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Business Services and Consumer and Investor Protection

Preston DuFauchard
California Corporations Commissioner
Sacramento, California
FILE NO: SB 1275

June 28, 2010

The Honorable Mark Leno

California State Senate
State Capitol, Room 4061
Sacramento, CA 95814

Re: Senate Bill 1275 – OPPOSE

Dear Senator Leno:

This letter is to inform you of the Department of Corporations and the Department of
Real Estate’s position of OPPOSE on SB 1275 (collectively, “Departments”).

While the Departments recognize that the goal of the legislation is to ensure that
borrowers are not “falling through the cracks” in the loan modification process, the same
areas of the loan modification process that SB 1275 seeks to remedy have already
recently been addressed. In particular, Supplemental Directive 10-02 under the Home
Affordable Modification Program (HAMP) addresses many of the same areas of the loan
modification process as SB 1275. It is premature to add another layer of requirements
covering the same issues, when there is no evidence regarding the lack of efficacy of
this HAMP directive that has only become operative on June 1, 2010.

Further, since the inception of the HAMP program in 2009, there have been ten
supplemental directives issued in 2009 and five thus far in 2010, further refining the
program and setting forth procedural requirements for servicers. Among the reasons for
the 15 directives are the changing nature of the housing crisis, and the need to respond
to program and economic developments. Consequently, the Departments are
concerned about legislating in the same area that is continuously evolving under federal
oversight, and in a manner which will open the door for legal challenges to the bill.

With respect to borrower outreach efforts, effective June 1, 2010, HAMP set forth a
prohibition against a referral to foreclosure until either a borrower has been evaluated

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The Honorable Mark Leno
SB 1275 – Oppose
June 28, 2010
Page 2

and determined to be ineligible for HAMP, or reasonable solicitation efforts have failed.
Therefore, for the overwhelming majority of loans, HAMP requires a borrower be
considered for a modification prior to a referral to foreclosure. SB 1275 adds an
unnecessary layer of redundancy to the process. For servicers not contractually
obligated to comply with HAMP, SB 1275 creates a disincentive not to offer loan
modifications, by crafting prescriptive timeframes and exposing servicers to liability for
engaging in loan modification efforts.

With respect to servicer declarations of compliance, the public declaration required

by SB 1275 raises privacy concerns for borrowers and adds needless disruption to a
declaration process that was enacted less than two years ago in SB 1137 (Perata, Ch.
69, Stats. 2008). The need or benefit of crafting a new declaration process is not clear,
given that in addition to SB 1137, the HAMP directive now requires servicers to provide
written certifications to trustees regarding compliance with HAMP. Consequently, the
process of documenting compliance with borrower outreach efforts appears to be
adequately addressed in existing law and under the recent HAMP directive. Again, SB
1275 adds an unnecessary layer of redundancy and complexity to the process, and
invites litigation.

In addition to other concerns, the remedies under the bill are troublesome given the
lack of any nexus between the procedural failures leading to liability under the bill and a
borrower’s ability to qualify for a loan modification or otherwise fulfill the mortgage
agreement. SB 1275 adds incentives for litigation to a nonjudicial foreclosure process
and establishes disincentives for servicers to participate in loan modification programs.
In an attempt to keep borrowers from falling through the cracks, SB 1275 has
established complex procedural requirements and exposure to liability for all loan
modifications to address problems that have occurred at the margins, and that have
already been addressed through the HAMP directive.

This legislation may have negative effects in the future, as it appears likely to
increase the future costs for housing finance. The Departments caution that the new
requirements, uncertainty, and liability resulting from the bill may be passed along to
borrowers and the housing markets through higher costs, less access to credit, and less
capital available for housing. In California, sustainable loan modifications have proven
to be elusive because of high unemployment and the prevalence of houses that are
worth significantly less than the loans secured by them.

Should you or you staff have any questions or need further assistance, please
contact me at the number below, or Tom Pool, Assistant Commissioner, Department of
Real Estate, at 227-0772.


Colleen Monahan
Deputy Commissioner
Department of Corporations
The Honorable Mark Leno
SB 1275 – Oppose
June 28, 2010
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