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SENATE  COMMITTEE  ON  BANKING,  FINANCE,    AND  INSURANCE   Senator  Ronald  Calderon,  Chair

SB 94 (Calderon) As Amended Fiscal: Urgency: Hearing Date: April 1, 2009 March 23, 2009 Yes No

SUMMARY Would prohibit persons from charging advance fees to borrowers in connection with the modification of the terms of the borrower’s loan, require those who wish to charge a fee for loan modification services (after performing them) to provide a specified notice to borrowers regarding other options available to the borrower, prohibit servicers from imposing any interest or charge for performing services for borrowers in connection with loan modifications or other forms of loan forbearance of forgiveness; and close a loophole in the California Finance Lenders Law. DIGEST Existing law 1. Prohibits real estate licensees from charging a borrower an advance fee in connection with a residential real estate loan, before the borrower becomes obligated on the loan (Business and Professions Code Section 10085.5); Allows licensed real estate brokers to charge borrowers an advance fee for helping negotiate a loan modification on a borrower’s behalf, as long as the broker’s fee agreement has been reviewed by the Department of Real Estate (DRE), and DRE has no objections to it. DRE interprets existing law as prohibiting brokers from collecting an advance fee once a notice of default has been recorded, but neither the Real Estate Law, nor the foreclosure consultant law, contains explicit language in this regard; Is silent regarding the fees that may be charged by licensed banks, credit unions, finance lenders and brokers, and residential mortgage lenders and servicers in connection with loan modifications and other forms of mortgage loan forbearance or forgiveness; Provides for the foreclosure consultant law (Civil Code Section 2945 et seq.), which defines a foreclosure consultant as one who makes any solicitation, representation, or offer to any owner of a property on which a notice of default has been recorded, to perform any of the following services for compensation: a. Stop or postpone a foreclosure sale, or save the owner’s residence from foreclosure; b. Obtain any forbearance from any beneficiary or mortgagee;

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c. Help the owner exercise his or her right of reinstatement, or extend the period within which the owner may reinstate his or her mortgage obligation; d. Obtain any waiver of an acceleration clause in any mortgage, as specified; e. Help the owner obtain a loan or advance of funds; f. Avoid or ameliorate the impairment of the owner’s credit, resulting from the recordation of a notice of default or the conduct of a foreclosure sale; g. Help the owner obtain remaining proceeds from a foreclosure sale of the owner’s residence; 5. Exempts the following individuals and businesses from the foreclosure consultant law: a person licensed to practice law; a licensed prorater; a licensed real estate broker, as specified; a licensed accountant; a person or his or her agent acting under express authority of or written approval from the U.S. Department of Housing and Urban Development or other federal department or agency; a person who holds or is owed an obligation secured by a lien on any residence in foreclosure, when the person performs services in connection with that obligation or lien; a licensed finance lender, as specified; a licensed depository institution; a licensed escrow agent or other licensed person authorized to conduct a title or escrow business; and a licensed residential mortgage lender or servicer; Makes it a violation of law for a foreclosure consultant to do any of the following, and subjects violators to a fine of not more than $10,000, imprisonment in the county jail or in state prison for up to one year, or by both a fine and imprisonment: a. Claim, demand, charge, collect, or receive any compensation until after the foreclosure consultant has fully performed each and every service he or she contracted to perform or represented that he or she would perform; b. Claim, demand, charge, collect, or receive any fee, interest, or any other compensation for any reason which exceeds 10% per annum of the amount of any loan the foreclosure consultant may make to the property owner; c. Take any wage assignment, any lien of any type on real or personal property, or other security to secure the payment of compensation; d. Receive any consideration from any third party in connection with services rendered to an owner, unless that consideration is fully disclosed to the owner; e. Acquire any interest in a residence in foreclosure from an owner with whom the foreclosure consultant has contracted, as specified; f. Take any power of attorney from any owner for any purpose;

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g. Induce or attempt to induce any owner to enter into a contract that is not in compliance with the foreclosure consultant law; h. Enter into an agreement to obtain the release of surplus funds after a trustee’s sale is conducted; 7. Pursuant to the foreclosure consultant law: a. Gives borrowers a five day right to rescind a contract with a foreclosure consultant, and requires foreclosure consultants to provide copies of their contracts to their potential customers in the language in which the contract is negotiated, as specified; b. Requires foreclosure consultants to register with the California Department of Justice and maintain a surety bond of $100,000, and punishes persons who violate this provision with a fine of between $1,000 and $25,000, and by imprisonment in the county jail for not more than one year, or by both a fine and imprisonment; 8. Authorizes an owner to bring an action against a foreclosure consultant for any violation of the foreclosure consultant law, and provides that judgment shall be entered for actual damages, reasonable attorneys’ fees and costs, and appropriate equitable relief. Also provides that a court may, in its discretion, award exemplary damages, as specified, in addition to any other award of actual damages; Provides that some of the provisions of the foreclosure consultant law described above are operative July 1, 2009; the remainder are currently operative.

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This bill 1. Would prohibit any natural person or entity 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: 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; b. Taking any wage assignment, any lien of any type on real or personal property, or any other security to secure the payment of compensation; c. Taking any power of attorney from the borrower for any purpose; 2. Would require any natural person or entity 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 form of compensation, or who otherwise offers to perform these services for a borrower for a fee or other form of compensation, to provide the following notice to the borrower, as a separate statement, in not less

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than 14-point bold type, 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. 3. Would require a translated copy of the notice shown immediately above to be provided to a borrower, if the loan modification or other mortgage loan forbearance services are offered to or negotiated with the borrower in one of the foreign languages set forth in Section 1632 of the Civil Code (Spanish, Korean, Vietnamese, Tagalog, and Chinese). Would authorize DRE to enforce violations of the sections of the Civil Code relating to mortgages (Civil Code Section 2920 et seq.) by real estate licensees, and would provide that a violation of the advance fee provisions described in Number 1 above by a real estate licensee is a public offense, punishable by a fine not exceeding $10,000 for an individual or $50,000 for a corporation, or by imprisonment in a county jail for up to six months, or by both a fine and imprisonment; Would make technical changes to the foreclosure consultant law, to more clearly describe the entities that are exempt from that law; Would provide, under the Banking Law, Credit Union Law, California Finance Lenders Law, and California Residential Mortgage Lending Act, that no licensee shall directly or indirectly charge, contract for, or receive any interest or charge of any nature for performing services for a borrower in connection with either of the following: a. The actual or attempted modification of the terms of a residential mortgage loan; b. The actual or attempted negotiation of another form of forbearance or forgiveness in connection with that loan; 7. Would provide that, notwithstanding Number 6 above, no bank, credit union, finance lender, finance broker, residential mortgage lender, or residential mortgage servicer licensee is prohibited from doing either of the following: a. Collecting interest or other charges pursuant to the terms of a loan that has been modified;

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b. Accepting payment from a federal agency in connection with the federal Homeowner Affordability and Stability Plan or other federal plan intended to help reduce foreclosures; 8. Would prohibit any California Finance Lender Law licensee from making a false, deceptive, or misleading statement, representation, or omission in connection with his or her lending or brokering activities.

COMMENTS 1. Purpose of the bill To prohibit the charging of advance fees by persons offering to help a borrower negotiate a loan modification or other form of mortgage loan forbearance or forgiveness from the institution servicing that borrower’s residential mortgage loan, educate borrowers who are being solicited to pay for loan modification services about no-cost options available to them, prohibit lenders and servicers from charging borrowers in connection with loan modifications and other forms of mortgage loan forbearance and forgiveness, and strengthen the California Finance Lenders Law by prohibiting false, deceptive, and misleading statements, representations, or omissions. Background SB 94 has four provisions, discussed below. Ban on Advance Fees, Multilingual Borrower Notification: The first two provisions of the bill are a response to a cottage industry that has sprung up to exploit borrowers who are having trouble affording their mortgages, and are facing default, and possible foreclosure, if they are unable to negotiate a loan modification or other form of mortgage loan forbearance with their lender. Although some loan modification consulting companies are reportedly acting in a reputable manner and providing significant value to their customers, there is significant anecdotal evidence that others are preying on borrowers’ fears of losing their homes and their ignorance of the options available to them, and charging these borrowers fees (often up-front, nonrefundable fees) for services the borrowers could obtain elsewhere, free-of charge. Unscrupulous individuals and businesses seeking to take advantage of troubled borrowers can be found outside every mortgage fair, trying to drum up business. Their advertisements abound in neighborhoods that have been hardest hit by foreclosure. California does have a law regulating the activities of foreclosure consultants, but that law contains numerous exemptions from its requirements, including exemptions for legal professionals, real estate brokers, and several types of lenders. SB 94 closes loopholes in existing law, which have allowed an unscrupulous loan modification industry to spring up. It does so by prohibiting individuals and businesses from accepting up-front fees for helping negotiate a loan modification or other form of loan forbearance or forgiveness on a borrower’s behalf. This prohibition is intended to prevent persons from charging borrowers an up-front fee, providing limited services that fail to help the borrower, and leaving the borrower worse off than before he or she engaged the services of a loan

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modification consultant. Under the provisions of the bill, persons exempt from the foreclosure consultant law would be allowed to help negotiate loan modifications on a borrower’s behalf for a fee, paid after services were rendered. However, every person that offers to help negotiate a loan modification for a borrower, for a fee, would have to inform that borrower that he or she may obtain the same or similar services, free of charge, from a non-profit housing counseling agency. SB 94 is intended to ensure that borrowers who agree to pay someone for help in negotiating a loan modification on their behalf fully understand that similar services are available elsewhere, free of charge. The bill contains a translation requirement to help achieve this intent. Prohibition Against Loan Modification Fees By Servicers: The third provision of SB 94 addresses two issues – first, whether servicers may charge borrowers fees in connection with the modification of loans they are servicing (they may not under the provisions of this bill), and second, whether servicers may act as foreclosure consultants, and offer to help borrowers negotiate loan modifications or other forms of mortgage loan forbearance or forgiveness from other servicers (they may act in this capacity under the provisions of the bill, but may not charge for these services). The logic behind this provision is that borrowers who are having trouble affording their loans are unlikely to be able to shoulder fees imposed on them by servicers in connection with a loan modification. This provision of SB 94 is consistent with the recently-announced, federal Home Affordable Modification plan. Under Home Affordable Modification plan guidelines, no modification fees or other charges may be imposed on a borrower who participates in the Home Affordable Modification program. Unpaid late fees owed by the borrower must be waived. Modification fees and charges incurred by servicers (such as notary fees, property valuation fees, and other required fees) must be reimbursed by investors. Servicers must cover the cost of credit reports pulled in connection with Home Affordable loan modifications. Although SB 94 does prohibit servicers from collecting fees for the purpose of, or in connection with the modification of a borrower’s loan, the bill does not prohibit financial institutions from collecting interest or other charges by servicing modified loans, nor from collecting incentive payments from the federal government through participation in the Home Affordable Modification plan or another, similar federal plan designed to encourage loan modifications and prevent foreclosures. SB 94 also allows financial institutions to charge borrowers to refinance the borrowers’ loans. Strengthening the California Finance Lenders Law: The final provision of SB 94 closes what many consider to be a loophole in the CFLL. Although that law bans false, deceptive, or misleading advertising, it does not expressly forbid false, deceptive, or misleading statements, representations, or omissions. SB 94 would expressly ban these inappropriate practices.

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Support. ByDesign Financial Solutions, the Coalition for Quality Credit Counseling, the Consumer Credit Counseling Service of Orange County, Novadebt, and Consumer Credit Counseling Service, Twin Cities, all non-profit credit and housing counseling agencies, support SB 94, because of its prohibition against advance fees and its requirement that borrowers be informed of their no-cost options for obtaining loan modification assistance. All of these organizations write that their counselors have seen the damage done to homeowners by real estate licensees and mortgage lenders, who charge large, up-front fees to homeowners for services that could be provided for free through a non-profit housing counseling organization. According to these agencies, “the elimination of any preperformance compensation and requirement of the notification to the borrower that counseling and other services are available free of charge from HUD counseling agencies would help to protect vulnerable borrowers.” Consumers Union (CU) supports the bill as an example of legislation that gets to the heart of many of the problems plaguing California at the present time. In its letter of support, CU notes that California has the highest number of foreclosures in the country, a problem which provides a huge market opportunity for new businesses that purport to serve the needs of the hundreds of thousands of Californians in some stage of the foreclosure process. CU has heard from consumers, who report being barraged with mailed offers and telephone calls from individuals referencing the availability of “new government programs” and soliciting the payment of an up-front fee to help the consumer access the programs and/or engage in a direct negotiation with the loan servicer on behalf of the consumer. The consumers receiving these solicitations are desperate, and thus extremely susceptible to falling for offers of help that may never deliver any value. According to CU, “SB 94 gets to the heart of the matter by addressing the practice of demanding an advance fee in connection with offering loan modification or foreclosure rescue services…To address other elements of the problem, SB 94 prohibits finance lenders and brokers, residential mortgage lenders and servicers, [and] state-chartered commercial banks and credit unions, from contracting for, receiving any interest or charge for performing loan modification or foreclosure rescue services for a borrower where the loan is secured by a lien on single family residential real property. SB 94 does not prohibit the ability of individuals to offer legitimate services.” CU also directly contradicts the position of the California Association of Realtors (see below), by asserting that DRE’s current practice of reviewing loan modification advance fee agreements submitted by real estate licensees “is simply not enough to provide the level of protection the public needs against this growing problem.” The California Reinvestment Coalition and several of its member organizations would support SB 94, if it were amended to prohibit fee-for-service loan modification services altogether (i.e., if the ban on advance fees was extended to a ban on all fees). Short of that, these groups would like a list of amendments, including the following: 1) remove the exemptions in the foreclosure consultant law for attorneys, real estate licensees, and finance lenders; 2) outlaw the process by which DRE approves fee agreements, 3) provide borrowers who are sold services

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in violation of the bill a private right of action, including recovery of attorney’s fees, and subject violators to a fine of between $1,000 and $25,000, imprisonment for up to one year, or both; 4) require detailed data reporting for each licensee that shows how many fee-for-service loan modification contracts were entered into, how much was charged, and what result was obtained; and 5) require DRE to report to the Legislature every three months on these data, and on the number of licensees that have violated the provisions of the bill, and the enforcement actions taken against them. 4. Opposition The California Association of Realtors (CAR) is opposed to the bill, because it prohibits the collection of advance fees by real estate licensees. CAR suggests that if a broker concludes it is appropriate to include an advance fee in his or her business model, submits its fee contract to DRE, receives approval from DRE for its contract, and abides by all of the disclosures and protections in SB 94, the advance fee contract ought to be allowed. Prior Legislation a. AB 180 (Bass), Chapter 278, Statutes of 2008: Added protections to the foreclosure consultant law, effective July 1, 2009. These protections include a requirement for foreclosure consultants to register with the Department of Justice and obtain a surety bond, increase the length of time an owner may rescind a contract with a foreclosure consultant, and require contracts with foreclosure consultants to be translated into foreign languages in certain circumstances. POSITIONS Support ByDesign Financial Solutions Coalition for Quality Credit Counseling Consumer Credit Counseling Service of Orange County Consumer Credit Counseling Service, Twin Cities Consumers Union Los Angeles County District Attorney’s Office Novadebt Oppose California Association of Realtors Consultant: Eileen Newhall (916) 651-4102

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