BILL ANALYSIS
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Date of Hearing: June 8, 2009
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Pedro Nava, Chair
AB 1160 (Fong) - As Amended: June 2, 2009
AS PROPOSED TO BE AMENDED
SUBJECT : Contracts: translation.
SUMMARY : Provides that a supervised financial organization who
in the course of entering into any contract or agreement for
loan or extension of credit secured by real property and who
negotiates primarily in Spanish, Chinese, Tagalog, Vietnamese,
or Korean shall provide the prospective borrower with a
translation of the key terms of the transaction prior to loan
closing. Specifically, this bill :
1)Exempts the translation requirement for extensions of credit
by federally chartered banks or credit unions.
2)Requires the Department of Corporations (DOC) and Department
of Financial Institutions (DFI) to create a translated summary
of key terms of a mortgage transaction that would be offered
by supervised financial institutions.
3)Specifies that the licensing agency may impose a penalty, in
the amount of $2,500 for the first violation, $5,000 for the
second violation, $10,000 for the third violation, and each
subsequent violation.
4)Provides that nothing shall be construed to prevent any
enforcement by a governmental entity against any person who
originates a loan and who is exempt or excluded from licensure
by all of the licensing agencies, based on a violation of any
provision of this section.
5)Establishes that a licensed person who violates the
requirements of this bill will have also been deemed to have
violated their licensing law.
6)Provides that nothing shall be construed to prevent the
California State Attorney General from enforcing the provision
of the bill.
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7)Provides for an operative date beginning 90 days after
issuance of the forms, or July 1, 2010, whichever is later.
EXISTING LAW
1)Requires a person in a trade or business who negotiates
certain specified contracts or agreements primarily in
Spanish, Chinese, Tagalog, Vietnamese, or Korean must provide
an unexecuted translation of the contract or agreement in the
language in which the contract or agreement was negotiated
prior to its execution. In addition, any subsequent document
making substantial changes in the rights and obligations of
the parties must also be translated. Provides that this
requirement does not apply if the consumer negotiates the
terms of the contract through an interpreter. The contracts
covered by this requirement are:
a) Retail installment or automobile conditional sales
contracts;
b) Unsecured loans or extensions of credit for use
primarily for personal, family or household purposes;
c) A lease, sublease, or rental contract or agreement;
d) A loan or extension of credit for use primarily for
personal, family or household purposes where the loan is
subject to the Industrial Loan Law (involving industrial
banks or industrial loan companies) or the California
Finance Lenders Law (generally involving higher-end
consumer loans, but may also include some home loans), or
loans involving a real estate broker (in which case only
specified information must be translated);
e) A reverse mortgage; and,
f) Legal services agreements. (Civil Code Section 1632.
Unless otherwise stated, all further statutory references
are to that code.)
2)Provides that the requirement to provide translated copies of
agreements is deemed complied with if a supervised financial
organization, which includes a bank, savings association or
credit union, provides a translation of the disclosures
required by Regulation M (consumer leasing) or Regulation Z
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(consumer lending) of the federal Truth in Lending Act.
(Section 1632.)
3)Specifies that the executed English-language contract shall
determine the rights and obligations of the parties, but
provides that the translation may be admissible in evidence
only to show that no contract was entered into because of a
substantial difference between the contract and the
translation. (Section 1632.)
4)Provides that the consumer may rescind the contract if a
required translation is not provided. If the contract has
been sold or assigned to a financial institution, the consumer
must make restitution to, and have restitution made by, the
person with whom he or she made the contract. In addition,
the assignor is required to promptly repurchase the contract
from the assignee. (Section 1632.)
FISCAL EFFECT : According to the Assembly Appropriations
Committee:
1)DOC, DFI, and Department of Real Estate (DRE) indicate that
the translation of documents will result in minor and probably
absorbable costs.
2)Minor examination and enforcement costs to DOC and DFI (less
than $50,000 annually combined), potentially offset by higher
administrative penalties.
COMMENTS :
This analysis discusses the bill as is proposed to be amended in
committee. This bill was originally heard in Banking & Finance
Committee on April 13, 2009. At the time of that hearing, AB
1160 faced extensive opposition due to various provisions,
including some technical problems. The committee recommended,
and the author accepted a series of amendments designed to
strengthen the bill and fix technical concerns. One issue left
outstanding at that time was the ability for a consumer to
rescind a mortgage loan transaction indefinitely if they had not
received the required translation. This unlimited right of
rescission currently exists in law for mortgage loans brokered
by a licensed real estate broker, and several other types of
loan products. The author, sponsors, and industry groups agreed
to conduct further meetings in an attempt to resolve this issue.
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The major changes made since this bill was last heard, is the
right of rescission has been struck out of the bill and the
implementation date has been altered. The amendments to this
bill taken on June 2, 2009 on the Assembly Floor not only
eliminate the rescission for a loan originated through a lender,
but also eliminate the right of rescission for other contracts.
The attempt to wedge in a translation requirement for lenders
into the current statute is problematic on many levels,
including the current statute may be one of the most difficult
sections of code to interpret and decipher. The previous
comment may be laden with some exaggeration, but committee
staff, industry participants and consumer advocates all agree
that the creation of a new code section may be the cleanest and
most effective way to accomplish the task at hand.
Subsequent to this bill being amended on the Assembly Floor all
interested parties and committee staff conducted meetings in
order to reach some type of compromise. What appears to be
clear is that all sides have agreed the policy of requiring
non-English speakers be provided with translations of their
mortgage documents is a worthy effort to undertake.
As mentioned in the previous analysis of this bill, and in the
proceeding paragraphs is that a number of issues have inspired
very detailed discussions and debates on the appropriate policy
and penalties. A major policy concern raised by this committee
in its previous hearing this bill was right of a consumer to
rescind their loan transaction. The author has made a decision
and a compromise to take rescission as a remedy. This has been
identified as a major compromise on the part of the author and
supporters of the bill. In spite of this major consolation
several other ancillary issues remain. The following is a
discussion of those issues and an explanation of how the mock-up
addresses these issues:
Timing of disclosure.
The original version of this bill required disclosure of the
translated loan documents seven days prior to the closing of the
loan. Subsequent conversations revealed that supporters of the
bill wanted the disclosure of the translation to reflect what is
currently required of mortgage brokers licensed by DRE. The
requirement for mortgage brokers is three days after initial
application. Other parties believe that the disclosure should
occur three days prior to closing of the loan. Compelling
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arguments exist on all sides for either timeline. The question
the committee must consider is what is in the best interest of
the borrower in regards to receiving the translation? If a
borrower has negotiated a loan in a non-English language and
then, pursuant to federally required disclosures, receives the
Good Faith Estimate (GFE) which would be in English, it would
seem to provide little benefit to the non English speaking
borrower. If that borrower wants to shop around with various
lenders, how would they compare their loan offers if they did
not have a translated copy of the document? The premise of
this legislation is that current English language disclosures do
not do an adequate job of informing non-English speaking
borrowers. If the requirement for the translation to occur were
to be three days prior to closing it would provide a final
"heads-up" to the borrower as to how they are about to sign
their life away. However, if the consumer doesn't see a
translation of the term until that point in time, are they in
any position to judge, three days before closing, and the merits
of the transaction? Additionally, the process of purchasing a
home is stressful and cumbersome, and three days prior to
closing most borrowers are in a daze of confusion and excitement
as they have finally settled on home loan terms.
The mock-up under consideration proposes to require that that
the translated summary should be given to the borrower three
business days after application. This is the same timeline that
is required for lenders to offer the GFE to prospective
borrowers. Requiring the translation of those key terms would
provide the vital disclosures necessary for non-English speaking
borrowers to make informed decisions.
Notice of rights .
Various other versions of this bill, including the current
version in print have contained notice requirements in order to
inform borrowers of their rights. The justification for such a
disclosure would be to inform consumers that they do have a
right to a translated summary of mortgage terms if they
negotiated their mortgage in a language other than English.
One solution offered in an earlier version (April 2, 2009) was
to require the disclosure of a consumer's right to a translation
on initial disclosure documents in the five non-English
languages all to borrowers regardless of whether they had
negotiated in those languages. The committee at that time did
not feel that such a broad requirement was appropriate for all
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loans and all borrowers. Subsequently, the committee
recommended amendments that would require some type of publicly
displayed notice that would inform customers of their rights.
However, this language didn't specify whether the notice would
appear at application or at closing, which is more than likely
not to be conducted in the actual lender's office.
Additionally, questions arose as to whether such a notice would
be clear and visible enough to provide the relevant disclosures.
Additional discussions have revolved around a more targeted
approach to disclosure involving lenders who may advertise to
non-English speaking communities. This approach would require
that such advertisements (Television, radio, print, etc) would
contain a statement in the language of the advertisement that
would disclose the borrower's right to a translated summary of
loan terms. Certainly this is a much more targeted approach to
ensure that the disclosure of a consumer's right is received by
those consumers who are most likely to negotiate in one of the
five languages subject to this bill. However, the downside of
such an approach is the disclosure may become buried among the
numerous lines of indecipherable text that is currently required
to be disclosed. A recent mortgage loan advertisement on
television, viewed by committee staff, revealed over five lines
of minuscule text disclosing rates and terms of the loan, as
well as, the license number of entity for every state in which
it was doing business. Staff fears that a new requirement for
disclosure would only become so clouded as to become ineffective
in offering any real benefit to the consumers. Additionally,
with many mortgages being conducted over the phone or on the
internet a visual or paper based disclosure may bypass those
consumers. Additionally, mortgage brokers, who are currently
required to provide a translated summary, are not required to
provide notice of the consumer's right to that summary.
All interested parties and committee staff have engaged in
detailed and thorough debate on this issue without coming to a
consensus on the best approach. At this time, without a
solution to this issue, committee staff believes that the
penalties present in the proposed mock-up will have to suffice
in order to encourage compliance.
The North Star .
Another point of contention and discussion has been to what
document DFI and DOC should use as a reference in creating the
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summary disclosure forms. Currently, the bill references DRE
forms 883 and 885 (for more discussion on these forms, please
review the committee's analysis for April 13, 2009). In short,
these forms are the current standards for disclosure for DRE
licensed real estate brokers. Some of the information contained
in these forms may not be applicable to lender originated loans.
However, the current version of the bill provides that such
reference to these forms is strictly permissive and is only an
attempt to offer the regulators a starting point for the
creation of such forms.
Concerns have been raised that in the creation of new forms that
they may be too long or burdensome on the lending community
thereby making compliance difficult, or increasing borrow
confusion. A proposal has been offered to require the forms to
be made via the administrative rule making process or under a
process instituted by a working group that would bring together
the various interested parties to offer insight and comment on
the proposed form.
The mock-up under consideration by the committee attempts to
reach a middle ground on the reference issue. First, the
mock-up proposes that the reference point for creation of the
translated forms should be the GFE. This document is the
primary initial disclosure offered to borrowers, by lenders, in
the mortgage lending process and contains the necessary and
primary terms and conditions of the mortgage transaction. At
this time, committee staff will not recommend that the model
forms be created via administrative rule or via working groups.
Not including such a proposal is not an indication or judgment
of the validity of such a process. On the contrary, it is an
acknowledgement that the costs of taking such action by the
regulatory bodies could jeopardize the future of this
legislation due to fiscal constraints. Should the author or
committee receive clarification, as this bill moves forward,
that such actions would not come with an extreme price tag, then
it may be worth revisiting this issue.
Penalties.
As mentioned previously, the proposed mock-up contains various
remedies intended to ensure compliance by the regulated
entities. First, a violation is subject to an administrative
penalty from $2,500, $5,000 or $10,000 depending on the number
of violations. Second, a failure to provide the translation
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would also be a violation of the licensing law of that
particular lender. Finally, the mock-up provides clarity that
the Attorney General may also bring an action to enforce. In
addition to the stated penalties, an aggrieved borrower would
have access to various other legal remedies provided under
common law and other state and federal statutes.
Need for bill . According to the author, "For the most
consumers, mortgages are the largest and most complex financial
transactions of their lives. For many non-English speakers,
failure to translate the documents results in limited or an
incorrect understanding of key loan terms like interest rate
adjustments and prepayment penalties. As a result, many end up
with excessively costly loans or loans that will result in high
levels of default and foreclosure. Lack of translation
compounds other problems that have contributed to sharply
increasing defaults and foreclosures in the subprime mortgage
market."
Contracts covered by the current translation requirement include
automobile sales and leases, consumer credit agreements, retail
installment contracts, rental agreements, certain types of
loans, and legal service contracts. This requirement was
established in 1974 to prevent certain trades or businesses from
taking "unfair advantage" of Spanish-speaking consumers. The
additional four languages were added in 2003, in response to the
2000 Census which revealed that approximately 4.3 million
Californians speak a non-English language other than Spanish in
their homes.
Media reports from 2007, specifically a series of articles from
the San Jose Mercury News (The Harsh Side of the Housing Boom,
March 11, 2007) detailed the problems of borrowers with limited
English skills unable to understand the complex disclosures or
key terms relating to their loans. The subprime housing boom
found particular strength in minority communities, specifically
non-English speaking. As the aforementioned article relays,
several mortgage companies hired teams of Spanish speakers to
call borrowers and negotiate strictly in Spanish. The article
goes on to say that many of these borrowers were not offered
translations of the loan documents. Yet, and in spite of the
difficulties presented regarding translations, another factor
increasing the problem associated with these mortgages was the
prevalence and use of no-documentation loans, or the use of
teaser rate loans that were in themselves, endemic with risks
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and the potential for default. Couple these risky features with
multiple languages and the likelihood of default skyrockets.
Previous legislation : AB 309 (Chu), Chapter 330, Statutes of
2003, expanded translation requirements beyond, what was then a
requirement for only Spanish translations, to Chinese, Tagalog,
Vietnamese, or Korean. AB 309 was a contentious measure pitting
several consumer organizations against organizations
representing concerns of various different affected industries.
In 2007, AB 512 (Lieber) was introduced in response to a concern
that some non-English speaking mortgage loan borrowers were not
being supplied with a translation of the mortgage loan
documents, and thus unable to understand the key terms of their
mortgage loan. AB 512 would have required supervised financial
organizations, as defined, who negotiate any material term of a
contract or agreement, in one of five listed foreign languages,
to provide either an approved disclosure form or a translated
copy of the contract or agreement to the borrower, as specified;
would subject violators of this section to specified penalties
for failure to comply; and would give aggrieved borrowers
certain rights to rescind contracts. The bill was held in
Senate Banking, Finance and Insurance.
REGISTERED SUPPORT / OPPOSITION :
Support
Center for Responsible Lending (Sponsor)
Asian Americans for Civil Rights & Equality (AACRE) (Co-Sponsor)
(April 2, 2009 version)
California Reinvestment Coalition (Co-Sponsor) (April 2, 2009
version)
California Labor Federation, AFL-CIO (April 2, 2009 version)
Consumer Attorneys California (April 2, 2009 version)
Consumer Federation of California (April 2, 2009 version)
Consumers Union (April 2, 2009 version)
Lawyer's Committee for Civil Rights of the San Francisco Bay
Area (LCCR) (April 2, 2009 version)
League of United Latin American Citizens (LULAC) (April 2, 2009
version)
Service Employees International Union (SEIU) (April 2, 2009
version)
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Opposition
California Chamber of Commerce (April 2, 2009 version)
California Credit Union League (April 2, 2009 version)
Civil Justice Association of California (CJAC) (April 2, 2009
version)
California New Car Dealers Association (CNCDA) (April 2, 2009
version)
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081