BILL ANALYSIS
SB 1275
Page 1
Date of Hearing: August 4, 2010
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Felipe Fuentes, Chair
SB 1275 (Leno and Steinberg) - As Amended: August 2, 2010
Policy Committee: Banking and
Finance Vote: 7-3
Judiciary 7-4
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill imposes new requirements on loan servicers seeking to
foreclose on loans secured by owner-occupied residences, and
provides for remedies to borrowers in cases where the servicer
fails to adhere to notification and related requirements
associated with the foreclosure process.
FISCAL EFFECT
Annual costs in the range of $150,000 to administer and enforce
new requirements imposed by this bill. The Department of
Corporations estimates it would incur annual costs of $112,000
for an additional examiner, while the Department of Financial
Institutions indicates it would incur unknown, probably modest
workload-related costs related to increased questions and
complaints under the new law.
SUMMARY (Continued)
Specifically, the bill:
1)Requires that, before a notice of default can be issued
(generally considered the first formal step in a foreclosure),
a loan servicer must send an initial notice to borrowers
behind on their payments. The contents of the notice are
specified in the bill, and include information regarding the
borrower's rights and options under the foreclosure process,
descriptions of loan modification options, and relevant phone
numbers and web addresses. The notice is required to be
created by an unspecified state agency in English and five
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foreign languages (Spanish, Tagalog, Korean, Vietnamese, and
Chinese).
2)Provides that, if the borrower applies for a loan
modification, the servicer must gather all of the borrower's
documents and determine if the borrower qualifies for the
modification within specified timelines. A servicer would
also have to satisfy the federal Home Affordable Modification
Program (HAMP) requirements for notice, standards, and
timelines prior to filing a notice of default.
3)States that if a borrower does not qualify for a loan
modification, or no loan modification exists for that
borrower, the servicer must provide a denial explanation
letter to the borrower that includes the reasons and evidence
for the modification denial.
4)Requires loan servicers to include a declaration of compliance
when it records a notice of default - a "check the box"
document identifying the provisions of law apply to the loan,
the provisions of law that were followed in connection with
the loan, and the specific options the borrower elected. The
servicer must also maintain information regarding efforts to
contact the borrower, including specific dates and phone
numbers used.
5)Generally exempts credit unions from the added notification
requirements of this bill.
6)Provides for various remedies to borrowers when their loan
servicer fails to comply with the loan modification evaluation
and denial process, or fails to send a denial explanation
letter that complies with specified provisions of the bill.
7)Applies to loans recorded from 2003 through 2008, and for
defaults occurring through December 31, 2012.
COMMENTS
1)Background - foreclosure process. Existing law regulates the
nonjudicial foreclosure of properties. It requires that, to
commence foreclosure, the mortgagee, trustee, or beneficiary
to record a notice of default and allow three months to lapse
before setting a date for sale of the property. The
foreclosure sale is required to be officially noticed in a
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newspaper of general circulation, posted on the property, and
recorded at least 20 days before the sale date. SB 1137
(Perata), Chapter 69/2008, added requirements to the
foreclosure process with regard to loans made from 2003
through 2007. It required that a lender contact the borrower
that is in default at least 30 days prior to initiating
foreclosure proceedings, inform the borrower of his or her
right to a subsequent meeting with the lender, and provide the
borrower with specified contact information.
2)Background - HAMP . This program is a central component of
federal government efforts to stem foreclosures. It is a
voluntary program, where the lender is provided incentives to
modify loans in a way that makes it affordable and sustainable
to the borrower. Under the program, lenders agree to waive
late interest and penalties, reduce mortgage interest rates,
extend the term of the mortgage (up to 40 years), and reduce
the principal balance of the loan to the point that brings the
borrowers' debt to income to as close a possible to 31%. In
order to encourage participation in the program, Treasury pays
incentives using Troubled Asset Relief Program (TARP) funds.
3)Rationale . The purpose of the bill is to prevent unnecessary
foreclosures and increase the number of successful loan
modifications. Proponents point to statistics showing a low
rate of loan modifications and a continued high rate of
foreclosures, along with anecdotes of mishandled applications
and homes being sold in the middle of modification processes,
as evidence that present laws are inadequate.
According to proponents, the bill expands on existing law to
maximize the chances that a borrower who is seeking to avoid
foreclosure will be treated fairly. They assert that, despite
some improvements, loan servicers continue to lack adequate
staffing and systems, and as a result, eligible and qualified
homeowners are not receiving loan modifications, with some
losing their homes to foreclosure.
4)Opponents . This bill is opposed by financial services and
building industry trade groups, the California Chamber of
Commerce, and the Civil Justice Association of California on a
number of grounds. Objections include: (a) the bill will add
to the complexity of the loss mitigation process; (b) the bill
will create a series of procedural traps that will lead to
ever-increasing litigation; and (c) the bill will prolong the
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foreclosures process, thereby threatening the economic
recovery and causing local governments to deal with blighted
properties.
The Department of Real Estate and Department of Corporations
also oppose the bill, stating that Supplemental Directive
10-02 under the HAMP program addresses many of the same areas
of the loan modification process as this bill, and that it is
premature to add another layer of requirements covering the
same issues.
Analysis Prepared by : Brad Williams / APPR. / (916) 319-2081