BILL ANALYSIS
SENATE COMMITTEE ON BANKING, FINANCE,
AND INSURANCE
Senator Ronald Calderon, Chair
AB 764 (Nava) Hearing Date: July 1, 2009
As Amended: June 22, 2009
Fiscal: Yes
Urgency: No
SUMMARY Would, until January 1, 2013, prohibit all persons
from charging an advance fee in connection with a loan
modification agreement; attorneys would be able to charge fees
after providing services in connection with a loan modification
agreement; all other persons would be prohibited from charging
fees in connection with a loan modification agreement, unless
they obtained a loan modification on behalf of their client.
DIGEST
Existing law
1. Prohibits real estate licensees from charging a borrower an
advance fee in connection with a residential real estate loan,
before the borrower becomes obligated on the loan (Business and
Professions Code Section 10085.5);
2. Allows licensed real estate brokers to charge borrowers an
advance fee for helping negotiate a loan modification on a
borrower's behalf, as long as the broker's fee agreement has
been reviewed by the Department of Real Estate (DRE), and DRE
has no objections to it, and as long as the fee is collected
before a notice of default has been recorded. DRE interprets
existing law as prohibiting brokers from collecting an advance
fee once a notice of default has been recorded, but neither the
Real Estate Law, nor the foreclosure consultant law, contains
explicit language in this regard;
3. Is silent regarding the fees that may be charged by licensed
banks, credit unions, finance lenders and brokers, and
residential mortgage lenders and servicers in connection with
loan modifications and other forms of mortgage loan forbearance
or forgiveness;
AB 764 (Nava), Page 2
4. Provides for the foreclosure consultant law (Civil Code Section
2945 et seq.), which defines a foreclosure consultant as one who
makes any solicitation, representation, or offer to any owner of
a property on which a notice of default has been recorded, to
perform any of the following services for compensation:
a. Stop or postpone a foreclosure sale, or save the owner's
residence from foreclosure;
b. Obtain any forbearance from any beneficiary or
mortgagee;
c. Help the owner exercise his or her right of
reinstatement, or extend the period within which the owner
may reinstate his or her mortgage obligation;
d. Obtain any waiver of an acceleration clause in any
mortgage, as specified;
e. Help the owner obtain a loan or advance of funds;
f. Avoid or ameliorate the impairment of the owner's
credit, resulting from the recordation of a notice of default
or the conduct of a foreclosure sale;
g. Help the owner obtain remaining proceeds from a
foreclosure sale of the owner's residence;
5. Exempts the following individuals and businesses from the
foreclosure consultant law: 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
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;
6. Makes it a violation of law for a foreclosure consultant to do
any of the following, and subjects violators to a fine of not
more than $10,000, imprisonment in the county jail or in state
AB 764 (Nava), Page 3
prison for up to one year, or by both a fine and imprisonment:
a. Claim, demand, charge, collect, or receive any
compensation until after the foreclosure consultant has fully
performed each and every service he or she contracted to
perform or represented that he or she would perform;
b. Claim, demand, charge, collect, or receive any fee,
interest, or any other compensation for any reason which
exceeds 10% per annum of the amount of any loan the
foreclosure consultant may make to the property owner;
c. Take any wage assignment, any lien of any type on real
or personal property, or other security to secure the payment
of compensation;
d. Receive any consideration from any third party in
connection with services rendered to an owner, unless that
consideration is fully disclosed to the owner;
e. Acquire any interest in a residence in foreclosure from
an owner with whom the foreclosure consultant has contracted,
as specified;
f. Take any power of attorney from any owner for any
purpose;
g. Induce or attempt to induce any owner to enter into a
contract that is not in compliance with the foreclosure
consultant law;
h. Enter into an agreement, at any time, to obtain the
release of surplus funds after a trustee's sale is conducted;
7. Pursuant to the foreclosure consultant law:
a. Gives borrowers a five day right to rescind a contract
with a foreclosure consultant, and requires foreclosure
consultants to provide copies of their contracts to their
potential customers in the language in which the contract is
negotiated, as specified;
b. Requires foreclosure consultants to register with the
California Department of Justice and maintain a surety bond
of $100,000, and punishes persons who violate this provision
with a fine of between $1,000 and $25,000, and by
AB 764 (Nava), Page 4
imprisonment in the county jail for not more than one year,
or by both a fine and imprisonment;
c. Authorizes an owner to bring an action against a
foreclosure consultant for any violation of the foreclosure
consultant law, and provides that judgment shall be entered
for actual damages, reasonable attorneys' fees and costs, and
appropriate equitable relief. Also provides that a court
may, in its discretion, award exemplary damages, as
specified, in addition to any other award of actual damages.
This bill
1. Would, until January 1, 2013, prohibit a real estate broker
from claiming, demanding, charging, receiving, or collecting
a fee for a loan modification agreement, until the terms of
the loan that is the subject of that agreement has been
modified, as follows:
a. "Loan modification agreement" would be defined as a
contract 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
residential real property;
b. A licensed real estate broker who performs a loan
modification service for a fee would have to provide
their license number and the following notice to the
borrower before entering into a loan modification
agreement with that borrower:
i. A separate statement, in not less than
14-point bold type, stating: "It is not necessary
to pay a third party to arrange for a loan
modification from your mortgage lender of servicer.
You may call your lender directly to ask for a
change in your loan terms. Nonprofit housing
counseling agencies also offer these and other forms
of borrower assistance free of charge. A list of
nonprofit housing counseling agencies approved by
the United States Department of Housing and Urban
Development (HUD) is available from your local HUD
office or by visiting www.hud.gov ." This statement
would have to be translated into Spanish, Chinese,
Tagalog, Korean, or Vietnamese, if the loan
modification agreement is offered or negotiated in
AB 764 (Nava), Page 5
any of these foreign languages;
c. A licensed real estate broker who performs loan
modification services, as defined, would be required to
notify DRE in writing, within 30 days after first
performing a loan modification agreement and within 30
days after last performing a loan modification agreement;
d. A violation of these provisions would be a public
offense punishable by a fine not exceeding $20,000 for an
individual ($60,000 for a corporation), by imprisonment
of an individual in the county jail for a term not to
exceed 12 months, or by both a fine or imprisonment;
2. Would, until January 1, 2013, authorize the imposition of
discipline against an attorney who claims, demands, charges,
receives, or collects a fee from any person to provide
services to obtain a legally enforceable modification of the
terms of a person's single-family residential real property,
until those services have been provided;
3. Would, until January 1, 2013, provide that, except for the
provisions above that apply to real estate licensees and
attorneys, no person who performs loan modification services
may claim, demand, charge, receive, or collect a fee for a
loan modification agreement until the terms of the loan have
been modified, as follows:
a. "Loan modification agreement" would be defined as a
contract 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;
b. The person performing the loan modification service
for a fee would have to provide the following statement
to the borrower, in not less than 14-point bold type,
before entering into a loan modification agreement with
that borrower: "It is not necessary to pay a third party
to arrange for a loan modification from your mortgage
lender of servicer. You may call your lender directly to
ask for a change in your loan terms. Nonprofit housing
counseling agencies also offer these and other forms of
borrower assistance free of charge. A list of nonprofit
housing counseling agencies approved by the United States
Department of Housing and Urban Development (HUD) is
AB 764 (Nava), Page 6
available from your local HUD office or by visiting
www.hud.gov ." This statement would have to be translated
into Spanish, Chinese, Tagalog, Korean, or Vietnamese if
the loan modification agreement is offered or negotiated
in any of these foreign languages;
c. These provisions would not apply to a person, or an
agent acting on that person's behalf, offering loan
modification or other loan forbearance services for a
loan owned or serviced by that person, as specified;
d. A violation of these provisions would be a public
offense punishable by a fine not exceeding $10,000 for an
individual ($50,000 for a corporation), by imprisonment
of an individual in the county jail for a term not to
exceed 12 months, or by both a fine or imprisonment;
4. Would (with no sunset date) make the following changes
related to advance fees charged by real estate licensees:
a. All real estate licensees wishing to engage in an
advance fee agreements would be required to submit their
agreements, and all materials intended to be used in
obtaining those advance fee agreements (including, but
not limited to contract forms, solicitation materials,
and radio and television advertising), to DRE at least
ten calendar days before their use, for review by DRE.
DRE would be authorized, but not required, to order that
any submitted material not be used, if DRE believes it
would be misleading;
b. Advertisements used to obtain advance fee agreements
would not be allowed to employ words, letters, initials,
symbols, or other devices that are so similar to those
used by a government agency, nonprofit, charitable
institution, or senior organization that they could
mislead the public;
c. The fine for any person found using, disseminating,
or publishing any matter the commissioner has ordered not
to be used, published, or disseminated would increase
from $1,000 to $2,500, and the length of possible
imprisonment would increase from a maximum of six months
to a maximum of one year, for each use, dissemination, or
publication;
AB 764 (Nava), Page 7
d. DRE would be required, rather than authorized, to
determine the form of all advance fee agreements, and all
material used to solicit prospective owners, sellers, and
borrowers, by real estate licensees;
e. The punishment for unlawfully charging an advance
fee would increase to $20,000 for each individual (up
from $10,000), $60,000 for each corporation (up from
$50,000), and up to one year in a county jail (up from
six months);
5. Would, effective January 1, 2013, require a licensed real
estate broker who performs loan modification services, as
defined, to notify DRE in writing, within 30 days after
first performing a loan modification agreement and within 30
days after last performing a loan modification agreement;
6. Would clarify that the Real Estate Law does not apply to a
HUD-certified housing counseling organization or its
employees, when the organization or its employees provides
counseling services at no cost to a borrower, and in
connection with the modification of the terms of a loan
secured directly or collaterally by a lien on single-family
residential real property.
AB 764 (Nava), Page 8
COMMENTS
1. Purpose of the bill To help protect borrowers from
unscrupulous loan modification consultants.
2. Background This bill would enact changes in two areas -
advance fees charged by real estate licensees and loan
modification agreements entered into by real estate
licensees and others. The bill is a response to a cottage
industry that has sprung up to exploit borrowers who are
having trouble affording their mortgages, and are facing
default, and possible foreclosure, if they are unable to
negotiate a loan modification or other form of mortgage loan
forbearance with their lender.
Although some loan modification consulting companies are
reportedly acting in a reputable manner and providing
significant value to their customers, there is significant
anecdotal evidence that others are preying on borrowers'
fears of losing their homes and their ignorance of the
options available to them, and charging these borrowers fees
(often up-front, nonrefundable fees) for services the
borrowers could obtain elsewhere, free-of charge.
Unscrupulous individuals and businesses seeking to take
advantage of troubled borrowers can be found outside every
mortgage fair, trying to drum up business. Their
advertisements abound in neighborhoods that have been
hardest hit by foreclosure.
California does have a law regulating the activities of
foreclosure consultants, but that law contains numerous
exemptions from its requirements, including exemptions for
legal professionals, real estate brokers, and several types
of lenders.
Loan modification provisions: AB 764 seeks to close loopholes
in existing law that have allowed an unscrupulous loan
modification industry to spring up. It does so by
prohibiting individuals and businesses from accepting
up-front fees for helping negotiate a loan modification on a
borrower's behalf. This prohibition is intended to prevent
persons from charging borrowers an up-front fee, providing
limited services that fail to help the borrower, and leaving
the borrower worse off than before he or she engaged the
services of a loan modification consultant.
AB 764 (Nava), Page 9
Under the provisions of the bill, every person that offers to
help negotiate a loan modification for a borrower, for a
fee, would have to inform that borrower that he or she may
obtain the same or similar services, free of charge, from a
non-profit housing counseling agency. This provision is
intended to ensure that borrowers who agree to pay someone
for help in negotiating a loan modification on their behalf
fully understand that similar services are available
elsewhere, free of charge. The bill contains a translation
requirement to help achieve this intent.
In order to address complaints about the unscrupulous actions of
real estate licensees, this bill would prohibit real estate
licensees from collecting money in connection with a loan
modification agreement, unless a modification was actually
obtained for a borrower. Attorneys would be able to collect
money in connection with a loan modification agreement,
after performing agreed-upon services.
All of the loan modification-related provisions of this bill
would sunset on January 1, 2013.
Advance fees charged by real estate licensees: Although a great
deal of attention has recently become focused on the
charging of advance fees in connection with loan
modification consulting services by real estate licensees,
advance fees have traditionally been charged by real estate
licensees for other purposes. Most often, advance fees are
charged by real estate licensees, to collect marketing fees
for promoting large commercial real estate projects and/or
higher-end residential real estate auctions. Some have also
used advance fees in the past to charge sellers for placing
a sales listing in the Multiple Listing Service.
California's Real Estate Law defines advance fees (Section
10026), authorizes the Department to review advance fee
agreements and other materials used to obtain advance fee
agreements (Section 10085), prohibits the collection of
advance fees in certain circumstances, and creates penalties
for improperly charging or collecting these fees (Section
10085.5). Regulation 2970 builds on Section 10085 by
requiring, rather than authorizing, the Department to review
advance fee agreements and other materials used to obtain
these agreements, and by specifying the conditions under
which the Department may, and may not, approve materials use
to advertise, promote, solicit, or negotiate an advance fee
AB 764 (Nava), Page 10
agreement. AB 764 would codify portions of Regulation 2970
and increase the penalties in Section 10085.5. The bill
would also create a new offense for using, disseminating, or
publishing any matter DRE has ordered not be used,
published, or disseminated, with a fine of $2,500 and jail
time of up to one year. These changes would be permanent.
3. Support . The California Labor Federation, California
Reinvestment Coalition, and California ACORN are supportive
of AB 764's consumer protections. All of these
organizations have heard multiple stories from clients that
have been victimized by loan modification scams. Some
people have been charged up to $500 to fill out an
application, $2,000 to $6,000 in conjunction with the
promise of a modification, and up to $5,000 to $8,000 to
negotiate with a servicer on a borrower's behalf. The Labor
Federation asserts that most foreclosure assistance is free
and not for profit, so high-priced foreclosure consultants
are not providing any real service.
Most of the people about which ACORN is aware paid some of the
fees before realizing that nothing was being done on their
behalf, and before they were aware that HUD-certified
counseling agencies, like ACORN, offered the service for
free. ACORN believes that no one should be exempt from the
bill, because many families are placing their trust in
attorneys, real estate brokers, and unlicensed individuals
working on behalf of lending institutions. ACORN believes
that the Legislature should do anything in its power to pass
the strongest regulations possible, to thwart the various
loan modification scams being perpetrated on unsuspecting
borrowers.
The California State Bar supports the provisions of the bill
(Business and Professions Code Section 6106.4), which
addresses the problem of real estate loan modification fraud
by prohibiting attorneys from collecting advance fees for
performing loan modification services in connection with
one- to four-unit single family residential real properties.
The State Bar's Office of the Chief Trial Counsel is
receiving between 850 and 900 calls per month on its
attorney discipline complaint line relating to promised loan
modification services, and to advance fees being collected
and no work being done. The State Bar supports AB 764,
because it believes that disciplinary action after the fact
is too late to deal with the harm already done to clients.
AB 764 (Nava), Page 11
"What is required is prevention, and the advance fee
prohibition of AB 764 would have a major preventative effect
against improper conduct by attorneys."
4. Opposition The California Association of Realtors (CAR) is
opposed to the bill, because it prohibits the collection of
advance fees by real estate licensees. CAR asserts that
many of the most egregious examples of loan modification
solicitations don't come from real estate licensees at all,
but instead come from law firms and other licensees that are
specifically exempt from AB 764, or who are operating
without any license at all. CAR believes that it is
ill-advised to take legitimate brokers out of the
marketplace and send consumers into the hands of less
legitimate or totally unregulated players. CAR is also
concerned about the provision of AB 764 which allows a real
estate licensee to collect a fee only if a loan is modified.
CAR believes that a legitimate agent should be allowed to
earn a fee, after he or she has fully performed all that he
or she said would be done.
5. Suggested Amendments
a. It is unclear why this bill treats attorneys
differently from all other persons, with respect to
the circumstances under which they may charge fees for
helping borrowers obtain loan modifications. Unless
the bill's author can provide justification for the
different treatment, the bill should be amended to
treat all licensed fee-for-service providers of loan
modification services equally;
b. The bill's definition of a loan modification
agreement covers modifications, but does not cover
loan forbearance or other forms of loan forgiveness.
If the author wishes to cover all of the possible ways
in which a borrower might be aided by a
fee-for-service provider of foreclosure avoidance
services, he may wish to expand the definition of a
loan modification agreement to cover modification "or
other forms of mortgage loan forbearance or
forgiveness;"
c. Proposed Sections 10085.6 of the Business and
Professions Code and 2944.6 of the Civil Code prohibit
specified persons from claiming, demanding, charging,
AB 764 (Nava), Page 12
receiving, or collecting a fee for loan modification
agreements "until the terms of that loan have been
modified." The bill would benefit from amendments
clarifying when a loan is deemed to have been modified
for purposes of these sections.
Some of the issues the author may wish to clarify
include: i) whether a temporary, trial modification
offered by a servicer is deemed to be a modification
for purposes of the bill; ii) whether an offer of loan
forbearance or loan forgiveness by a servicer (but not
a modification of the terms of a loan) qualifies a
fee-for-service provider for compensation; iii)
whether the modification (or forbearance of
forgiveness) offered by a servicer must meet certain
criteria in order to qualify the fee-for-service
provider for compensation; and iv) whether a
modification (or forbearance of forgiveness) offered
by a servicer, but rejected by a borrower, qualifies a
fee-for-service provider for compensation;
d. The penalties for violating provisions of the
Real Estate Law prohibiting the collection of advance
fees are different than the penalties for violating
nearly identical provisions of the Civil Code
($10,000/$50,000 for violating proposed Civil Code
Section 2944.6 and $20,000/$60,000 for violating
proposed Business and Professions Code Section
10085.6). Unless there is justification for imposing
more stringent penalties on real estate licensees than
on others who engage in the same prohibited acts, the
penalties in the two sections should be revised to
ensure consistency;
e. Two other sets of references in the bill
should also be amended to ensure consistency, as
follows:
i. One of the sections of the bill
applies to the modification of loans secured by
liens on residential real property (Section
10085.6 of the Business and Professions Code),
another section applies to the modification of
loans secured by liens on single-family
residential real property (2944.6 of the Civil
Code), and another section refers to the
AB 764 (Nava), Page 13
modification of loans secured by liens on
single-family residential real property
containing four or fewer dwelling units (Section
6106.4 of the Business and Professions Code);
ii. The bill refers to a "legally
enforceable" loan modification in Section 6106.4
of the Business and Professions Code and to a
loan that has "been modified" (with no reference
to legal enforceability) in Section 10085.6 of
the Business and Professions Code and 2944.6 of
the Civil Code;
f. Sections 10085.5 and 10085.6 require a
licensed real estate broker who performs loan
modification services to notify DRE in writing within
30 days from the first performance of a loan
modification agreement and the last performance of a
loan modification agreement. It is unclear whether
"performance of a loan modification agreement" refers
to the day on which a person enters into contract to
perform loan modification services or on which a
person completes the services he or she has contracted
to perform.
Furthermore, the bill fails to apply these reporting
requirements to other licensed persons who enter into
loan modification agreements with borrowers. The
author may wish to impose similar reporting
requirements on other types of licensees, such as
attorneys and others who are exempted from
California's foreclosure consultant law (Civil Code
Section 2945 et seq.);
g. The bill regulates the charging of fees "for
loan modification agreements." Technically, one
charges a fee for performing services in connection
with an agreement, not for the agreement itself. The
bill should be amended to correct these references.
6. Prior and Related Legislation
a. 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
AB 764 (Nava), Page 14
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;
b. SB 94 (Calderon), 2009-10 Legislative Session:
Would, until January 1, 2013, prohibit persons from
charging advance fees to borrowers in connection with
the modification of the terms of the borrower's loan,
as defined; would, without a sunset date, require
those who wish to charge a fee for loan modification
services (after performing them) to provide a
specified notice to borrowers regarding other no-cost
options available to the borrower; and would close a
loophole in the California Finance Lenders Law by
prohibiting materially false and misleading statements
or representations in connection with a loan made or
brokered by a finance lender licensee.
POSITIONS
Support
ACORN
California Labor Federation
California Reinvestment Coalition
California State Bar
Office of Mayor Antonio Villaraigosa
Oppose
California Association of Realtors
Consultant: Eileen Newhall (916) 651-4102