BILL ANALYSIS
SB 94
Page 1
Date of Hearing: July 9, 2009
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
SB 94 (Calderon) - As Amended: June 11, 2009
As Proposed to be Amended
SENATE VOTE : 21-14
SUBJECT : Mortgages: Loans modification services
KEY ISSUES :
1)SHOULD PERSONS OFFERING MORTGAGE LOAN MODIFICATION SERVICES BE
PROHIBITED for the next two years FROM CHARGING CONSUMERS
UP-FRONT FEES?
2)SHOULD PERSONS OFFERING MORTGAGE LOAN MODIFICATION SERVICES BE
REQUIRED TO PROVIDE CONSUMERS WITH A WRITTEN NOTICE STATING
THAT THERE ARE NO-COST ALTERNATIVES, AND TO PROVIDE A
TRANSLATION OF THAT NOTICE IF THE TRANSACTION IS NEGOTIATED IN
SPECIFIED LANGUAGES?
FISCAL EFFECT : As currently in print this bill is keyed fiscal.
SYNOPSIS
This important consumer protection bill seeks to prohibit for
approximately two years charging advance fees to borrowers in
connection with a residential loan modification, and requires
those who wish to charge a fee for loan modification services to
provide a notice to borrowers regarding other options available
to the borrower. Supporters state that the bill addresses 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 provide 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
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obtain elsewhere, free-of charge. The analysis notes that the
bill appears to be an important first step towards better
protecting borrowers facing possible foreclosure if they can't
get their loans modified, and also suggests that the author
consider further legislation in the future to bring this area of
the law much closer to the more protective law contained in the
related Foreclosure Consultants Law. That law regulates similar
services in a more demanding manner when a notice of foreclosure
has actually been issued. This bill is nevertheless opposed by
the Realtors Association, which argues for retaining current law
allowing advance fees with the oversight of the DRE if the
broker abides by the disclosures and protections of the bill.
SUMMARY : Prohibits for approximately two years charging advance
fees to borrowers in connection with a residential loan
modification, and requires those who wish to charge a fee for
loan modification services to provide a notice to borrowers
regarding other options available to the borrower.
Specifically, this bill :
1)Prohibits, until January 1, 2013, any person (including
attorneys and licensed real estate brokers) who negotiates,
attempts to negotiate, arranges, attempts to arrange, or
otherwise offers to perform a mortgage loan modification or
other form of mortgage loan forbearance for a fee or other
compensation paid by the borrower in regard to a mortgage or
deed of trust secured by residential real property containing
four or fewer dwelling units to do any of the following:
a) Claim, demand, charge, collect, or receive any
compensation until after the licensee has fully performed
each and every service the licensee contracted to perform
or represented that he/she/it would perform;
b) Take any wage assignment, any lien of any type on real
or personal property, or any other security to secure the
payment of compensation; or,
c) Take any power of attorney from the borrower for any
purpose.
1)Provides that a violation of the advance fee prohibition is a
public offense, punishable by a fine not exceeding $10,000 for
a natural person or $50,000 for a corporation or other
business, or by imprisonment in a county jail for up to one
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year, or by both a fine and imprisonment.
2)Requires any person, including an attorney or licensed real
estate broker, who negotiates, attempts to negotiate,
arranges, attempts to arrange or otherwise offers to perform a
mortgage loan modification or other form of mortgage loan
forbearance for a fee or other form of compensation paid by
the borrower 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."
3)Requires 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). Unlike the similar Foreclosure Consultants Law,
does not yet require that the substantive terms of the loan
modification contract itself must be provided if the
transaction was negotiated in one of the five languages
covered by Civil Code section 1632.
4)Provides that a violation of the above notice requirement is a
public offense, punishable by a fine not exceeding $10,000 for
a natural person or $50,000 for a corporation or other
business entity, 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.
5)Clarifies that the real estate law does not apply to a
HUD-certified 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 specified residential real property.
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6)Authorizes the Department of Real Estate (DRE) to enforce
violations of the sections of the Civil Code relating to
mortgages, and other regulatory agencies to do so with respect
to their licensees regarding the loan modification provisions.
7)Prohibits any California Finance Lender Law licensee from
making a materially false or misleading statement or
representation to a borrower about the terms or conditions of
that borrower's loan, when making or brokering the loan.
8)Makes technical changes to the foreclosure consultant law, to
more clearly describe the entities that are exempt from that
law.
EXISTING LAW :
1)Provides for the Foreclosure Consultants Law (FCL) with respect to
a person who solicits, represents, or offers to any owner of a
property on which a notice of default has been recorded, to
perform certain services for compensation, including:
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 obtain a loan or advance of funds. (Civil
Code section 2945 et seq.)
2)Exempts the following individuals and businesses from the FCL: a
person licensed to practice law; a licensed real estate broker; a
licensed accountant; a person or his or her agent acting under
express authority of or written approval from HUD or other federal
department or agency; a licensed finance lender; 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; 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. (Civil Code section 2945.1.)
3)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
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than $10,000, imprisonment in the county jail or in state 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 to obtain the release of surplus
funds after a trustee's sale is conducted.
4)Gives borrowers a five-day right to cancel a contract with a
foreclosure consultant.
5)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 imprisonment in the county jail for not
more than one year, or by both a fine and imprisonment.
6)Authorizes a homeowner to bring an action against a foreclosure
consultant for any violation of the FCL, and provides that
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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. (Civil Code section 2945.6.)
7)Provides that any contract which attempts or purports to limit the
liability of the foreclosure consultant shall be void and shall at
the option of the homeowner render the contract void. The
foreclosure consultant is liable to the homeowner for all damages
proximately caused by that void provision. (Civil Code section
2945.10.)
8)Provides that any waiver by an owner of the provisions of the
foreclosure consultant law shall be deemed void and unenforceable
as contrary to public policy. Any attempt by a foreclosure
consultant to induce an owner to waive his rights shall be deemed
a violation of this article. (Civil Code section 2945.5.)
9)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. (Business and Professions Code section 10085;
10 CCR sections 2970, 2972.)
COMMENTS : This important consumer protection bill seeks to
suspend the current rule requiring that real estate licensees
obtain permission from the Department of Real Estate (DRE) in
order to charge consumers advance fees for mortgage loan
modification services. In support of the bill, the author
states:
This bill is intended to prohibit the charging of advance
fees by any individual or business that helps or offers to
help a borrower obtain a loan modification or other form of
mortgage loan forbearance or forgiveness from the
institution servicing that borrower's residential mortgage
loan. It is also intended educate borrowers who are being
solicited to pay for loan modification services about
no-cost options available to them, and strengthen the
California Finance Lenders Law [CFLL] by prohibiting
certain inappropriate practices in connection with the
making or brokering of a mortgage loan by a CFLL licensee.
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Several of this bill's provisions 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.
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. SB 94 closes loopholes in existing law, which
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 or other form of loan
forbearance or forgiveness 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.
Under the provisions of the bill, persons exempt from the
foreclosure consultant law would be allowed to help
negotiate loan modifications on a borrower's behalf for a
fee, paid after services were rendered. However, every
person that offers to help negotiate a loan modification
for a borrower, for a fee, would have to inform that
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borrower that he or she may obtain the same or similar
services, free of charge, from a non-profit housing
counseling agency. SB 94 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.
The final provision of SB 94 closes what many consider to
be a loophole in the California Finance Lenders Law.
Although that law bans false, deceptive, or misleading
advertising, it does not expressly forbid materially false
or misleading statements or representations to a borrower.
SB 94 would expressly ban these inappropriate practices.
This Bill Would Temporarily Prohibit Loan Modification
Negotiators (Other Than Lenders) From Advance-Fee Arrangements.
According to the Assembly Banking and Finance Committee: "A
number of loan modification companies are charging homeowners
$1000 to $4000 for little to no work. In most cases, companies
ask for the money upfront and lure homeowners in with false
promises and guarantees. This bill attempts to solve the issue
of these 'loan modification specialists' charging absurd fees
for little to no work completed. Currently, the [Department of
Real Estate] is investigating over 500 complaints of fraudulent
loan modification companies. This problem makes the state more
susceptible to foreclosure scams. Homeowners are desperate to
save their home and willing to go in further debt by paying a
fee before the person has even showed any substantive results.
It goes without saying, when a borrower gives a 'loan
modification specialist,' money the borrower wants the end
result to be a loan modification. "
There has long been concern about advance fee arrangements by
real estate licensees. Existing law provides that the DRE shall
review and permit all materials used in obtaining advance fee
agreements, including the contract forms, letters or cards used
to solicit prospective sellers, and radio and television
advertising be submitted to him or her at least 10 calendar days
before they are used. (Business and Professions Code section
10085; 10 CCR sections 2970, 2972.)
This bill would provide that, for approximately two years, this
arrangement for DRE approval of advance fees for loan
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modifications would be replaced by a prohibition against such
contract provisions.
The author reports that the two-year sunset was requested by the
Governor. However, the author states 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 protection the public needs against this
growing problem. DRE is trying to keep up with the number of
real estate brokers who are charging advance fees, but lacks the
resources necessary to provide adequate oversight." In light of
the state's ongoing budget difficulties and mandatory 15 percent
furlough reduction of state employees, it is not clear whether
the staffing and capacity of the DRE will realistically improve
when this bill sunsets.
This prohibition against advance-fee contracts has precedent in
the related Foreclosure Consultants Law. It is unlike the FCL
in that it does not restrict loan modification providers from
(1) the amount of interest they may charge on any loan which the
foreclosure consultant may make to the consumer; (2) receiving
any consideration from any third party in connection with
services rendered to a consumer unless that consideration is
fully disclosed; or (3) acquiring any interest in a residence in
foreclosure from a consumer with whom the foreclosure consultant
has contracted.
Also unlike the FCL, this bill also does not prohibit a loan
modification provider from inducing or attempting to induce a
consumer to enter into a contract which does not comply in the
advance-fee and other restrictions. The author explains that
these provisions of the FCL were not included in SB 94 in order
to avoid unintended consequences and to address the two most
pervasive abuses that have been perpetrated by unscrupulous
individuals and businesses offering loan modification services
in the wake of California's foreclosure crisis - representing
that borrowers must pay a fee to obtain a loan modification or
other form of loan forbearance or forgiveness and collecting
advance fees for loan modification services and failing to
perform the work promised to a borrower.
Consumer Notice of Options Would Be Required. SB 94 also
requires a valuable notice that consumers would be entitled to
receive prior to entering into the contract for loan
modification services, to the effect that comparable assistance
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may be available without charge through a number of alternative
means. Specifically, the notice would state:
"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."
The Consumer Options Notice Must Be Translated When The Contract
Is Negotiated In Certain Languages. The consumer options notice
above would be required in Spanish or one of the four most
prevalent API languages covered by existing consumer contract
translation requirements under Civil Code section 1632 if the
loan modification services are offered or negotiated in that
language. As of yet however, only the one-paragraph consumer
options notice will have to be translated; not the substantive
terms of the contract. Thus, a loan modification provider doing
business with a consumer who is not proficient in English and
who has consummated the transaction in another language would
appear to be required to tell the consumer that there were free
options, but not what services the consumer was to be provided
under the contract or the fees they are to be charged.
By contrast, the Foreclosure Consultants Law provides that the
contract itself shall be written in the language principally
used by the foreclosure consultant to describe his or her
services or to negotiate the contract. In addition, the
foreclosure consultant must provide the consumer, before she or
he signs the contract, with a copy of a completed contract
written in any other language used in any communication between
the foreclosure consultant and the consumer and in any language
described in subdivision (b) of Section 1632 and requested by
the consumer. The Foreclosure Consultants Law and Civil Code
section 1632 also provide that the right to a complete
translation of the contract may be enforced by the consumer him
or herself, either by going to court or by exercising the right
to rescind the contract unless and until the translation is
provided. SB 94 by contrast has no cognate provisions.
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Other Consumer Protections In The Related Foreclosure
Consultants Law That The Author May At Some Point Wish to
Consider Adding to This Potential New Law. As the author's
statement indicates, California currently regulates the similar
activities of foreclosure consultants - that is, persons who
solicit, represent, or offer to perform certain services to a
defaulted property owner for compensation, including to obtain
any forbearance from any beneficiary or mortgagee; help the
owner obtain a loan or advance of funds; or stop or postpone a
foreclosure sale, or to save the owner's residence from
foreclosure. (Civil Code section 2945 et seq.)
The Foreclosure Consultants Law has a number of beneficial
provisions the author may wish to consider seeking to add to
this potential new consumer protection law in the future. Like
this bill, the Foreclosure Consultants Law prohibits advance-fee
agreements. It also imposes a comprehensive registration
requirement by which foreclosure consultants must provide
background information, register with and maintain a certificate
from the Department of Justice, and maintain in force a surety
bond in the amount of $100,000, a copy of which shall be filed
with the Secretary of State. However, according to the author,
it is believed that few if any persons are complying with the
registration and bonding requirements of that law. Moreover, as
the author also notes, that law contains numerous "loopholes,"
including exemptions for legal professionals, real estate
brokers, and several types of lenders.
SB 94 therefore may be greatly needed to help reach unscrupulous
loan modification activities targeting homeowners in financial
trouble. This bill would fill the gaps in existing law to some
extent by covering the exempted persons, albeit with some
requirements less rigorous at this time than analogs in the
Foreclosure Consultants Law.
The Bill Provides That A Violation Of Its Provisions Is A
Violation Of The Licenses For Attorneys And Real Estate Brokers,
And Therefore Allows Administrative Discipline To Be Brought
Against Them, But Not For Other Licensees Who Are Covered By The
Bill. The bill codifies its requirements and prohibitions in
three places - (1) a general rule in the Civil Code applicable
to all persons; (2) an identical rule in the real estate
licensing statutes; and (3) an identical rule in the lawyer
regulation statutes allowing for State Bar enforcement. The
author explains that the two specific provisions in the
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licensing statutes are designed to ensure clarity that "any
person" includes real estate licensees and lawyers, and to
ensure that a violation of the bill by either of these licensees
constitutes a violation of their license such that they may be
subject to administrative discipline.
However, the bill does not contain a specific prohibition
covering other licensees - e.g., those under the Residential
Mortgage Lending act (RML), the Californian Finance Lenders Law
(CFLL). This inconsistency could be addressed by clarifying in
proposed Civil Code section 2944.6 and 2944.7 that any licensed
person who violates any provision of this section shall be
deemed to have violated that person's licensing law. There is
precedent for this in the Covered Loan Law. (Financial Code
section 4975.) However, the author is reluctant to address this
issue because of concern that the licensees covered by those
laws (financial institutions) might object to being treated the
same as other licensees as contrary to a negotiated agreement by
which they are neutral on the bill. The author notes he is not
yet open to such an amendment until he has further opportunity
to discuss this issue with all the interested parties with whom
he has been negotiating in good faith on the measure.
ARGUMENTS IN SUPPORT : The Center for Responsible Lending
states, "SB 94 cracks down on unscrupulous individuals and
businesses who are preying on troubled borrowers. The bill
prohibits any person or business who offers to provide a
homeowner with loan modification services from charging an
up-front fee, and requires those who seek to charge borrowers a
fee for any such loan modification services to clearly inform
borrowers that similar services are available from non-profit
housing counselors, free of charge."
ARGUMENT IN OPPOSITION: The California Association of Realtors
argues "if a broker concludes it is appropriate to include an
advance fee in his or her business model; and if the broker
submits the fee contract to the regulator; and if it is approved
by the DRE; and if the broker abides by the all the disclosures
and protections of SB 94, then the contract ought to be
allowed."
Author's Technical Amendments. The author proposes a number of
technical amendments to improve and clarify the intent of the
bill.
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Add an urgency clause, pursuant to Rules Committee approval.
In the proposed Bus. & Prof. section 6106.3 as it appears in
sections 1 and 2 of the bill, replace the phrase "prohibited
under" with the phrase "in violation of."
Revise Bus. & Prof Code section 101331.(a)(11) in Section 5 of
the bill as follows:
(11) Any nonprofit, community-based organization, or an
employee of such an organization, that has been approved by
the United States Department of Housing and Urban
Development pursuant to Section 106(a)(1)(iii) of the
federal Housing and Urban Development Act of 1968 (12 USC
1701x), to provide counseling services, when those services
are provided at no cost to the borrower and are in
connection with the modification of the terms of a loan
secured directly or collaterally by a lien on single-family
residential real property containing four or fewer dwelling
units.
In proposed Bus. & Prof. Code section 10147.6(b) and in Civil
Code sections 2944.6(b), strike the word "foreign."
In proposed Civil Code sections 2944.6(c) and 2944.7(b), change
"corporation" to "business entity."
Related Pending Legislation : SB 764 (Nava, Bass, Feuer) would
prohibit persons from charging fees to borrowers in connection
with the modification of the terms of the borrower's loan until
the terms of the loan have actually been modified, and would
require those who wish to charge a fee for loan modification
services to provide a specified notice to borrowers regarding
other options available to the borrower.
REGISTERED SUPPORT / OPPOSITION :
Support
AFSCME
ByDesign Financial Solutions
California ACORN
California Association of Mortgage Brokers
California Labor Federation
California Reinvestment Coalition
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Center for Responsible Lending
City of Oakland
City of Los Angeles
Coalition for Quality Credit Counseling
Consumer Credit Counseling Service of Orange County
Consumer Credit Counseling Service, Twin Cities
Consumers Union
Los Angeles County District Attorney's Office
Novadebt - Garden State Consumer Credit Counseling (New Jersey)
San Francisco District Attorney
State Bar of California
Opposition
California Association of Realtors
Analysis Prepared by : Kevin G. Baker / JUD. / (916) 319-2334