BILL ANALYSIS �
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THIRD READING
Bill No: SB 980
Author: Vargas (D)
Amended: As introduced
Vote: 21
SENATE BANKING & FINANCIAL INST. COMM. : 6-0, 4/11/12
AYES: Vargas, Blakeslee, Evans, Kehoe, Liu, Padilla
NO VOTE RECORDED: Walters
SENATE JUDICIARY COMMITTEE : 5-0, 4/24/12
AYES: Evans, Harman, Blakeslee, Corbett, Leno
SENATE APPROPRIATIONS COMMITTEE : Senate Rule 28.8
SUBJECT : Mortgage loans
SOURCE : Author
DIGEST : This bill extends the sunset date on the states
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.
ANALYSIS :
Existing law:
1. Provides that, notwithstanding any other provision of
law, it is unlawful for any person who negotiates,
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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 #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.
3. Provides that a violation of the prohibition described
in #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.
This bill extends all of the provisions of existing law
described below for an additional four years past their
current January 1, 2013 sunset date.
Background
This bill 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
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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 the 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 this bill 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.
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, without eliminating borrowers' access to
legitimate loan modification assistance. Some of this
evidence was presented by representatives of the State Bar
(Bar) and the Department of Real Estate (DRE), during a
joint informational hearing held by the Senate Banking,
Finance and 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 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
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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 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 Bar has received over 8,600 complaints
alleging misconduct in loan modification matters by
attorneys, and has conducted approximately 6,250
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.
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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.
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 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;
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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 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.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
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Local: Yes
SUPPORT : (Verified 5/15/12)
AFSCME
California Bankers Association
California Mortgage Bankers Association
CALPIRG
Center for Responsible Lending
Western Center on Law and Poverty
JJA:kc 5/15/12 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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