BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Ellen M. Corbett, Chair
2009-2010 Regular Session
SB 94
Senator Calderon
As Amended April 13, 2009
Hearing Date: April 21, 2009
Business and Professions; Civil; Financial Code
BCP:jd
SUBJECT
Mortgage Loans
DESCRIPTION
This bill would prohibit persons from charging advance fees to
borrowers in connection with a loan modification, and 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.
The violation of those restrictions would be a public offense
and subject the violator to a fine, imprisonment, or both.
This bill would additionally:
prohibit servicers from imposing any interest or charge for
performing services for borrowers in connection with loan
modifications or other forms of loan forbearance or
forgiveness; and
specifically prohibit any California Finance Lender Law
licensee from making a false, deceptive, or misleading
statement, representation, or omission in connection with
their lending or brokering activities.
BACKGROUND
On March 24, 2009, this Committee held an informational hearing
that focused on the serious problem of foreclosure related scams
facing delinquent homeowners. Many of those scams involve a
promise to renegotiate a delinquent borrower's loan in exchange
for a significant up-front fee. In arresting three members of a
foreclosure fraud ring in Southern California last November, the
Attorney General's office reported:
(more)
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The arrests came after an investigation into First Gov, also
operating as Foreclosure Prevention Services, uncovered that
the company was soliciting hundreds of homeowners with mail
flyers offering to help them stop the foreclosure process on
their homes. The scammers falsely told homeowners that they
would renegotiate their mortgages, reduce monthly payments,
and transfer any delinquent loan amounts to the renegotiated
principle [sic]. The company demanded an up-front fee,
ranging from $1,500 to $5,000, to participate in the
loan-modification program. The company also told the
victims to stop any mortgage payments or communications with
their lender, claiming they would interfere with the
company's effort to negotiate the loan modification.
When victims complained that they were still receiving
delinquency or foreclosure notices from their lenders,
fraud-ring members told the victims that the mortgage loans
had been renegotiated, but the lenders needed a "good faith"
payment to secure the new accounts. Homeowners made
payments to accounts under business names such as
"Reinstatement Department" or "Resolution Department" that
made it appear as if the payment had been applied toward the
loan. Bank records indicate that more than $700,000 was
stolen from homeowners who fell victim to this scheme.
The Attorney General reported the arrest of two women last month
who ran a similar foreclosure scam ring. The Attorney General
noted:
The two women operated a company called Foreclosure Freedom,
which sent hundreds of fliers to Californians promising help
in stopping the foreclosure of their homes. The fliers
read: "FINAL NOTICE - Respond only to this notice
immediately." This is similar to First Gov scam, which the
Attorney General stopped late last year.
When homeowners called the number on the flyer, they were
told their mortgages could be renegotiated to a lower
monthly payment. Victims, however, were required to pay
thousands of dollars in up-front fees and were instructed
not to contact their lenders. Victims were assured the
company had "private lenders and specialists exclusive to
their company who are very experienced in the options and
methods used to renegotiate home loans," yet neither of the
women who operated the company had real estate licenses,
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legal training, or any experience in the home mortgage
market. Investigators found no evidence of any successful
loan modifications and most of the victims were either
forced into bankruptcy or lost their homes to foreclosure.
In addition to the above instances, nearly all the witnesses
(both consumer advocates and law enforcement) in this
Committee's hearing last month expressed the need for a
prohibition on advance fees. Accordingly, this bill would ban
advance fees for those who offer loan modification services,
prohibit the taking of a power of attorney for any purpose, and
require a notice prior to entering into any fee agreement that
"IT IS NOT NECESSARY TO PAY A THIRD PARTY TO ARRANGE FOR A LOAN
MODIFICATION OR OTHER FORM OF FORBEARANCE FROM YOUR MORTGAGE
LENDER OR SERVICER."
In addition to banning advance fees for loan modifications, this
bill would prohibit licensees under the Banking Law, Credit
Union Law, California Finance Lenders Law, and California
Residential Mortgage Lending Act from charging for a loan
modification, as specified, and prohibit false, deceptive or
misleading statements by a California Finance Lender Law
licensee.
CHANGES TO EXISTING LAW
Existing law 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.
(Bus. & Prof. Code Sec. 10085.5.)
Existing law 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. (Bus. & Prof. Code Sec.
10085.)
Existing law regulates the activities of foreclosure
consultants, which are defined 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:
stop or postpone a foreclosure sale, or save the owner's
residence from foreclosure;
obtain any forbearance from any beneficiary or mortgagee;
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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;
obtain any waiver of an acceleration clause in any mortgage,
as specified;
help the owner obtain a loan or advance of funds;
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; or
help the owner obtain remaining proceeds from a foreclosure
sale of the owner's residence. (Civ. Code Sec. 2945 et seq.)
Existing law exempts certain individuals and businesses from the
foreclosure consultant law, including: persons licensed to
practice law; a licensed real estate broker, as specified; a
licensed accountant; 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 licensed residential mortgage lenders or
servicers. (Civ. Code Sec. 2945.1 (b).)
Existing law 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 prison for up to one year, or by both a fine and
imprisonment:
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;
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;
take any wage assignment, any lien of any type on real or
personal property, or other security to secure the payment of
compensation;
receive any consideration from any third party in connection
with services rendered to an owner, unless that consideration
is fully disclosed to the owner;
acquire any interest in a residence in foreclosure from an
owner with whom the foreclosure consultant has contracted, as
specified;
take any power of attorney from any owner for any purpose
(effective July 1); or
induce or attempt to induce any owner to enter into a
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contract that is not in compliance with the foreclosure
consultant law.
This bill would prohibit any person who solicits customers for
the purpose of helping negotiate a mortgage loan modification or
other form of mortgage loan forbearance for a fee or other
compensation, or otherwise offers to perform these services for
a borrower for a fee or other compensation, from doing any of
the following:
claiming, demanding, charging, collecting, or receiving
any compensation until after the person has fully performed
each and every service the person contracted to perform or
represented that he or she would perform;
taking any wage assignment, any lien of any type on real or
personal property, or any other security to secure the payment
of compensation; or
taking any power of attorney from the borrower for any
purpose.
This bill would additionally require any person who solicits
customers for the purpose of helping negotiate a mortgage loan
modification or other form of mortgage loan forbearance for a
fee or other form of compensation, or who otherwise offers to
perform these services for a borrower for a fee or other form of
compensation, to provide the following notice to the borrower,
as a separate statement, in not less than 14-point bold type,
prior to entering into any fee agreement with the borrower:
IT IS NOT NECESSARY TO PAY A THIRD PARTY TO ARRANGE FOR A LOAN
MODIFICATION OR OTHER FORM OF FORBEARANCE FROM YOUR MORTGAGE
LENDER OR 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 bill would require a translated copy of the above notice to
be provided to a borrower, if the loan modification or other
mortgage loan forbearance services are offered to or negotiated
with the borrower in one of the foreign languages set forth in
Section 1632 of the Civil Code (Spanish, Korean, Vietnamese,
Tagalog, and Chinese).
This bill would provide that a violation of the above advance
fee provisions and notice requirements is a public offense,
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punishable by a fine not exceeding $10,000 for a natural person
or $50,000 for a corporation, or by imprisonment in a county
jail for up to one year, or by both a fine and imprisonment.
Those penalties are cumulative to any other remedies or
penalties provided by law.
This bill would additionally authorize the DRE to enforce
violations of the sections of the Civil Code relating to
mortgages (Civil Code Section 2920 et seq.) by real estate
licensees, and include identical advance fee, notice, and
penalties for licensees under the Real Estate Law.
This bill would provide, under the Banking Law, Credit Union
Law, California Finance Lenders Law, and California Residential
Mortgage Lending Act, that no licensee shall directly or
indirectly charge, contract for, or receive any interest or
charge of any nature for performing services for a borrower in
connection with either of the following:
the actual or attempted modification of the terms of a
residential mortgage loan; or
the actual or attempted negotiation of another form of
forbearance or forgiveness in connection with that loan.
This bill would additionally provide that, notwithstanding the
above, no bank, credit union, finance lender, finance broker,
residential mortgage lender, or residential mortgage servicer
licensee is prohibited from doing either of the following:
collecting interest or other charges pursuant to the
terms of a loan that has been modified; or
accepting payment from a federal agency in connection
with the federal Homeowner Affordability and Stability Plan
or other federal plans intended to help reduce
foreclosures.
This bill would further prohibit any California Finance Lender
Law licensee from making a false, deceptive, or misleading
statement, representation, or omission in connection with his or
her lending or brokering activities.
This bill would additionally make technical changes to the
foreclosure consultant law, to more clearly describe the
entities that are exempt from that law.
COMMENT
1. Stated need for the bill
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The author notes that the bill has four provisions. The first
two provisions regarding advance fees and multilingual borrower
notification "are 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."
The third provision, a prohibition against loan modification
fees by servicers, "addresses two issues - first, whether
servicers may charge borrowers fees in connection with the
modification of loans they are servicing (they may not under the
provisions of this bill), and second, whether servicers may act
as foreclosure consultants, and offer to help borrowers
negotiate loan modifications or other forms of mortgage loan
forbearance or forgiveness from other servicers (they may act in
this capacity under the provisions of the bill, but may not
charge for these services)."
The author notes that the final provision would strengthen the
California Finance Lenders Law by expressly banning false,
deceptive, or misleading statements, representations, or
omissions.
2. This bill would prohibit advance fees for loan modifications
As noted above, this Committee heard testimony during the March
24, 2009 informational hearing on the wide breadth and scope of
foreclosure scams that are taking advantage of desperate
homeowners. Many of the consumer advocates, and representatives
from law enforcement, expressed their strong belief that advance
fees should be completely banned as it is almost impossible to
tell a legitimate service from one that will take a borrower's
money and not perform the promised services. Regarding the
advance fees that are currently being charged to struggling
homeowners, California ACORN, in support, reports:
We are hearing that people are being charged up to $500 just
to fill out an application, $2,000 - $6,000 in conjunction
with the promise of a modification, and on top of that up to
$5,000 - $8,000 for the scammer to negotiate with a servicer
on their behalf. Most people paid some of the fees before
they realized nothing was being done, and before they were
aware that HUD certified counseling agencies, like ACORN,
provide this service for free.
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This bill would directly respond to the issue of foreclosure
scammers charging those excessive advance fees, and inform
anyone who would contract for loan modification services that
they need not pay for that service.
a) Proposed limitations to address foreclosure rescue scams
This bill would prohibit any person who offers, for
compensation, to help negotiate a mortgage loan modification
or other forbearance from: (1) receiving any compensation
until after the person has fully performed each and every
service the person contracted to perform or represented that
he or she would perform; (2) taking any wage assignment, any
lien of any type, or other security to secure payment of
compensation; or (3) taking a power of attorney from the
borrower for any purpose. Those prohibitions appear to
address many of the scams and concerns raised in this
Committee's March 24, 2009 informational hearing.
For example, if a desperate homeowner is approached by an
unscrupulous individual who offers to help modify their loan
for $2,500, that individual would be prohibited from
collecting that fee until after they have actually performed
the service they represented they would perform (modifying the
borrower's loan). Since the reported foreclosure scams
operate by taking advance fees but offering no actual service
to the borrower, the above prohibition on fees appear to
prohibit the scams reported to this committee. The author
further maintains that those restrictions are intended to
close the loopholes in existing laws that have allowed an
unscrupulous loan modification industry to spring up.
This committee also heard testimony about the involvement of
attorneys and DRE licensees that were charging up-front fees
in connection with foreclosure scams - it should be noted that
those restrictions cover "any person," thus applying
regardless of whether the individual was licensed to practice
law or licensed by the Department of Real Estate.
In addition to prohibiting advance fees, this bill would
require those who do charge a fee to inform the customer that
it is not necessary to pay a third party to arrange for a loan
modification, and that nonprofit housing counseling agencies
offer assistance free of charge. Essentially, if a borrower
is approached in the above situation, that borrower must also
be informed that they need not pay any money for a loan
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modification and that nonprofit housing counseling agencies
offer assistance free of charge. That notice must be on a
separate statement, in not less than 14-point bold type, be
provided prior to entering into any fee agreement, and a
translated copy of that statement must be provided if the
services are offered or negotiated in one of the foreign
languages set forth in Civil Code Section 1632 (Spanish,
Korean, Vietnamese, Tagalog, and Chinese). From a public
policy standpoint, the addition of those translation
requirements provides a key consumer protection for desperate
homeowners with limited, or no, English proficiency.
While the notice would be very useful, the proposed text of
the notice is in all caps, a factor that could make it more
difficult to read for the average borrower. The author has
agreed to amend the bill to have the notice be written,
instead, in upper and lower case to improve readability.
Author's amendment: Amend the statutory notice to,
instead, be in upper and lower case.
b) April 13, 2009 amendments add enforcement to the
prohibitions
In response to concerns by committee staff and consumer
groups, the April 13, 2009 amendments add enforcement to the
above prohibitions. Pursuant to those amendments, a violation
of the above prohibitions by a natural person is a public
offense punishable by a fine up to $10,000, by imprisonment
for up to one year, or both that fine and imprisonment.
Corporations that violate the above prohibitions are
punishable by a fine up to $50,000. Furthermore, those
penalties are cumulative to any other remedies or penalties
provided by law.
While those provisions place enforcement in the hands of the
Attorney General or District Attorney, the ability to sentence
someone to jail for up to one year would provide some
deterrence for those who would violate the provisions of SB
94. It should be noted that those penalties are substantially
similar to the criminal penalties under the foreclosure
consultant law. (Civ. Code Sec. 2945.7.)
c) Arguments in support
The Center for Responsible Lending (CRL) notes that an
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unscrupulous loan modification industry has sprung up to take
further advantage of Californians who are already suffering.
Consumers Union maintains that this bill would add "important
consumer protections against rampant abuses by individuals
engaging in the rapidly growing business of offering consumers
foreclosure rescue and loan modification services for a fee."
The California Labor Federation, AFL-CIO further contends that
this bill would "protect families from foreclosure scams by
limiting the circumstances under which borrowers can be
charged for services relating to loan modifications."
A coalition of nonprofit and community development
organizations, in a support if amended position, maintain that
the "surest way to protect the public while ensuring their
access to reputable loan counseling services is to prohibit
fee-for-service loan modification 'services' altogether."
Absent a prohibition, the coalition suggests amendments,
including a private right of action, removing certain
exemptions under the foreclosure consultant law, and detailed
data reporting on fee for service loan modification contracts.
Kamala Harris, San Francisco District Attorney, in support,
makes similar requests regarding a private right of action and
data reporting.
It is unknown how the April 13, 2009 amendments affect those
requests, but the addition of criminal enforcement provisions
that are consistent with the foreclosure consultant law (Civ.
Code Sec. 2945.7.) should address some of the concerns.
d) Opposition by the California Association of Realtors
The California Association of Realtors (CAR) states that their
opposition is based on the complete prohibition on advance
fees by real estate licensees, and that they will withdraw
their opposition if an exemption is included for DRE-approved
advance fee contracts. CAR contends that it is appropriate to
charge an advance fee if a broker submits their fee contract
to the regulator, it is approved by the DRE, and the broker
then complies with the disclosures and protections of this
bill. Although not in opposition, the California Association
of Mortgage Brokers (CAMB) states they would support SB 94
with amendments to include a similar exemption.
Consumers Union directly contradicts those positions by
asserting that DRE's current practice of reviewing loan
modification advance fee agreements submitted by real estate
licensees "is simply not enough to provide the level of
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protection the public needs against this growing problem."
The author states that he agrees with the position of
Consumers Union on this issue.
3. Prohibition against loan modification fees by servicers
Similar to the above restrictions, this bill would prohibit
state licensed loan servicers from charging for an actual or
attempted loan modification or other forbearance on a loan
secured by single-family residential property, except as
specified. The author states that the logic behind this
provision is that borrowers who are having trouble affording
their loans are unlikely to be able to shoulder fees imposed
upon them by servicers in connection with a loan modification.
It should be noted that this provision is consistent with the
federal Home Affordable Modification Plan, which provides that
no modification fees or other charges may be imposed on a
borrower who participates in the program.
4. Strengthening the California Finance Lenders Law
The final provision would amend the California Finance Lenders
Law (CFLL) to provide that no person shall make a false,
deceptive, or misleading statement, representation, or omission
in the course of his or her lending or brokering activities.
The author notes that this provision is intended to close a
loophole in the CFLL - existing law bans false, deceptive, or
misleading advertising, but does not expressly forbid false,
deceptive, or misleading statements, representations, or
omissions.
Support : Kamala D. Harris, San Francisco District Attorney;
California ACORN; Consumers Union; Center for Responsible
Lending; Los Angeles District Attorney's Office; Coalition for
Quality Credit Counseling; Novadebt; Consumer Credit Counseling
Service, Twin Cities; ByDesign Financial Solutions; Consumer
Credit Counseling Service of Orange County; Coalition for
Quality Credit Counseling; California Labor Federation, AFL-CIO
Opposition : California Association of Realtors
HISTORY
Source : Author
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Related Pending Legislation : None Known
Prior Legislation :
AB 180 (Bass, Chapter 278, Statutes of 2008), strengthened the
foreclosure consultant law.
Prior Vote : Senate Committee on Banking, Finance and Insurance
(Ayes 7, Noes 2)
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