BILL ANALYSIS
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
260 (Lieu)
Hearing Date: 8/17/2009 Amended: 7/23/2009
Consultant: Maureen Ortiz Policy Vote: Jud 3-2 BFI 7-3
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BILL SUMMARY: AB 260 enacts the Higher-Priced Mortgage Loan
Law, effective July 1, 2010, and authorizes California's
mortgage regulators to apply specified federal mortgage lending
laws and regulations to their licensees.
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Fiscal Impact (in thousands)
Major Provisions 2009-10 2010-11 2011-12 Fund
Admin/enforcement -----approximately $400 to
$600 annually--- Special*
$700
$1,400 $1,400 Special**
$125
$250 $250 Special***
* Corporations Fund
** Real Estate Fund
*** Financial Institutions Fund
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STAFF COMMENTS: This bill meets the criteria for referral to the
Suspense file.
The Department of Corporations indicates costs of between
$400,000 and $600,000 to examine licensees for compliance, and
for enforcement expenses. This includes 4 PYs that will conduct
exams of 1,700 licensees on a four year cycle. The Department
of Real Estate reports the need for 12 PYs as follows in order
to expand the scope of compliance audits and enforcement
investigations: 5 PY's in the Audit Division, 5 PY's in the
Enforcement Division, 1 PY in Mortgage Lending, and 1 PY for a
Real Estate Counsel in the Legal Division. The Department of
Financial Institutions will need two Examiner PYs at a cost of
approximately $250,000 annually.
Specifically, AB 260 does the following:
1) Enacts the Higher-Priced Mortgage Loan Law, effective July
1, 2010, and defines a higher-priced mortgage loan by reference
to Federal Reserve Board Regulation Z as a consumer credit
transaction secured by the consumer's principal dwelling with an
annual percentage rate that exceeds the average prime offer rate
for a comparable transaction as of the date the interest rate is
set by 1.5 or more percentage points for loans secured by a
first lien on a dwelling, or by 3.5 or more points for a
subordinate lien. Loans for initial home construction,
temporary or "bridge" loans, reverse mortgages and home equity
lines of credit as excluded.
2) Caps the maximum amount of a prepayment penalty that may be
imposed by a licensed person in connection with a higher-priced
mortgage loan at 2 percent or the loan's principal balance
during the first 12 months following loan consummation, and 1
percent of the loan's principal balance during the second 12
months. (This provision is
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AB 260 (Lieu)
broader than current federal law which, effective October 1,
2009, will limit prepayment penalties to two years but does not
designate the amount of the penalty.)
3) Prohibits any licensee from attempting to avoid these
provisions by dividing any loan transaction into separate parts.
4) Prohibits a licensed person from making, or causing to be
made, a false, deceptive, or misleading statement or
representation in connection with a higher-priced mortgage loan.
5) Requires a mortgage broker who arranges only higher-priced
mortgage loans to disclose that fact to a borrower, both orally
and in writing, at the time of initially engaging in mortgage
brokerage services with that borrower.
6) Prohibits a mortgage broker who arranges a higher-priced
mortgage loan from steering, counseling, or directing a borrower
to accept a loan at a higher cost than that for which the
borrower could qualify.
7) Prohibits a mortgage broker who arranges a higher-priced
mortgage loan from receiving greater compensation for arranging
a higher-priced mortgage loan with a prepayment penalty, than
for arranging the same loan without the penalty.
8) Prohibits higher-priced mortgage loans from containing a
negative amortization provision.
9) Provides that a violation of the Higher-Priced Mortgage Loan
Law constitutes a violation of the person's licensing law.
10) Authorizes the licensing agency or the Attorney General to
enforce the Higher-Priced Mortgage Loan Law, and authorizes
civil penalties up to $10,000 against a licensed person who
willfully and knowingly violates the provisions of this law, and
thereby nullifying any prepayment penalties charged.
11) Enhances the fiduciary responsibility of the mortgage broker
to the borrower by including a requirement that the mortgage
broker place the economic best interest of the borrower ahead of
his or her own economic interest.
Current law authorizes the Real Estate Commissioner to suspend
or revoke the license of a real estate licensee, or deny the
issuance of a license for a multitude of violations of the Real
Estate law involving fraud, misrepresentation, negligence, or
deceit. Additionally, the Commissioner can suspend or revoke
licenses for convictions of a felony, or violated the Franchise
Investment Law, or the Corporate Securities Law.
California law authorizes residential mortgage lending,
brokering, and servicing under five different laws, including
the Banking Law, Credit Union Law, California Finance Lenders
Law, California Residential Mortgage Lending Act, and the Real
Estate Law.
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AB 260 (Lieu)
These licensees are regulated by three different departments,
including the Department of Financial Institutions, Department
of Corporations, and Department of Real Estate.
This bill is similar to AB 1830 (Lieu) which was vetoed by the
Governor last year as indicated below:
I am returning Assembly Bill 1830 without my signature.
In an attempt to address various issues to come out of the
subprime loan meltdown, this bill would enact the Higher-Priced
Mortgage Loan Law, restrict the use of various loan features,
codify a fiduciary duty for mortgage brokers, and authorize
California's mortgage regulators to apply specified federal
mortgage lending laws and regulations to their licensees.
The goals of this bill are to be lauded and the work and effort
that went into the bill commended. However, I believe the
approach of the bill to address the subprime crisis overreaches
and may have unintended consequences.
First, its provisions will only apply to state regulated
entities, as federally regulated entities will be exempt. This
will create an uneven playing field, putting state regulated
entities at a competitive disadvantage and consumers will have
unequal protections under the law. Secondly, this bill allows
for a private right of action and allows a plaintiff to recover
attorney fees if he or she prevails. The bill does not allow a
defendant to
recover costs if he or she prevails. This provision will likely
lead to increased litigation based on de minimis violations as
plaintiffs attorneys will have much to gain and little to lose.
Many changes have already occurred to curb some of the past
lending and brokering abuses. Last year, I signed SB 385
strengthening underwriting criteria to ensure that borrowers can
afford loans. The Federal Reserve Board has implemented
amendments to the Truth in Lending Act (Regulation Z) to
regulate advertising practices and provide additional
protections to the lending marketplace. I recently signed SB
1137 to provide homeowners with additional protections against
foreclosure and to expand the rights of
tenants. Finally, the President recently signed the Housing
and Economic Recovery Act, which imposes new oversight
requirements on loan originators and contains many other
provisions to assist in economic recovery. All of these changes
need time to take effect. As a result, further legislation is
unnecessary until we can evaluate the effect of the reforms that
have already been enacted.
I am directing the appropriate agencies within my
Administration to implement any of the appropriate portions of
this bill that can be done so administratively. I encourage the
Legislature to work with my Administration to implement the many
pieces of this legislation that could be helpful to consumers.