BILL ANALYSIS �
SENATE JUDICIARY COMMITTEE
Senator Hannah-Beth Jackson, Chair
2013-2014 Regular Session
AB 1730 (Wagner)
As Amended June 5, 2014
Hearing Date: June 17, 2014
Fiscal: Yes
Urgency: No
TH
SUBJECT
Mortgage Loan Modification
DESCRIPTION
Existing law prohibits any person who negotiates a loan
modification from charging the borrower an upfront fee, and
provides that a person who violates this prohibition is guilty
of a misdemeanor punishable by a fine and imprisonment. This
bill would provide that a violation of that prohibition may be
charged either as a misdemeanor or as a felony. This bill would
additionally authorize a public prosecutor to assess a $20,000
civil penalty against an offender per violation, as well as a
$2,500 civil penalty if the victim is a disabled person or a
senior citizen. This bill would also authorize a court to order
an offender to pay restitution to a victim, and would enact a
four-year statute of limitation for bringing an action.
BACKGROUND
On March 24, 2009, this Committee held an informational hearing
that focused on the serious problem of foreclosure-related scams
facing delinquent homeowners. Many of those scams involved a
promise to renegotiate a delinquent borrower's loan in exchange
for a significant up-front fee. In arresting three members of a
foreclosure fraud ring in Southern California in November 2009,
the Attorney General's office reported:
The arrests came after an investigation into First Gov, also
operating as Foreclosure Prevention Services, uncovered that
the company was soliciting hundreds of homeowners with mail
flyers offering to help them stop the foreclosure process on
(more)
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their homes. The scammers falsely told homeowners that they
would renegotiate their mortgages, reduce monthly payments,
and transfer any delinquent loan amounts to the renegotiated
principle [sic]. The company demanded an up-front fee,
ranging from $1,500 to $5,000, to participate in the
loan-modification program. The company also told the
victims to stop any mortgage payments or communications with
their lender, claiming they would interfere with the
company's effort to negotiate the loan modification.
When victims complained that they were still receiving
delinquency or foreclosure notices from their lenders,
fraud-ring members told the victims that the mortgage loans
had been renegotiated, but the lenders needed a "good faith"
payment to secure the new accounts. Homeowners made
payments to accounts under business names such as
"Reinstatement Department" or "Resolution Department" that
made it appear as if the payment had been applied toward the
loan. Bank records indicate that more than $700,000 was
stolen from homeowners who fell victim to this scheme.
In response to this and similar incidents, the Legislature
passed and the Governor signed SB 94 (Calderon, Ch. 630, Stats.
2009) which prohibited, until January 1, 2013, any person from
charging advance fees to borrowers in connection with a loan
modification, and required those who wish to charge a fee upon
the completion of loan modification services to first provide a
specified notice to borrowers regarding other options available
to the borrower. Relying on the provisions of SB 94, the State
Bar, the Bureau of Real Estate (BRE), and the California
Attorney General have acted on thousands of complaints and taken
enforcement action against hundreds of foreclosure scammers.
About a year after the enactment of SB 94, the Federal Trade
Commission (FTC) promulgated the Mortgage Assistance Relief
Services (MARS) rule that also, subject to certain exceptions,
prohibits the collection of advance fees by loan modification
service providers, and requires certain disclosures to be made
to consumers.
As enacted, the prohibitions in SB 94 were to sunset on January
1, 2013. This sunset date was extended to January 1, 2017, in
SB 980 (Vargas, Ch. 563, Stats. 2012), and was extended
indefinitely by AB 1950 (Davis, Ch. 569, Stats. 2012). AB 1950
additionally made it unlawful to act as a mortgage loan
originator without being licensed, and extended the statute of
limitation period for prosecution of certain misdemeanors such
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as running loan modification scams or selling real estate
without a license.
This bill would expand some of the original provisions of SB 94
pertaining to criminal and civil penalties. Specifically, this
bill would:
authorize prosecutors to charge individuals with either a
misdemeanor or a felony for violating mortgage loan
modification restrictions;
authorize the Attorney General or a local prosecutor to assess
a $20,000 civil penalty for each violation;
with respect to victims who are senior citizens or disabled
persons, allow for the assessment of an additional $2,500
civil penalty per violation and require the payment of
restitution; and
implement a four-year statute of limitation for bringing a
cause of action regarding mortgage loan modification
restrictions, as specified.
CHANGES TO EXISTING LAW
Existing law requires any person who solicits customers for the
purpose of helping negotiate a mortgage loan modification or
other form of mortgage loan forbearance for a fee or other
compensation, or who otherwise offers to perform these services
for a borrower for a fee or other compensation, to provide the
following notice to the borrower, as a separate statement 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. (Bus. & Prof.
Sec. 10147.6(a).)
Existing law prohibits any person who solicits customers for the
purpose of helping negotiate a mortgage loan modification or
other form of mortgage loan forbearance for a fee or other
compensation, or otherwise offers to perform these services for
a borrower for a fee or other compensation, from doing any of
the following (Bus. & Prof. Secs. 6106.3; 10085.6(a); Civil Code
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Sec. 2944.7(a).):
claiming, demanding, charging, collecting, or receiving any
compensation until after the person has fully performed each
and every service the person contracted to perform or
represented that he or she would perform;
taking any wage assignment, any lien of any type on real or
personal property, or any other security to secure the payment
of compensation; or
taking any power of attorney from the borrower for any
purpose.
Existing law provides that a violation of the above 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 by imprisonment in a county jail for up to one
year, or by both a fine and imprisonment. These penalties are
cumulative to any other remedies or penalties provided by law.
This bill would provide that a violation of the above advance
fee prohibition is punishable by a fine not exceeding ten
thousand dollars ($10,000), by imprisonment in a county jail for
a term not to exceed one year, by imprisonment for 16 months, or
two or three years, or by both that fine and imprisonment, or if
by a business entity, the violation is punishable by a fine not
exceeding fifty thousand dollars ($50,000). These penalties are
cumulative to any other remedies or penalties provided by law.
This bill would provide that in addition to the penalties and
remedies provided by existing law, as specified, a person who
violates the advance fee prohibition shall be liable for a civil
penalty not to exceed twenty thousand dollars ($20,000) for each
violation, which shall be assessed and recovered in a civil
action brought in the name of the people of the State of
California by the Attorney General, or by a public prosecutor,
as specified.
This bill would also provide that, in addition to the penalties
described above, if a person violates the above advance fee
prohibition with respect to a victim who is a senior citizen or
a disabled person, the violator may be liable for an additional
civil penalty not to exceed two thousand five hundred dollars
($2,500) for each violation. This bill would define a "disabled
person" to mean a person who has a physical or mental
disability, as specified, and would define a "senior citizen" to
mean a person who is 65 years of age or older. This bill would
also direct the court to consider, among other things, the
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following factors in determining whether to impose this
additional civil penalty:
whether the defendant knew or should have known that his or
her conduct was directed to one or more senior citizens or
disabled persons;
whether the defendant's conduct caused one or more senior
citizens or disabled persons to suffer any of the following:
loss or encumbrance of a primary residence, principal
employment, or source of income, substantial loss of property
set aside for retirement, or for personal or family care and
maintenance, or substantial loss of payments received under a
pension or retirement plan or a government benefits program,
or assets essential to the health or welfare of the senior
citizen or disabled person; and
whether one or more senior citizens or disabled persons are
substantially more vulnerable than other members of the public
to the defendant's conduct because of age, poor health or
infirmity, impaired understanding, restricted mobility, or
disability, and actually suffered substantial physical,
emotional, or economic damage resulting from the defendant's
conduct.
This bill would provide that a court of competent jurisdiction
may make orders and judgments as necessary to restore to a
senior citizen or disabled person money or property, real or
personal, that may have been acquired by means of a violation of
the above advance fee prohibition.
This bill would provide that any cause of action alleging a
violation of the above prohibitions shall be commenced within
four years after the cause of action accrued.
COMMENT
1. Stated need for the bill
The author writes:
Mortgage loan modification fraud is a huge issue, especially
amongst unwitting senior citizens. Due to the deflation of
real property values, either (1) the liens securing the
promissory note(s) for principal residential property exceeds
the value of the parcel or (2) the loans which were made have
resulted in mortgage payments beyond the ability of the
property owners to pay. As a consequence, individuals
desperate to save their homes have paid what little money they
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may still have in advance to individuals who claim to be able
to save the home by obtaining a loan modification. These
individuals then take the money, abandon the homeowners, and
allow the property to be sold at foreclosure.
Because this is a white collar crime and a misdemeanor,
priority for prosecution is low. . . . District attorneys are
finding that the penalties for the statutory violation are not
sufficient to deter the crime as victims of fraud are
potentially losing hundreds of thousands of dollars in the
aggregate, but the offense is just a misdemeanor. There is a
desire amongst district attorneys to increase the criminal
punishments as a future deterrent to individuals engaging in
this type of behavior.
This bill would authorize a violation of these provisions to
be punished as a wobbler/felony with imprisonment in jail for
a period of one year, and/or a non-dischargeable civil penalty
of $20,000.
2. Extended Incarceration and Civil Penalties
Under this bill, prosecutors would be given the discretion to
charge an individual who commits mortgage loan modification
fraud with either a misdemeanor (as in existing law), or a
felony. Because the bill does not set a specific period for
incarceration, an offender would likely face a period of
incarceration lasting 16 months, two, or three years. (See Pen.
Code Sec. 1170(h).) Additionally, this bill would authorize
prosecutors and certain city attorneys, as specified, to seek a
$20,000 civil penalty per violation from an offender. This
civil penalty amount would be in addition to a potential $10,000
fine brought as part of a criminal action, and a potential
$2,500 civil penalty that can presently be assessed under
California's Unfair Competition Law (UCL). (See Bus. & Prof.
Code Sec. 17206(a).) Like most violations of law, an act of
mortgage loan modification fraud falls within the broad scope of
the UCL, which provides remedies for "anything that can properly
be called a business practice and that at the same time is
forbidden by law." (Cel-Tech Communications, Inc. v. Los
Angeles Cellular Telephone Co. (1999) 20 Cal.4th 163, 180
[citations omitted].)
These penalty enhancements would arguably undercut the economic
rationale that drives individuals to commit mortgage loan
modification fraud in the first place. Further, the prospect of
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obtaining more substantial penalties against an offender may
incentivize certain prosecutors to more aggressively pursue
actions against those who commit mortgage loan modification
fraud. If either of these possibilities come to pass, the net
benefit would be good for California's consumers insofar as each
would likely reduce the prevalence of mortgage loan modification
fraud in the state.
3. Enhanced Penalties for Senior Citizen and Disabled Victims
This bill would also authorize a public prosecutor, as defined,
to seek an additional penalty of $2,500 per violation against
offenders who commit mortgage loan modification fraud upon
senior citizens or disabled persons. This extra civil penalty
would be in addition to all possible fines and penalties that
could be assessed in other mortgage loan modification fraud
cases, as described in Comment 2. Staff notes that the UCL
would additionally allow a public prosecutor to seek an
independent $2,500 civil penalty for each act of "unfair
competition" perpetrated against one or more senior citizens or
disabled persons, which would include acts of mortgage loan
modification fraud. (See Civ. Code Sec. 17206.1.) Thus, a
total of $5,000 in additional civil penalties per violation may
be assessed against violators who victimize senior citizens or
disabled individuals.
Additionally, this bill would provide that a court may order a
person who commits mortgage loan modification fraud to pay
restitution to victims who are senior citizens or disabled
persons. Staff notes that restitution is already provided as a
remedy to all victims of unfair business practices under the
UCL. Among other things, Section 17203 of the Business and
Professions Code provides that a court "may make such orders or
judgments . . . as may be necessary to restore to any person in
interest any money or property, real or personal, which may have
been acquired by means of such unfair competition." (See also
Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4th
1134, 1146 ["An order for restitution, then, is authorized by
the clear language of the [UCL."]].)
4. Statute of Limitation
Finally, this bill would enact a four year statute of limitation
for pursuing either a criminal or civil claim against an
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offender who commits mortgage loan modification fraud. Staff
notes that statutes of limitations are a fundamental element of
California law. By limiting the time period within which a
party can bring a cause of action against another, statutes of
limitations provide finality to disputes that otherwise might
never end. Without statutes of limitations, ancient wrongs
committed while someone is young might become the subject of
litigation years later in their old age. Statutes of
limitations "are designed to promote justice by preventing
surprises through the revival of claims that have been allowed
to slumber until evidence has been lost, memories have faded,
and witnesses have disappeared. The theory is that even if one
has a just claim it is unjust not to put the adversary on notice
to defend within the period of limitation and that the right to
be free of stale claims in time comes to prevail over the right
to prosecute them." (Order of R. Telegraphers v. Railway
Express Agency, Inc. (1944), 321 U.S. 342, 348-349.)
Staff notes that the four year statute of limitation proposed in
this bill mirrors the four year statute of limitation applicable
to UCL claims. (See Bus. & Prof. Code Sec. 17208.) The
prohibition on accepting advance fees for mortgage loan
modifications does not presently contain an express statute of
limitation. Arguably, as a fraud action, the general three year
statute of limitation for actions grounded in "fraud or mistake"
would apply to civil claims premised on this prohibition under
current law. (See Code Civ. Proc. Sec. 338(d).) Staff notes
that the general statute of limitation for fraud claims begins
to run upon "discovery, by the aggrieved party, of the facts
constituting the fraud or mistake." (Id.) While the author's
proposed statute of limitation is triggered upon commission of
the act, not upon discovery, staff notes that it is unlikely a
party would take more than a year to discover that they were the
victim of mortgage loan modification fraud. Consequently, it is
likely that the author's proposed statute of limitation would
provide aggrieved parties with more time to bring a claim
against an offender than is presently available in a fraud
action not premised on the UCL.
5. Double Referral to Senate Committee on Public Safety
This bill is double referred to the Senate Committee on Public
Safety. Should this bill be approved by this Committee, it will
be referred to the Senate Committee on Public Safety for review
of those provisions within that Committee's jurisdiction.
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Support : Los Angeles County Board of Supervisors; Taxpayers for
Improving Public Safety
Opposition : None Known
HISTORY
Source : Author
Related Pending Legislation : None Known
Prior Legislation :
AB 1072 (Wagner, 2013) would have amended existing law
pertaining to penalties for unlawful activities in conjunction
with mortgage loan modifications in a manner similar to that
proposed in this bill (AB 1730). AB 1072 died in the Assembly
Committee on Judiciary.
AB 1950 (Davis, Ch. 569, Stats. 2012) See Background.
SB 980 (Vargas, Ch. 563, Stats. 2012) See Background.
SB 2 (Calderon, 2011) would have extended the sunset date
contained in SB 94 from January 1, 2013, to January 1, 2015, and
would have extended its provisions to persons who for a fee
negotiate, arrange, or otherwise offer to accomplish the sale of
a residential dwelling for less than its remaining amount of
indebtedness. This bill died in the Senate Committee on Banking
and Financial Institutions.
SB 94 (Calderon, Ch. 630, Stats. 2009) See Background.
Prior Vote :
Assembly Floor (Ayes 73, Noes 0)
Assembly Committee on Appropriations (Ayes 17, Noes 0)
Assembly Committee on Banking and Finance (Ayes 10, Noes 0)
Assembly Committee on Judiciary (Ayes 10, Noes 0)
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