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SB 980 SENATE RULES COMMITTEE Office of Senate Floor Analyses 1020 N Street, Suite 524 (916) 651-1520 Fax: (916) 327-4478 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 CONTINUED SB 980 Page 2 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 CONTINUED SB 980 Page 3 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 CONTINUED SB 980 Page 4 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 CONTINUED SB 980 Page 5 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 CONTINUED SB 980 Page 6 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 **** END ****