BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Ellen M. Corbett, Chair
2009-2010 Regular Session
AB 2325 (Lieu)
As Amended April 26, 2010
Hearing Date: June 22, 2010
Fiscal: Yes
Urgency: No
BCP:jd
SUBJECT
Mortgage Foreclosure Consultants: Loan Audits
DESCRIPTION
Existing law places strict restrictions on the activities of
foreclosure consultants, as defined. This bill would add the
audit of any obligation secured by a lien on a residence in
foreclosure to the definition of "services" that a foreclosure
consultant performs, thus, adding individuals who perform
forensic loan audits to the foreclosure consultant law, as
specified.
BACKGROUND
Last year, SB 94 (Calderon, Corbett, Steinberg, Chapter 630,
Statutes of 2009) sought to address problems surrounding the
practice of charging troubled borrowers significant amounts of
money in exchange for help in achieving a loan modification.
Many of those borrowers spent several thousands of dollars only
to receive no actual modification, or a modification that was
less than promised. To address those issues, and the fact that
a borrower may ask their lender directly for a loan modification
or obtain free assistance from a nonprofit housing counseling
agency, SB 94 prohibited any person from charging an up-front
free for helping to negotiate a loan modification. SB 94 also
required any person who sought to charge a fee after performing
the service to provide a disclosure that similar services are
available from non-profit housing counselors, free of charge.
Although SB 94's prohibitions appear to have reduced the above
fraudulent loan modification practices, a related practice has
(more)
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emerged in California. Specifically, the Attorney General
issued a warning on February 22, 2010 that:
Californians [should] avoid forensic loan audits, the
loan-modification industry's latest "phony
foreclosure-relief service," in which homeowners pay
up-front fees for a forensic review of their lender's
practices, but are provided no actual foreclosure relief. .
. .
Individuals and businesses who offer forensic loan audits
use inflated and misleading claims to convince homeowners to
pay up-front fees for services that produce no actual
foreclosure relief. Homeowners are encouraged to pay for an
audit of their mortgage loan file to determine their
lender's compliance with state and federal mortgage-lending
laws. This audit is pitched to homeowners as a tool they
can use to gain leverage and speed up the loan-modification
process.
In truth, there is no evidence or statistical data to
support claims that forensic loan audits-even if performed
by a licensed, legitimate and trained auditor, mortgage
professional or lawyer-will help homeowners obtain loan
modifications or provide any other foreclosure relief.
This bill seeks to address the problems relating to forensic
loan audits by adding that activity to the definition of
"foreclosure consultant," thus subjecting those individuals to
the strict statutory limitations of California's foreclosure
consultant law.
CHANGES TO EXISTING LAW
Existing law defines "foreclosure consultant" as any person who
makes any solicitation, representation, or offer to any owner to
perform for compensation or who, for compensation, performs any
service which the person in any manner represents will in any
manner do any of the following: (1) stop or postpone the
foreclosure sale; (2) obtain any forbearance from any
beneficiary or mortgagee; (3) assist the owner to exercise the
right of reinstatement, as specified; (4) obtain any extension
of the period within which the owner may reinstate his or her
obligation; (5) obtain any waiver of an acceleration clause; (6)
assist the owner obtain a loan or advance of funds; (7) avoid or
ameliorate the impairment of the owner's credit resulting from
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the recording of a notice of default or foreclosure sale; (8)
save the owner's residence from foreclosure; or (8) assist the
owner in obtaining the remaining proceeds from the foreclosure
sale of the owner's residence. (Civ. Code Sec. 2945.1(a).)
Existing law exempts numerous individuals from the definition of
foreclosure consultant, including persons licensed to practice
law and real estate brokers. (Civ. Code Sec. 2945.1(b).)
Existing law defines "service" to include, among other things,
debt, budget, or financial counseling of any type, and
contacting creditors on behalf of an owner in foreclosure.
(Civ. Code Sec. 2945.1(e).)
Existing law imposes numerous requirements on foreclosure
consultants, including:
Requiring contracts made with a consultant to be
cancelled until midnight of the fifth business day after
signing; (Civ. Code Sec. 2945.2.)
Prohibiting the collection or receipt of compensation
until after performance of each and every service the
consultant contracted to perform or represented that he or
she would perform; (Civ. Code Sec. 2945.4.)
Prohibiting the consultant from taking any wage
assignment, any lien of any type on real or personal
property, or other security to secure the payment of
compensation; (Civ. Code Sec. 2945.4.)
Prohibiting the consultant to take a power of attorney
from an owner for any purpose; and (Civ. Code Sec. 2945.4.)
Requiring registration with the Department of Justice
and the maintenance of a surety bond in the amount of
$100,000. (Civ. Code Sec. 2945.45.)
Existing law permits an owner to bring an action against a
foreclosure consultant for violations, and permits the recovery
of actual damages, reasonable attorneys' fees and costs, and
appropriate equitable relief. The court may also award
exemplary damages equivalent to three times the compensation
received in violation of specified provisions, and three time
the actual damages. (Civ. Code Sec. 2945.6.)
This bill would add the act of arranging or attempting to
arrange an audit of any obligation secured by a lien on a
residence in foreclosure to the list of activities included in
the definition of "service."
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COMMENT
1. Stated need for the bill
According to the author:
AB 2325 establishes greater protections for homeowners by
providing that foreclosure consultant services include the
audit of any obligation secured by a lien on a residence in
foreclosure. AB 2325 also requires a foreclosure consultant
to register with the Department of Justice to provide a
forensic loan audit. With record unemployment persisting
and foreclosures continuing to devastate our economy, we
need to be as vigilant as we can. AB 2325 strengthens
current law to address a new scam, and ensures people
offering a forensic loan service comply with existing
consumer protection requirements, including a ban on advance
fees. This bill would result in fewer homeowners being
victimized.
2. Result of adding forensic loan audits to the foreclosure
consultant law
In recognition that homeowners who are facing the foreclosure of
their home may be subject to fraud, deception, harassment, and
unfair dealing on the part of foreclosure consultants, the
Legislature enacted specific restrictions on the actions of
mortgage foreclosure consultants (Civ. Code Sec. 2945 et seq.).
By adding "arranging or attempting to arrange an audit of any
obligation secured by a lien on a residence in foreclosure" to
the list of services performed by a mortgage foreclosure
consultant, this bill seeks to add individuals who perform
forensic loan audits to the foreclosure consultant law, and as a
result, to its associated requirements and prohibitions.
As a result, those who offer forensic loan audits would be
prohibited from, among other things, collecting advance fees and
taking a power of attorney from an owner for any purpose. Those
individuals would also have to register with the Department of
Justice (DOJ), submit all of their advertising and promotional
material to the DOJ, and maintain a surety bond of $100,000.
Failure to register, or violation of the various prohibitions
could subject an individual to fines and, or imprisonment under
the foreclosure consultant law.
From a policy standpoint, applying the provisions of the
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foreclosure consultant law to individuals who do perform these
forensic loan audits would add numerous safeguards that would
protect consumers - including a right to cancel their contract
within five business days. Although some of the more fraudulent
actors may elect to continue operating in violation of the law,
the clear inclusion of this type of activity within the
foreclosure consultant law provides victims and prosecutors with
additional recourse against those individuals.
3. Evidence supporting restriction on forensic loan audits
Forensic loan auditors typically charge an up-front fee of
several hundred dollars to review a borrower's loan documents to
determine whether the loan itself complied with state and
federal laws. Those audits are sometimes described as a way to
help avoid foreclosure, or as a way to facilitate a loan
modification. Despite those claims, the Federal Trade
Commission's consumer alert entitled "Forensic Mortgage Loan
Audit Scams: A New Twist on Foreclosure Rescue Fraud" warns
consumers that despite the claims of auditors:
there is no evidence that forensic loan audits will help
you get a loan modification or any other foreclosure
relief, even if they're conducted by a licensed,
legitimate and trained auditor, mortgage professional or
lawyer.
some federal laws allow you to sue your lender based on
errors in your loan documents. But even if you sue and
win, your lender is not required to modify your loan
simply to make your payments more affordable.
if you cancel your loan, you will lose your home and you
will have to return the money you borrowed to your lender.
In addition to the FTC, California's Attorney General and the
Department of Real Estate (DRE) have issued similar consumer
alerts. Similar to the above statements by the FTC, DRE's
consumer alert states:
There is no statistical or other data that supports the
claims that a forensic loan audit, even if performed by a
licensed, legitimate and trained auditor, will help you
modify your home loan or "stop foreclosure in its tracks."
And it is important to note that many audits are done by
people with no experience using various software programs.
Given the above concern, and the reports of issues surrounding
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the practice of forensic loan auditing, the proposed addition of
those auditors to the foreclosure consultant law appears
appropriate. As noted below, that addition to the foreclosure
consultant law alone will not capture all of the actors due to
different individuals exempted from its restrictions.
4. Exemptions from coverage of the foreclosure consultant law
It should be noted that the foreclosure consultant law is not
all-inclusive - various professionals are specifically exempted
from the definition of "foreclosure consultant." Those exempt
individuals include attorneys, proraters, real estate brokers,
persons licensed to makes loans under the California Finance
Lenders Law, and persons licensed as a residential mortgage
lender or servicer, as specified.
Support : Greenlining Institute
Opposition : None Known
HISTORY
Source : Author
Related Pending Legislation : None Known
Prior Legislation : See Background.
Prior Vote :
Assembly Banking & Finance Committee (Ayes 9, Noes 2)
Assembly Appropriations Committee (Ayes 11, Noes 5)
Assembly Floor (Ayes 46, Noes 24)
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