BILL ANALYSIS �
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Juan Vargas, Chair
SB 980 (Vargas) Hearing Date: April 11,
2012
As Introduced: January 23, 2012
Fiscal: Yes
Urgency: No
SUMMARY Would extend the sunset date on the state's
prohibition against collecting up-front fees in connection with
mortgage loan modifications and other forms of mortgage loan
forbearance, from January 1, 2013 to January 1, 2017.
DESCRIPTION Would extend all of the provisions of existing law
described below for an additional four years past their current
January 1, 2013 sunset date.
EXISTING LAW
1. Provides that, notwithstanding any other provision of law,
it is unlawful for any person 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, to do any of the following:
a. Claim, demand, charge, collect, or receive any
compensation until after the person has fully performed
each and every service the person contracted to perform
or represented that he, she, or it would perform.
b. Take any wage assignment, any lien of any type on
real or personal property, or other security to secure
the payment of compensation.
c. Take any power of attorney from the borrower for any
purpose.
2. Applies the prohibition described in Number 1 above only to
mortgages and deeds of trust secured by residential real
property containing for or fewer dwelling units, and applies
the prohibition only until January 1, 2013.
SB 980 (Vargas), Page 2
3. Provides that a violation of the prohibition described in
Number 1 above is a misdemeanor, punishable by a fine not
exceeding $10,000 ($50,000 if the party violating the law is
a corporation), imprisonment in a county jail for up to one
year, or by both a fine and imprisonment, and provides that
those penalties are cumulative to any other remedies or
penalties provided by law.
COMMENTS
1. Background and Discussion: SB 980 proposes to extend the
sunset date on the provisions of a 2009 urgency bill (SB 94,
Calderon, Chapter 630, Statutes of 2009), which cracked down
against unscrupulous individuals and businesses, who were
preying on troubled borrowers by charging them up-front,
often nonrefundable fees, under the guise of helping the
borrowers obtain loan modifications or other forms of
mortgage forbearance from their lenders.
All too frequently, these fees were charged for services that
were never provided, leaving thousands of troubled borrowers
worse off than they had been before seeking help. SB 94
addressed that problem, by prohibiting those who sought to
charge borrowers a fee for helping negotiate a loan
modification or other form of mortgage loan forbearance from
collecting their fee until they performed all agreed-upon
services. SB 94 also required those who sought to charge
for these services to clearly inform their potential
customers that similar services were available, free of
charge, from non-profit housing counseling agencies.
Although early versions of SB 94 lacked a sunset date, the
Schwarzenegger Administration requested that a January 1,
2013 sunset date be added to the loan modification advance
fee ban provision of his bill. Because of that sunset date,
the needed protections added to California law by SB 94 will
sunset at the end of 2012, unless the Legislature acts to
extend them. The author of SB 980 is concerned that failure
to extend the sunset date on SB 94 will re-open the door to
unscrupulous individuals and businesses bent on duping
borrowers into paying unnecessary fees.
2. Did SB 94 Work? All available evidence strongly suggests
that SB 94 worked as intended, by getting unscrupulous
providers of loan modification services out of the business,
SB 980 (Vargas), Page 3
without eliminating borrowers' access to legitimate loan
modification assistance. Some of this evidence was
presented by representatives of the State Bar and the
Department of Real Estate (DRE), during a joint
informational hearing held by the Senate Banking, Finance &
Insurance Committee and the Senate Judiciary Committee in
March 2010.
Testifying during that hearing, Mr. Russell Weiner, interim
chief trial counsel for the disciplinary arm of the State
Bar, stated "SB 94 has been extremely effective in
accomplishing its purpose. To give you some numbers-from
January 1st of 2009 until last Friday, we have taken in
almost 4,000 complaints involving allegations of misconduct
in providing loan modification services by attorneys...
There were, really, thousands and thousands of homeowners
that were taken advantage of prior to SB 94. But without SB
94, I can't imagine what we'd be looking at today... what it
did is it took the financial incentive away from lawyers who
were really using it as a vehicle to defraud unsuspecting
homeowners and from participating with nonlawyers who were
using these lawyers in order to do the same thing. And so,
it's been very effective in that regard."
Mr. Jeff Davi, DRE Commissioner at the time of that hearing,
also testified about the need for and effectiveness of SB
94: "First of all, the question of SB 94 in terms of its
need, it was undeniably a needed piece of legislation...
When you look at what was happening prior to October 11,
2009 �the operative date of SB 94], you basically had
attorneys, foreclosure consultants, real estate brokers, and
then many predatory people impersonating one of those three,
out there collecting advance fees under the false promise of
providing a loan modification... what we found is since
October 11th, most of the complaints are still about prior
activity taking place. We've only found 30 examples since
the first of the year where there were violations after the
passage of SB 94."
Since enactment of SB 94 on October 11, 2009, the State Bar,
DRE, and State Attorney General have taken a significant
number of enforcement actions against unscrupulous providers
of loan modification services. In the time since SB 94's
passage, the State Bar has received over 8,600 complaints
alleging misconduct in loan modification matters by
attorneys, and has conducted approximately 6,250
SB 980 (Vargas), Page 4
investigations against approximately 800 attorneys.
Approximately 2,500 of those complaints have resulted in
some form of disbarment of, resignation from the Bar by, or
discipline against an attorney. Another 450 cases are
pending before the State Bar Court. About 700 complaints
are still under investigation by the Bar or in the early
stages of a pending disciplinary action. All told,
approximately 110 attorneys have been disciplined, 50
attorneys are awaiting discipline by the Supreme Court, and
another 50 attorneys' cases are pending before the State Bar
Court.
Since enactment of SB 94, DRE has filed over 1,100
administrative actions against loan modification scammers.
It has issued over 300 desist and refrain orders, revoked or
accepted the surrender of approximately 100 licensees, and
suspended the licenses of another 20 licensees.
Since enactment of SB 94, the State Attorney General has filed
approximately one dozen civil cases, involving approximately
40 defendants, and seven criminal cases involving over 50
defendants. An additional 16 criminal investigations are
pending.
3. What is the MARS Rule? In December 2010, the Federal
Trade Commission (FTC) issued a rule governing mortgage
assistance relief services (MARS; Federal Register Vol. 75,
No. 230, December 1, 2010, pp 75092 - 75144). The FTC
defines MARS as "any service, plan, or program, offered or
provided to the consumer in exchange for consideration, that
is represented, expressly or by implication, to assist or
attempt to assist the consumer in negotiating a modification
of a dwelling loan that reduces the amount of interest,
principal balance, monthly payments, or fees; stopping,
preventing, or postponing a foreclosure or repossession, or
obtaining any of the following types of relief: a
forbearance or repayment plan; an extension of time to cure
a default, reinstate a loan, or redeem a property; a waiver
of an acceleration clause or balloon payment; and a short
sale, deed in lieu of foreclosure, or any other disposition
of the property except a sale to a third-party that is not
the loan holder. "
Under the MARS rule, any for-profit company which, in exchange
for a fee, offers to work on behalf of consumers to help
them obtain a mortgage loan modification or otherwise avoid
SB 980 (Vargas), Page 5
foreclosure, is required to disclose certain information
about their proferred services to the consumer, is
prohibited from making false or misleading claims about
their proferred services, is prohibited from collecting
advance fees for those services, and is prohibited from
providing assistance or support to another person they know
is engaged in a violation of the rule.
The FTC's MARS Rule does not pre-empt California law; instead,
it overlays California law. Thus, California law in this
area governs when it is more protective of borrowers than
the federal MARS rule, and the MARS rule governs when it is
more protective of borrowers than California law. Because
the MARS definition of covered services is broader than the
SB 94 definition of these services, and because the list of
required and prohibited activities under the MARS rule is
longer than the list of required and prohibited activities
under SB 94, the FTC's MARS rule adds a layer of consumer
protection to California law, which supplements and adds to
SB 94.
Why, then, is an extension of the SB 94 sunset date needed?
Such an extension is needed, if California wishes to
continue applying uniform rules to all persons who offer to
assist borrowers in obtaining loan modifications or other
forms of mortgage loan forbearance for a fee paid by the
borrower. Absent any action to extend the provisions of SB
94, attorneys will be able to collect advance fees from
borrowers in connection with offers to help avoid
foreclosure, effective January 1, 2013, but real estate
licensees and unlicensed persons will be prohibited from
doing so.
The statement immediately above is true, because the FTC chose
to apply its MARS rule less stringently to attorneys than it
did to all other parties subject to the MARS rule. SB 94
treated real estate licensees, attorneys, and unlicensed
persons identically, because all three groups were preying
on unsophisticated homeowners. The FTC took a different
approach. Because of the way in which it is written, the
MARS rule is more stringent than SB 94 as it pertains to
real estate licensees, and less stringent than SB 94 as it
pertains to attorneys. Thus, SB 94 governs the behavior of
attorneys who offer to help borrowers obtain loan
modifications in California, while the MARS rule governs the
behavior of real estate licensees and unlicensed persons who
SB 980 (Vargas), Page 6
offer to help borrowers with those services. If SB 94 is
allowed to sunset, the less stringent provisions of the MARS
rule which apply to attorneys will govern the behavior of
attorneys in California.
4. Summary of Arguments in Support: AFSCME, the California
Bankers Association, and the California Mortgage Bankers
Association support the bill's borrower protections, and
believe that the provisions of SB 94 should not be allowed
to sunset on January 1, 2013.
5. Summary of Arguments in Opposition: None received.
6. Prior and Related Legislation:
a. SB 94 (Calderon), Chapter 630, Statutes of 2009:
Enacted the provisions whose sunset date this bill would
extend by four years. Also required any person who
negotiates, attempts to negotiate, arranges, attempts to
arrange, or who otherwise offers to perform residential
mortgage loan modifications or other forms of mortgage
loan forbearance for a fee paid by a borrower to provide
a specified statement to the borrower, translated into
the language used to solicit the borrower, informing the
borrower that similar services are available free of
charge. Made other consumer-friendly changes to the Real
Estate Law and Finance Lenders Law.
b. AB 1950 (Davis): Would extend the provisions of SB
94 permanently, impose a $25 fee on all notices of
default recorded in California, and extend the statute of
limitations on loan modification and certain other real
estate-related offenses to four years, as specified.
Double-referred to the Assembly Public Safety Committee
and the Assembly Local Government Committee.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
AFSCME
California Bankers Association
California Mortgage Bankers Association
Opposition
SB 980 (Vargas), Page 7
None received
Consultant: Eileen Newhall (916) 651-4102