (c) and many federal reforms have
AB 260
Page 4
already taken place which should curb abuses in the industry.
Analysis Prepared by : Brad Williams / APPR. / (916) 319-2081