BILL ANALYSIS
AB 764
Page 1
Date of Hearing: April 13, 2009
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Pedro Nava, Chair
AB 764 (Nava) - As Amended: April 2, 2009
SUBJECT : Real estate brokers.
SUMMARY : Prohibits any person from claiming, demanding,
charging, receiving, collecting or contracting for advance fees
for performing services for borrowers in connection with the
modification of the terms of a mortgage loan. Specifically,
this bill :
1)Prohibits any person from claiming, demanding, charging,
receiving, collecting or contracting for any fee for
performing services for borrowers in connection with the
modification of the terms of a mortgage loan, unless the
person is a licensed real estate broker.
2)Prohibits licensed real estate brokers from collecting advance
fees for modifying the terms of a mortgage loan.
3)Requires the commissioner to determine the form of advance fee
agreements and loan modifications agreements and mandates the
submission of the advance fee agreement and loan modification
agreement materials prior to their use for approval.
4)Prohibits advertisements used in obtaining advance fee
agreements or loan modifications agreements from using words,
letters, initials, symbols, or other devices that are similar
to those used by a governmental agency or nonprofit entity.
5)Defines "loan modification agreement" as a contract by a
licensed real estate broker for the performance of services
for a borrower in connection with the modification of the
terms of a loan secured directly or collaterally by a lien on
single-family residential real property.
6)Authorizes the commissioner to adopt rules and regulations to
implement provisions related to loan modification agreements.
7)Exempts licensed residential mortgage lenders from the fee
prohibition.
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8)Increases the fines from $10,000 to $20,000 for an individual
and $50,000 to $60,000 for a corporation.
EXISTING LAW
1)Allows the commissioner to look at all materials used in
obtaining advance fee agreements, including but not limited to
the contract forms, letters or cards used to solicit
prospective sellers, and radio and television advertising be
submitted to him or her at least 10 calendar days before they
are used. [Business and Professions Code, Section 10085]
2)Allows the commissioner to determine the form of the advance
fee agreements, and all material used in soliciting
prospective owners and sellers. [Business and Professions
Code, Section 10085]
3)Prohibits any person from claiming, demanding, charging,
receiving, collecting, or contracting for an advance fee for
soliciting lenders on behalf of borrowers or performing
services for borrowers in connection with loans to be secured
directly or collaterally by a lien on real property, before
the borrower becomes obligated to complete the loan or, for
performing any other activities for which a license is
required, unless the person is a licensed real estate.
[Business and Professions Code Section 10085.5]
FISCAL EFFECT : Unknown.
COMMENTS :
NEED FOR THE BILL :
The Author believes, first and foremost, all homeowners in fear
of facing foreclosure can receive help for free either through
their lender or through an approved Housing and Urban
Development (HUD) counseling agency. Homeowners do not need to
pay a dime for a loan modification. Unfortunately, many loan
modification companies are charging homeowners $1000 to $4000
for little to no work. In most cases, companies ask for the
money upfront and lure homeowners in with false promises and
guarantees.
Currently, the DRE is investigating over 500 complaints of
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fraudulent loan modification companies. DRE does have a process
in place to handle advance fees. For example, a licensed real
estate broker is supposed to fill out an advance fee agreement
for approval by the DRE before accepting advance fees, and once
a real estate broker receives an advance fee, this money is put
into a trust account. Although, a process is in place for the
acceptance of advance fees under the DRE, the question remains,
why is it ever necessary to collect an advance fee for modifying
a loan? First, most often, licensed real estate brokers are
collecting an advance fee without even knowing if a loan can
actually be modified. AB 764 will eliminate this issue and
require a licensed real estate broker to actually look at the
complexities of the loan and then determine whether or not it
can be modified before taking any money rather than going
through the process of the trust account. Licensed real estate
brokers will actually get paid for work completed and will most
likely filter more cases rather than accepting all cases and
then determining if it is possible. In addition, a number of
loan modification companies are advertising that the upfront fee
is non-refundable. AB 764 will eliminate this concern. Second,
President Barack Obama, among others, just announced that
consumers should not pay an upfront fee for modifying a loan.
AB 764 finds a middle ground for licensed real estate brokers
while eliminating the acceptance of any fees by anyone for
modifying a loan, licensed real estate brokers will still be
able to collect a fee with the approval from the DRE, based on
performance.
California continues to rate very high with the number of
foreclosures filed. This problem makes the state more
susceptible to foreclosure scams. Homeowners are desperate to
save their home and willing to go in further debt by paying an
advance fee to modify their home. California needs action now
to curb further abuse and prevent these scam artists from
finding ways to make money off a very sad situation.
ADVERTISING:
This bill contains provisions prohibiting advertising from using
words, letters, initials, symbols, or other devices that are
similar to those used by a governmental agency or nonprofit
entity. A main resource for these "loan modification
consultants" is through advertising which all too often is
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misleading. A lot of the time the advertising looks like it is
government approved through the use of logos or wording which
lures homeowners into believing the company is government
sponsored. The Federal Trade Commission (FTC) recently surveyed
online and print advertising for mortgage foreclosure rescue
operations nationwide and identified approximately 71 distinct
companies running suspicious ads. On the civil enforcement
side, the FTC filed five new cases to halt the illegal practices
of individuals and companies offering loan modification or
foreclosure scams - including one company that spent 9 million
dollars on TV and radio ads in less than one year. Recently, in
hope of further addressing fraudulent advertising, the Chair of
the Assembly Banking and Finance Committee wrote a letter to the
Chair of the FTC, Jon Leibowitz asking him to investigate all
advertising related to loan modifications and also wrote a
letter to California Attorney General, Jerry Brown, asking that
he place an injunction on all loan modification advertising.
In addition, Attorney General Brown made an announcement warning
the public that scam artists have "sunk to a new low" and have
used the forged letterhead of major lenders to con worried
Californians into paying thousands of dollars for non-existent
loan modification services.
ADVANCE FEES vs. FORECLOSURE CONSULTANTS :
There is an assumption that current law already prohibits the
acceptance of advance fees in relation to loan modifications.
This is not the case. Homeowners are approached before they
have defaulted on their home and after a notice of default has
been recorded. Under existing law, foreclosure consultants can
not come into the picture until after a notice of default has
been recorded on a home. If there is an outstanding notice of
default, an advance fee cannot be accepted rather a person is
paid for the work completed. The law does not prohibit the
acceptance of an advance fee if there is no outstanding notice
of default. In addition, a foreclosure consultant does not
include any of the following: a person licensed to practice
law; a licensed prorater; a licensed real estate broker, as
specified; a licensed accountant; a person or his or her agent
acting under express authority of or written approval from the
U.S. Department of Housing and Urban Development or other
federal department or agency; a person who holds or is owed an
obligation secured by a lien on any residence in foreclosure,
when the person performs services in connection with that
obligation or lien; a licensed finance lender, as specified; a
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licensed depository institution; a licensed escrow agent or
other licensed person authorized to conduct a title or escrow
business; and a licensed residential mortgage lender or
servicer.
Illegitimate loan modification companies have also evolved into
no-up front loan modification groups to get by the restrictions
that currently exist under the business and professions code.
Under existing law, licensed real estate brokers do not need to
go through DRE for approval if they do not collect an advance
fee. The bill addresses these concerns by prohibiting anyone
from collecting any fee unless you are a licensed real estate
broker but the bill does add a provision allowing licensed real
estate brokers to collect a fee for work completed if approved
by DRE. Under AB 764, licensed real estate brokers who want to
remain in the loan modification business will need to seek
approval from DRE before collecting a fee. Similar to the
foreclosure consultant law, licensed real estate brokers will
only receive money after work is accomplished. While this
provision may dry up the unnecessary profitable loan
modification market and discontinue the growing number of
licensed real estate brokers creating loan modification
companies this most likely is not a bad progression. As stated
before, homeowners get loan modification services free through a
HUD approved counseling agency or their lender. In reality, a
homeowner has the same capability and opportunity as a licensed
real estate broker when it comes to modifying their own home
loan.
OTHER STATES AND FEDERAL LEVEL ACTION:
Earlier this year, President Obama's Administration launched the
Making Home Affordable Program in an effort to stabilize the
housing market and ensure responsible homeowners can afford to
stay in their homes by assisting eligible homeowners with
refinancing or modifying their mortgages. It is estimated the
plan will help up to 7 to 9 million families restructure or
refinance their mortgages to lower their monthly payments and
make their mortgages affordable now and in the future - an
opportunity for relief that unfortunately also brings greater
opportunity for criminal actors to prey upon consumers seeking
assistance.
On April 6, 2009, President Obama's Administration along with
the U.S. Department of the Treasury, the U.S. Department of
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Justice (DOJ), the Department of Housing and Urban Development
(HUD), the FTC, and the Attorney General of Illinois announced
an effort to coordinate information and resources across
agencies to maximize targeting and efficiency in fraud
investigations, alert financial institutions to emerging
schemes, step up enforcement actions and educate consumers to
help those in financial trouble avoid becoming the victims of a
loan modification or foreclosure rescue scam. A key part of the
announcement emphasized borrowers should never pay any up-front
fees for loan modifications.
Currently, the Federal Bureau of Investigation (FBI) has
targeted 2,100 companies suspected of defrauding troubles
homeowners with "rescue scams." This number is up 400% from the
caseload five years ago.
Treasury's Financial Crimes Enforcement Network (FinCEN) also
conducted recent studies on mortgage fraud that found that
between July 2002 and June 2008, depository institutions filed
nearly 180,000 mortgage fraud suspicious activity reports
(SARs), with those involved in mortgage fraud often involved in
other types of crime as well.
California Attorney General Jerry Brown has made a number of
arrests in regards to those involved in foreclosure scams.
Illinois Attorney General announced the initiation of more than
20 cases targeting mortgage fraud, including a case against one
company targeting a Latino community with radio ads.
Illinois, Maryland, Minnesota along with California are carrying
legislation in hopes of stopping loan modification scams.
RELATED LEGISLATION:
SB 94 (Calderon) would prohibit persons from charging advance
fees to borrowers in connection with the modification of the
terms of the borrower's loan, require those who wish to charge a
fee for loan modification services (after performing them) to
provide a specified notice to borrowers regarding other options
available to the borrower, and prohibit servicers from imposing
any interest or charge for performing services for borrowers in
connection with loan modifications or other forms of loan
forbearance of forgiveness.
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PREVIOUS LEGISLATION :
AB 1448 (Scott), Chapter 156, Statutes of 2008, increased the
maximum fine for an unlicensed person acting or advertising
themselves as a real estate broker or a real estate salesperson
from $10,000 to $20,000 and for an unlicensed corporation from
$50,000 to $60,000.
AB 180 (Bass), Chapter 278, Statutes of 2008 added protections
to the foreclosure consultant law, effective July 1, 2009.
These protections include a requirement for foreclosure
consultants to register with the Department of Justice and
obtain a surety bond; increase the length of time an owner may
rescind a contract with a foreclosure consultant, and require
contracts with foreclosure consultants to be translated into
foreign languages in certain circumstances.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file.
Opposition
None on file.
Analysis Prepared by : Kathleen O'Malley / B. & F. / (916)
319-3081