BILL ANALYSIS �
AB 643
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Date of Hearing: April 25, 2011
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Mike Eng, Chair
AB 643 (Davis) - As Amended: April 15, 2011
SUBJECT : Mortgages: counseling.
SUMMARY : Requires a mortgage broker to provide a borrower
pre-purchase mortgage debt counseling that explains what a
prudent debt-to-income ratio would be for the borrower taking
into account the borrower's income and credit rating.
Specifically, this bill :
1)Includes the mandatory pre-purchase counseling provision in
the mortgage brokers fiduciary duty.
2)Requires the Department of Corporations (DOC), Department of
Real Estate (DRE) and Department of Financial Institutions
(DFI) to establish a standard for determining a prudent
debt-to-income ratio for borrowers.
3)Prohibits the filing of a notice of default (NOD) unless a
borrower has been provided counseling relating to foreclosure
prevention that includes assistance in negotiating an
agreement to cure the default.
EXISTING LAW
1)Provides that a mortgage broker, performing mortgage brokerage
servicers to a borrower owes the borrower a fiduciary duty
that includes a requirement that the mortgage broker place the
economic interest of the borrower ahead of his or her own
economic interest. �Civil Code, Section 2923.1]
2)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 2923.5a1].
3)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 Department of Housing and
Urban Development (HUD) to find a HUD- certified housing
counselor. �Section 2923.5a2].
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4)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 2923f].
5)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 2923g].
6)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
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, as well as, 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 2923g (5)].
7)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 ;
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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 2923h].
FISCAL EFFECT : Unknown
COMMENTS :
Need for bill .
According to information supplied by the author's office:
This bill is necessary because notwithstanding the increase
in unemployment and the evaporation of credit in our
financial markets, a significant factor in mortgage
foreclosures is inadequate knowledge on the part of
borrowers at the time they enter into a loan as to the
amount of additional debt that they can withstand, and how
this factors into their ongoing ability to sustain a
contemplated mortgage payment over a period of several
years. This bill will serve to highlight for the borrower
the need to be cognizant of his or her prudent
debt-to-income ratio, and how this knowledge should affect
their decision about whether or not to enter into a
particular mortgage loan.
Background .
The idea behind this bill is that borrowers that receive
pre-purchase counseling will be able to make a better informed
decision about buying a home. Since the start of the subprime
lending crisis, state and federal government have implemented
numerous reforms to the mortgage lending markets.
On January 9, 2008 the Federal Reserve Board (Board) published
proposed rules that would amend Reg Z, which implements Truth in
Lending Act (TILA) and the Home Owner Equity Protection Act
(HOEPA). The proposal included new restrictions and
requirements for mortgage lending and servicing designed to
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protect consumers from abusive mortgage product features and
deceptive acts. This proposal created a new class of loans for
coverage called "higher-priced loans." Additionally, in 2009
the Governor signed AB 260 (Lieu) Chapter 629, Statutes of 2009
which incorporated the definition of the Reg Z "higher-priced"
loan definition along with California specific restrictions on
these loans.
Changes to loan features and products have not been the only
response to the subprime crisis. In 2008 Congress passed the
Secure and Fair Enforcement of Mortgage Licensing (SAFE) Act,
pursuant to Title V of the provisions of the Housing and
Economic Recovery Act of 2008 (HR 3221; Public Law 110-289).
The SAFE Act requires mortgage loan originators to register with
a national database, undergo background checks, and comply with
minimum education and ethical requirements.
Just last year, congress passed and the President signed the
Dodd-Frank Wall Street Reform and Consumer Protection Act, the
largest overhaul of financial regulation of this generation.
The Dodd-Frank Act also imposes various changes to the mortgage
finance and origination system. In addition, to imposing
minimum underwriting standards on all mortgages, it proposed
regulations to further corral the securitization and
risk-retention rules of various mortgage products. The risk
retention provisions are designed to force lenders to retain
some risk in non-qualified mortgage loans because lessons from
the subprime crisis have demonstrated that greater care and
accuracy in mortgage lending occurs when the risk of that
transaction cannot be fully passed on to the secondary market.
While Dodd-Frank put forth ground breaking (and very complex)
mortgage lending standards it also empowers and directs federal
regulators, including the new Consumer Protection Bureau to
draft further mortgage lending rules.
In summary, between state and federal laws passed in the last
four years we now have multiple layers and requirements for
non-traditional, higher-costs, higher-priced, qualified, and
non-qualified mortgages, as well as, standards for loan
originators and a new framework for risk retention and secondary
market activity.
The majority of reforms have concentrated on removing those
products and features that would appear to put borrowers at the
most risk. The only area of mortgage lending that has any sort
of pre-counseling requirement is the reverse mortgage market.
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The reasons for requiring counseling for reverse mortgages are
clear in that you are dealing generally, with an at-risk
population (elderly), and that a reverse mortgage is very
complicated financial transaction with short-term and long-term
potential liabilities.
In addition to the Dodd-Frank reforms mentioned previous, it
placed a requirement on Consumer Financial Protection Bureau to
produce a booklet for anyone seeking federally related mortgages
outlining the risks associated with mortgages, including
descriptions on the various types of mortgage products and their
features. This requirement also includes:
Information about homeownership counseling services made
available pursuant to section 106(a) (4) of the Housing 124
STAT. 2176 PUBLIC LAW 111-203-JULY 21, 2010 and Urban
Development Act of 1968 (12 U.S.C. 1701x (a) (4)), a
recommendation that the consumer use such services, and
notification that a list of certified providers of
homeownership counseling in the area, and their contact
information, is available.
Dodd-Frank acknowledges the need for borrowers to have upfront
information prior to purchasing a mortgage, but does not require
actual counseling, or standards on debt to income ratios.
According to Lender Processor Services' Mortgage Monitor report,
9.3% of all mortgages in California are in some form of
delinquency. This also means that 90.7% of mortgages are paid
on time and performing as normal. Historically, absent a
crisis, the mortgage delinquency rate is barley 2% and often is
much less. This bill would require counseling for those 90+% of
cases where borrowers did not have a problem choosing the best
mortgages for themselves.
Issues for discussion.
1)Prudent Debt to Income Ratio:
This bill requires that a mortgage broker must provide the
borrower with debt counseling including what constitutes a
prudent debt to income (DTI) ratio for the borrower
considering the borrower's income and credit rating. Under
this bill, state regulators are required to establish a
prudent DTI standard for all borrowers. A prudent DTI
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standard would appear to be subjective at best. Additionally,
this requires California's regulators to establish a standard
when they do not have the expertise to make such a
determination, nor is the establishment of such standards part
of their regulatory mission. Is DTI alone, sufficient to
gauge a borrower's ability to repay? According to proposed
amendments to the Truth in Lending Act just released on April
20, 2011 by the Federal Reserve Board the ability to repay
includes numerous key factors that include:
a) Income or assets relied upon in making the ability to
repay determination;
b) Current employment status;
c) Monthly mortgage payments and payments for mortgage
related obligations (taxes & insurance);
d) Current debt obligations;
e) Monthly debt-to-income ratio; and
f) Credit history.
Even if a DTI standard could be established across the board,
the committee did not receive any background to demonstrate
that DTI alone is sufficient to gauge a borrower's ability to
repay a mortgage alone.
2)Pre NOD counseling.
The requirement in the bill to provide pre-NOD counseling
appears to be redundant of existing law provisions regarding
pre-NOD contact requirements for mortgage loan servicers (See
Civil Code sections, 2923.5(a1)-2923g). These sections
require specific due-diligence requirements on the part of
mortgage servicers prior to filing an NOD, that include
notification to the borrower of their write to seek counseling
and discuss loan modification options.
3)Counseling?
This bill requires brokers to offer this counseling. How are
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brokers qualified to offer such counseling? Are current
disclosures insufficient? No background has been offered in
support of this bill that would demonstrate that current
disclosures are inadequate. Furthermore, with the broad
application required even those persons that we generally view
as having specialized educational training, such as attorneys,
would be required to receive this counseling. Additionally, a
borrower buying a home for investment purposes, such as rental
property, or a borrower buying their second or third home
would have to undergo such counseling.
4)Fiduciary Duty.
This bill places the counseling requirement as part of a
brokers fiduciary duty. In order to understand the impact of
this change some historical perspective is necessary. The
codification of a mortgage broker's fiduciary duty occurred
via AB 260 (Lieu), Chapter 629, statutes of 2009. Prior to
this change, case law had established that mortgage brokers
owe a fiduciary duty via Wyatt v. Union Mortgage Co., (924
Cal. 3d 773, 598 P.2d 45, 157 Cal. Rptr. 392 (1979)). In
this case, the court analogized the obligation of the mortgage
brokers to that of insurance agents noting that individuals
justifiably rely on agents' advice because of the volume and
technical nature of the documents. The court concluded:
There is a second reason why appellants breached their
fiduciary obligations toward
respondents. In the context of insurance policies, this court
has recognized that a
fiduciary's duty may extend beyond bare written disclosure of
the terms of a transaction to
duties of oral disclosure and counseling? The reason in these
cases applies to
transactions with mortgage loan brokers as well?Against such a
backdrop, the broker's
failure to disclosure orally the true rate of interest, the
penalty for late payment of the
swollen size of the balloon payment clearly consisted a breach
of broker's fiduciary
obligations.
Through the years, DRE, the regulator of real estate brokers,
interpreted that their brokers did owe borrowers a fiduciary
duty. In the spring, 2008 issue of the Real Estate Bulletin,
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DRE published an article that contained the following section on
fiduciary duty:
Real estate brokers, including when they are acting as
mortgage loan brokers, are
fiduciaries of their clients. A fiduciary relationship is a
relationship involving a high
degree of trust, fidelity, integrity and confidence, and the
exercise of professional
expertise or special knowledge. Being a fiduciary imposes the
highest standard of care on the
broker and imposes duties including, but not limited to: the
obligation to exercise
diligence and skill in representing a client, to fully and
truthfully disclose to a client all
material facts, and to exercise the utmost honesty, candor, and
unselfishness toward the
client. A real estate broker must work in the best interests of
his or her principal.
Subsequent to case law and administrative interpretation, AB 260
contained the provision, that is now current law (Civil code,
Section 2923.1), outlining the fiduciary duty of brokers, and
other licensees acting as brokers in certain circumstances.
This section was carefully negotiated between numerous parties
in the negotiations that occurred regarding AB 260 (and its
predecessor, AB 1830 of 2008 that was vetoed). Countless hours
were spent negotiating and drafting this section to ensure that
it provided the necessary protection for borrowers, while
maintaining a clear standard for licensees. Among the
considerations for the codification of a fiduciary standard was
to ensure that regulators and the courts had a clear standard
with enough flexibility to have broad interpretation and
application.
This section was carefully crafted has only been in effect for a
little over a year, and no evidence has been provided suggests
that it needs revision at this time.
REGISTERED SUPPORT / OPPOSITION :
Support
California Black Chamber of Commerce
West Angeles Community Development Corporation
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Opposition
California Association of Realtors
California Bankers Association
California Chamber of Commerce
California Credit Union League (CCUL)
California Financial Services Association
California Independent Bankers
California Land Title Association
California Mortgage Association
California Mortgage Bankers Association
Civil Justice Association of California
Securities Industry and Financial Markets Association
United Trustees Association
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081