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SB 980
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THIRD READING
Bill No:
Author:
Amended:
Vote:
SB 980
Vargas (D)
As introduced
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 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.
ANALYSIS:
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
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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 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
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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
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
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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.
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
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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 thirdparty 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; 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
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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 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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