BILL ANALYSIS
AB 1639
Page 1
Date of Hearing: April 22, 2010
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
AB 1639 (Nava, Bass, Lieu) - As Amended: April 12, 2010
As Proposed to be Amended
SUBJECT : RESIDENTIAL MORTGAGE WORKOUT PROGRAM
KEY ISSUE : WOULD THE FORECLOSURE CRISIS AND ITS IMPACT ON
CALIFORNIA COMMUNITIES BE AMELIORATED BY PROVIDING A PROCESS BY
WHICH A PROFESSIONAL CONCILIATION SPECIALIST WOULD ASSIST THE
PARTIES IN AN EFFORT TO REACH A MUTUALLY SATISFACTORY AGREEMENT
TO MODIFY THE LOAN IN ORDER TO PROVIDE A MORE SUSTAINABLE
LONG-TERM ARRANGEMENT, SUCH AS HAS ALREADY BEEN SUCCESSFULLY
IMPLEMENTED IN OTHER STATES?
FISCAL EFFECT : As currently in print this bill is keyed fiscal.
SYNOPSIS
This bill, sponsored by Los Angeles Mayor Antonio Villaraigosa,
would establish a three-year monitored Mortgage Workout Program
(MMWP), such as has been adopted in a number of other states, by
which certain residential mortgage borrowers and lenders would
engage in conciliation efforts for purposes of developing a loan
modification plan. In response to various opposition concerns,
the authors have proposed a lengthy set of amendments described
in the analysis to limit and clarify the bill. Perhaps most
importantly, a lender's participation in the process would be
limited to a specified period of time.
The program would require that specified information regarding
the program be included with the notice of default sent to the
borrower and recorded in the office of the county recorder. The
program would require a qualified borrower who elects to
participate in the program to complete a specified form and
return the form to the program administrator within a specified
time, along with other required information, and would require
the borrower to deposit with the administrator half of the
current mortgage payment each month during participation in the
program. The bill would impose various fees payable by the
lender or by the borrower, as specified, who participate in the
MMW Program. The bill would also provide that the timelines set
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forth in the provision governing the exercise of the power of
sale, as specified, would be suspended until the completion of
the program, as specified. The bill would provide for an
administrator of the program in the executive branch and require
the administrator, among other duties, to implement rules and
standards for selecting qualified neutral dispute resolution
facilitators who will function like mediators, and to develop
standards for forms and reports required to implement the
program. The bill would also require the administrator, upon
receipt of a borrower's form whereby he or she elects to
participate in the program, to provide the parties with an
opportunity to mutually agree on a dispute resolution
facilitator; if the parties cannot agree, the administrator
would randomly appoint a neutral facilitator. This person would
be compensated by the parties for his or her services to the
program and would be required to use reasonable efforts to
ensure that each MMW Program is completed within 60 calendar
days. The bill would also require the mediator and program
administrator to prepare specified reports and provide that
lenders post specified data about their loans on their Internet
Web site.
The bill is opposed by trade associations representing bankers
and others in the lending industry who contend that the bill is
unnecessary, flawed, and unhelpful. They contend that requiring
them to participate in discussions regarding loan modifications
will be costly and will further prolong the economic crisis
precipitated by the collapse of the financial services markets
related to residential lending.
SUMMARY : Establishes a Meditated Mortgage Workout Program
(MMWP) for borrowers facing foreclosure whereby a borrower could
request to participate in mediation sessions with their lender
to examine mortgage loan modification options or foreclosure
alternatives. Specifically, this bill :
1)Provides that a mortgagee, trustee, beneficiary, or authorized
agent shall inform a borrower via certified mail accompanying
a notice of delinquency that the borrower may request to
participate in the MMWP. The notice shall include the
telephone number, email address, and Internet Web site for the
administrator.
2)Provides that the provisions of the MMWP apply to primary
residences only.
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3)Allows a borrower 30 days from the receipt of the delinquency
notice to request participation in the MMWP.
4)Provides that if a borrower chooses to participate in the
program prior to the filing of a notice of default (NOD) then
the mortgagee, trustee, beneficiary, or authorized agent is
not required to exercise other due diligence contact
requirements as currently mandated under the law.
5)Provides that if a borrower elects to participate in the MMW
Program s/he must complete an election form either via
internet website, email, telephone, or via mail service.
6)Provides that the program administrator shall:
a) Implement rules and standards for choosing qualified
mediators;
b) Implement rules and standards for removal of mediators;
c) Develop standards and rules for forms and reports;
d) Require additional training for mediators to meet the
goals of the MMWP;
e) Collect all fees as required.
7)Requires within 10 days of requesting to participate in the
MMWP, the borrower shall submit specified documents to the
program administrator.
8)Requires that within 10 days of receiving notice that the
borrower has elected to participate in the MMWP, the
mortgagee, trustee, beneficiary, or authorized agent shall
likewise submit specified documents to the program
administrator.
9)Provides that the foreclosure process is suspended during the
time the borrower is participating in the program.
10)Provides that the mortgagee, trustee, beneficiary or
authorized agent shall deposit an administrative fee of $500
and a deposit of mediator's fees of $600, as well as, all
required documentation within 10 days of notification from the
administrator of the borrower's request to participate in the
program.
11)Prohibits continuances of the MMW program session(s) unless
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certain conditions are met.
12)Specifies that the borrower and mortgagee, trustee,
beneficiary, or authorized agent may, but are not required to,
agree on the terms of a loan modification.
13)Provides that nothing shall be construed to prevent a
creditor from offering or accepting alternatives in writing to
foreclosure, such as a short sale or deed-in-lieu of
foreclosure, but only if the borrower requests these
alternatives, rejects a loan modification offered pursuant to
this section, or does not qualify for a loan modification
pursuant to this section.
14)Specifies that if a borrower fails to meaningfully
participate in the MMWP, the program shall be suspended,
unless the borrower cures noncompliance within 10 days.
15)Specifies that the mortgagee, trustee, beneficiary or
authorized agent fails to meaningfully participate,
foreclosure actions shall be suspended until such time that
the mortgagee, trustee, beneficiary or authorized agent cures
noncompliance.
16)Requires the administrator to report quarterly to the
Legislature regarding the performance of the MMWP.
17)Each mortgagee, trustee, beneficiary, or authorized agent
participating in the MMWP shall post public data reports on a
quarterly basis on its Internet Web site
18)Requires that a mediator shall use all reasonable efforts to
ensure that each MMWP session is completed within 60 calendar
days of the mediator's appointment.
19)Requires the mediator to issue a report to the Administrator
upon completion of the mediation that shall state whether the
parties reached a mutually acceptable resolution.
EXISTING LAW :
1)Regulates the non-judicial foreclosure process pursuant to the
power of sale contained within a mortgage contract, and
provides that in order to commence the process, a trustee,
mortgagee, or beneficiary must record a NOD and allow three
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months to lapse before setting a notice of sale for the
property. (Civil Code Section 2924, all further references
are to the Civil Code.)
2)Provides that the mortgagee, trustee or other person
authorized to make the sale must give notice of sale, and
requires notice of the sale to be made, as specified, at least
20 days prior to the date of sale. (Section 2924(f).)
3)Provides that a mortgage, trustee, beneficiary, or authorized
agent may not file a NOD until 30 days after contact has been
made with the borrower who is in default. (Section
2923.5(a)(1).)
4)Requires the mortgagee, trustee, beneficiary or authorized
agent to contact a borrower in default in person or by
telephone and inform them of their right to a subsequent
meeting, and telephone number of the United States Department
of Housing and Urban Development (HUD) to find a HUD certified
housing counselor. (Section 2923.5(a)(2).)
5)Allows a borrower to assign a HUD-certified counselor,
attorney or other advisor to discuss with the entities options
for the borrower to avoid foreclosure. (Section 2923(f).)
6)Provides that a NOD may be filed when the mortgagee, trustee,
beneficiary or authorized agent has not contacted the borrower
provided that the failure to contact the borrower occurred
despite reasonable due diligence on the part of the entity and
that "due diligence" means and requires the following:
a) The mortgagee, trustee, beneficiary or authorized agent
sends a first class letter that includes the toll-free
number available for the borrower to find a HUD-certified
housing counseling agency; and,
b) Subsequent to the sending of the letter the mortgagee,
trustee, beneficiary or authorized agent attempts to
contact the borrower by telephone at least three times at
different hours and on different days. (Section 2923(g).)
7)Requires the mortgagee, trustee, beneficiary or authorized
agent to maintain a toll-free number for borrowers that will
provide access to a live representative during business hours
and requires the mortgagee, trustee, beneficiary or authorized
agent to maintain a link on the main page of its Internet Web
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site containing the following information:
a) Options that may be available to borrowers who are
unable to afford their mortgage payments and who wish to
avoid foreclose, and instructions to borrowers advising
them on steps to take to explore these options; and,
b) A list of documents borrowers should collect and be
prepared to submit when discussing options to avoid
foreclosure. (Section 2923(g)(5).)
8)Specifies that the notice and contact requirements do not
apply in the following circumstances:
a) The borrower has surrendered the property as evidenced
via a letter or delivery of keys to the property to the
mortgagee, trustee, beneficiary or authorized agent;
b) The borrower has contacted a person or organization
whose primary business is advising people who have decided
to leave their homes on how to extend the foreclosure
process and avoid the contractual obligations; or,
c) The borrower has filed for bankruptcy. (Section
2923(h).)
9)Makes a legislative findings and declarations that a loan
servicer acts in the best interest of all parties if it agrees
to, or implements a loan modification or workout plan in one
of the following circumstances:
a) The loan is in payment default, or payment default is
reasonably foreseeable; or,
b) Anticipated recovery under the loan modification or
workout plan exceeds the anticipated recovery through
foreclosure on a net present value basis. (Section
2923.6.)
10)Provides that a notice of sale may not be given for 90 days
in order for parties to pursue a loan modification. (Section
2923.52.)
11)Specifies that a servicer can get an exemption from the
90-day foreclosure moratorium if they demonstrate proof of a
comprehensive modification program. (Section 2923.53.)
12)Provides that a notice of sale postponement may occur at any
time prior to the completion of a sale for any period of time
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not to exceed a total of 365 days from the date set in the
notice of sale. (Section 2924(g).)
13)Specifies that if sale proceedings are postponed for a period
totaling more than 365 days, the scheduling of any further
proceedings shall be preceded by giving a new notice of sale.
(Section 2924(g).)
COMMENTS : The joint authors carry this bill, sponsored by Los
Angeles Mayor Antonio Villaraigosa, to provide an important
opportunity for residential mortgage borrowers to engage in
discussions with their lender or loan servicer in an effort to
come to work out a mutually acceptable agreement to modify the
terms of the loan prior to foreclosure.
The authors explain the reason for the bill as follows:
Thus far, the solutions offered to address foreclosure have
been a gamut of voluntary programs that still place
borrowers at the distinct disadvantage of having to trust
that their lenders can process their request for help in a
timely manner to help them avoid foreclosure.
Voluntary approaches that rely on the beneficent decisions
of lenders are no longer acceptable. All of the programs
that exist today fail to create an atmosphere of
accountability, trust and transparency in the loan
modification process.
The Home Affordable Modification Program (HAMP), is the
cornerstone of the Federal response to the foreclosure
crisis. Thus far, the numbers are less than successful.
The HAMP program was designed to assist 3-4 million
homeowners. Almost eighteen months after implementation,
1.3 million temporary modifications offers have been
extended with only 170,000 made permanent. While 1.3
million temporary offers seems significant, it is unclear
how many of those were accepted or whether they were on
terms the borrower could afford. Anecdotal examples show
that many temporary offers do little more than create
balloon payments of outstanding principle and interest, or
in some cases actually increase the monthly mortgage amount
due to the mandatory creation of escrow accounts for taxes
and insurance.
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A solution that holds promise is foreclosure mediation that
requires lenders and borrowers to meet face to face with a
neutral third party to work out a loan modification, or to
determine if a modification is not appropriate and work out
an exit from the home that is best for all parties.
Foreclosure mediation is working in other jurisdictions
outside of California. The City of Philadelphia has had
success in saving homes using this model and last year,
Nevada started a statewide mediation program.
Under AB 1639, a borrower who is delinquent on their
mortgage or receives a notice of default can elect to
participate in a foreclosure mediation program with their
lender so they can arrive at a sustainable loan
modification. If the borrower is not able to receive a
modification it would allow the borrower and lender to work
out a reasonable transition plan. This program will ensure
that homeowners who have a chance to stay in their homes
get that opportunity. Mediation is not a one-sided concept
- lenders and servicers have every incentive to participate
because a mediation session will demonstrate if a borrower
qualifies for a modification program. Furthermore,
mediation is also a fair system to address foreclosure
because in CA, the mediator can not compel a specific
result.
Banking Committee Oversight Hearings Produced Testimony
Regarding The Effectiveness of Similar Programs In Other States.
The Banking and Finance Committee reports that it conducted two
oversight hearings specific to loan modifications and mediation
on October 13, 2009 and November 12, 2009. Those hearings
examined the potential use of mediation as a solution to
foreclosures.
According to the committee, testimony provided at these hearings
provided insight into the foreclosure issue from the perspective
of servicers, housing counselors, community groups and
individual borrowers. The common thread of complaints among
community groups and individual borrowers has been a lack of
response from servicers regarding loan modification requests.
While, the numbers have slightly improved since the committee
conducted those hearings, borrowers and community groups
continue to raise these issues. Based on the information
gathered at those hearings the authors of AB 1639 decided to
move forward with a foreclosure mediation bill. The authors
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contend that a foreclosure mediation process would provide an
avenue for borrowers to reach some type of mutual agreement with
their servicers.
Nevada, Connecticut, New Jersey, Florida, Maine and Illinois
have all instituted some form of foreclosure mediation programs
over the last year. On April 13, 2010 the Maryland legislature
approved a bill that established a foreclosure mediation
program. Additionally, local jurisdictions are also engaging in
mandatory mediation programs such as the cities of Philadelphia
and Milwaukee. The majority of these foreclosure mediation
programs are less than one year old so data regarding their
performance is limited.
Of these, Nevada is believed to be the state most like
California in its foreclosure process and housing market. At
this point, Nevada has data for the first six months of their
program:
Notices of Default filed: 29,242 (July through October)
Requests for mediation: 3,446
Mediations conducted: 372
Mediations scheduled: 805
Cases scheduled 1,402
This Bill Would Oblige Lenders and Servicers To Enter Into A
Facilitated Dispute Resolution Process Akin To Mediation In An
Effort To Reach A Voluntary Agreement That Avoids The Need To
Foreclose. The authors note that AB 1639 does not mandate loan
modifications, but encourages both parties to reach a resolution
with the aid of a professional dispute resolution facilitator.
The process is akin to mediation, and the normal mediation rules
would apply, although the participation in the process for a
minimum period of time would be required if the borrower elects
to participate - assuming that the borrower complies with
specified obligations, such as depositing funds toward the
mortgage payment while the resolution process is being
attempted, and providing required documents.
Details Of the Process - Lender's Participation And Costs
Limited. Under the bill, mortgage borrowers would have two
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separate opportunities to request mediation. First, when the
servicer notifies the borrower that they are delinquent on their
mortgage, the delinquency letter would include notification that
the borrower has a right to request mediation, as well as the
contact information for the Administrator of the program. In
the event a borrower has not yet requested mediation and becomes
in default, the notice of default (NOD) would include an
additional opportunity to request mediation. After requesting
mediation, the borrower would have 10 days to submit the
required documentation to the administrator and in the event of
a request occurring after an NOD has been filed; the borrower
would also have to deposit 50 percent of his monthly mortgage
payment with the administrator as a sign of good faith. Once
mediation is requested, the foreclosure process stops until the
mediation sessions are either, concluded, or the borrower fails
to meaningfully participate in the program. After a servicer
receives notice that the borrower has elected to participate in
the program, the servicer would have 10 days to submit certain
required documentation and required fees to the administrator.
If the servicer does not submit the required documentation or
fees, the mediation program is suspended until such items are in
compliance. Additionally, neither the foreclosure process, nor
the mediation session shall continue until the servicer provides
the required documents.
Once the case is officially in the program, the first resolution
session must be scheduled within 15 days. Importantly, as
proposed to be amended the obligation to participate is not
open-ended but reasonably limited to a few hours. Moreover, the
mediator is required to ensure that the MMWP will be completed
within 60 days. Once the mediation session(s) are finished the
mediator is required to issue a report to the Administrator
stating whether the parties reached a mutually acceptable
solution. Additionally, the bill requires that the
Administrator must report to the legislature on the progress of
the mediation program.
Relationship To Federal Foreclosure Relief Efforts . According
to the Banking Committee, the contention among some industry
groups is that the federal response to foreclosures could be
complicated or otherwise frustrated by implementing a statewide
foreclosure mediation program. At this point, the Banking
Committee states, nothing in AB 1639 directly conflicts with
ongoing loan modification efforts. Rather, getting borrows and
sevicers in the same room with a neutral third party could
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expedite modifications under the federal program by ensuring
that both parties communicate and possess all the necessary
documentation to evaluate a need for modification. Moreover,
supporters believe that a mediation exchange of information
would reveal very clearly to a lender whether a borrower has a
realistic ability to pay their mortgage.
Concerns Regarding Strategic Default. In response to concerns
raised regarding so-called "strategic default," the authors
states that strategic default is when a borrower who can
otherwise afford his or her mortgage payment is in a negative
equity position and decides to go into default, either to walk
away from the mortgage or compel the servicer to negotiate a
loan modification. The Banking Committee states that studies on
the issue of strategic default tend to examine previous down
turns, or engage in surveys to gauge general attitudes about
mortgage default and its interaction with negative equity
positions. In a study from July of 2009, "Moral and Social
Constraints to Strategic Default on Mortgages" the authors,
while finding that when negative equity reaches the 50 percent
mark, borrowers are 17 percent more likely to default, still
found that, "It is difficult to study the strategic default
decision, because it is de facto an unobservable event. While
we do observe defaults, we cannot observe whether a default is
strategic." This study attempted to reach correlations on
strategic default even though by the authors own admission
strategic defaults are not observable for the purposes of study.
At this point, the additional evidence is mostly anecdotal as
found in newspapers and other media outlets. The authors
contend that, while strategic default occurs, AB 1639 provide no
incentive or motivation.
Authors' Proposed Amendments . To address various concerns and
drafting issues, the author has agreed to take certain
amendments that, owing to the brief period of days between this
hearing and the prior hearing in the Banking Committee, must be
described in concept below. As the bill moves forward, the
authors have pledged to work with the Committee to develop
acceptable language.
Amendment 1
This article shall not apply if a mortgagee, trustee,
beneficiary, or authorized agent has either:
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(1) Conducted a personal face-to-face meeting for the
purpose of discussing loan modification or foreclosure
avoidance options; or
(2) Documented evidence that the borrower has been offered a
beneficial loan modification designed to meet long-term
sustainability.
Amendment 2
A borrower may not participate more than once in the MMWP.
Amendment 3
The MMWP program shall not be available to a borrower that has
filed for bankruptcy.
Amendment 4
A mortgagee, trustee, beneficiary or authorized agent may
request mediation under the MMWP.
Amendment 6
In the event that the borrower fails to meaningfully participate
in the program the administrator shall refund to the mortgagee,
trustee, beneficiary or authorized agent all fees previously
paid.
Amendment 7
Clarify that the borrower is to share one-half of the
administrative fees when an agreement is reached -- page 11,
line 27.
Amendment 8
Specify that the current unpaid principle balance of the
mortgage loan at issue is no more than $729,750. Consistent
with HAMP.
Amendment 9
Restrict program to borrowers facing financial hardship and
require financial hardship document to be filed with
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Administrator when borrower requests mediation. HAMP currently
has this requirement.
Amendment 10
Sunset date of January 1, 2014.
Amendment 11
Limit mediation to loans originated prior January 1, 2009.
Amendment 12
Match the documents that must be provided by the borrower with
those required under HAMP.
Amendment 13
Limit documents that servicer must provide to recent appraisal,
documentation of ownership of the deed of trust, and in the case
of investor prohibition against a modification, documentation of
such prohibition.
Amendment 14
In order to avoid confusion, the term "mediation" will be
replaced with a similar term such as "facilitated resolution."
Likewise, the term "mediator" will be replaced with a term such
as "neutral dispute resolution facilitator," as used in a
similar process under Civil Code section 1375.
Amendment 15
Clarify that the incorporation of the referenced Evidence Code
sections applies to the extent not inconsistent with the bill,
including termination of confidentiality.
Amendment 16
The Administrator will be required to implement rules and
standards for ensuring the neutrality of the dispute resolution
facilitators. On a related point, parties will be allowed to
participate in the selection of the neutral after appropriate
disclosures ala Civil Code section 1375, consistently with the
practice of voluntary dispute resolution that parties have trust
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and confidence in the neutrality of the process. Voluntarily
agreeing to a facilitator is often the first step in a
successful negotiated agreement. However, if the parties cannot
voluntarily agree, the bill will specify a process by which the
administrator will appoint one.
Amendment 17
Clarify the housing counselor obligations so that they are
consistent with 1923.2 of the Civil Code (reverse mortgages).
Amendment 18
Provide a reasonable time for borrowers and financial
institutions to provide the required documentation to the
facilitator and require that the submitted documents be kept
confidential by the facilitator and the program administrator.
Amendment 19
Specify that the facilitators shall receive no more than a
reasonable hourly rate to be determined by the administrator.
Amendment 20
Specify that the borrower and financial institution are required
to participate only up to a few hours (e.g., 4-6). If the
process has not resulted in agreement by that time and the
parties do not wish to continue to participate voluntarily, the
process would terminate.
Amendment 21
Clarify that the administrator may allow persons to attend in
place of the party in appropriate circumstances.
Amendment 22
Clarify that attorneys may represent clients in facilitated
dispute resolution sessions without additional restriction on
the payment of their fees beyond that otherwise provided by the
rules regulating the legal profession.
Amendment 23
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Clarify the circumstances and time period regarding continuances
of program meetings in order to accommodate legitimate needs
without undue penalties.
Related Pending Legislation . SB 1275 (Leno, Steinberg),
requires a mortgagee, trustee, beneficiary, orauthorized agent,
prior to the filing of a notice of default, to provide the
borrower with an application for a loan modification and other
foreclosure avoidance options and a specified notice regarding
the borrower's rights during the foreclosure process. Prohibits
the mortgagee, beneficiary, or authorized agent from combining
collections activity with communication with the borrower about
foreclosure avoidance options. Deletes the requirement that the
notices of default contain a specified declaration, and would
instead require the mortgagee, beneficiary, or authorized agent
to, concurrently with the filing of a notice of default, record
a declaration of compliance that attests to specified facts, and
mail the borrower a notice stating that these requirements have
been met. Provides that failure to record a declaration of
compliance, or recordation of a declaration of compliance that
fails to meet the specified requirements, would constitute
grounds for the borrower to bring an action to void the
foreclosure, or to recover either treble damages or statutory
damages in the amount of $10,000, whichever is greater, from the
mortgagee, trustee, beneficiary, or authorized agent. Status:
In Senate Banking, Finance & Insurance Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
Los Angeles Mayor Antonio Villaraigosa (sponsor)
California Dispute Resolution Council
Consumers Union
Opposition
California Bankers Association
California Building Industry Association
California Chamber of Commerce
California Credit Union League (CCUL)
California Financial Services Association
California Independent Bankers
California Land Title Association
California Mortgage Bankers Association
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Securities Industry and Financial Markets Association
The Civil Justice Association of California (CJAC)
United Trustees Association
Analysis Prepared by : Kevin G. Baker / JUD. / (916) 319-2334