Governor Schwarzenegger recently signed several pieces of legislation aimed at the mortgage lending industry, which the Governor announced “helps crack down on abusive lending practices by giving law enforcement the tools to effectively investigate mortgage fraud crimes and provides Californians with greater consumer protections to promote homeownership in a safe and accountable environment.” The following is a summary of the recent California legislation chaptered into law in October 2009:
Senate Bill 36 - SAFE Act Implementation Under Mortgage Lender Licensing Laws
SB 36 was the most significant piece of legislation enacted this October. The bill implements the requirements of the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (Public Law 110-289) across California’s three mortgage licensing schemes: the Real Estate Law; California Finance Lenders Law (“CFLL”); and, the Residential Mortgage Lending Act (“RMLA”). California’s SAFE Act requires the licensing of mortgage loan originators under the licensing scheme applicable to the individual’s employer. As with all SAFE Act legislation, California requires pre-licensing education, a passing score on a standard written exam, continuing education, and minimum threshold findings for an individual’s qualification as a mortgage loan originator for all license applicants. Notably, under each of the three regulatory licensing schemes, the definition of “mortgage loan originator” excludes: “An individual who solely renegotiates terms for existing mortgage loans held or serviced by his or her employer and who does not otherwise act as a mortgage loan originator, unless the United States Department of Housing and Urban Development or a court of competent jurisdiction determines that the SAFE Act requires such an employee to be licensed as a mortgage loan originator under state laws implementing the SAFE Act.” The licensing requirements for applicants under the CFLL and the RMLA become effective on July 31, 2010. Licensing requirements under the Real Estate Law become effective on December 31, 2010. (Stats. 2009, Ch. 629, S.B. 36, approved on October 11, 2009).
Assembly Bill 260 - Restrictions on “Higher-Priced Mortgage Loans.” Fiduciary Duty for Mortgage Loan Brokers
AB 260 establishes, among other things, new restrictions on mortgage loans characterized under Regulation Z as “higher-priced” mortgage loans. The restrictions include: limits on prepayment penalties to 2% during the first year and 1% for the second year; limits on mortgage broker compensation; a prohibition on negatively amortizing loans; and, prohibitions on recommending or encouraging default on existing loans or other debt. Additionally, AB 260 creates a fiduciary duty between a borrower and a mortgage broker in connection with a mortgage loan secured by one-to-four family residential real property, which requires that: “the mortgage broker place the economic interest of the borrower ahead of his or her own economic interest … regardless of whether the mortgage broker is acting as an agent for any other party in connection with the residential mortgage loan transaction.” The “higher-priced” mortgage loan provisions become effective on July 1, 2010. The mortgage broker fiduciary duty provisions become effective on January 1, 2010. (Stats. 2009, Ch. 629, A.B. 260, approved on October 11, 2009).
Senate Bill 239 - Mortgage Fraud
SB 239 provides that any person that commits mortgage fraud, where the value of such fraud exceeds $400, may be punished by imprisonment in state prison or a county jail for not more than one year. A person commits mortgage fraud if, with the intent to defraud, the person does any of the following:
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Deliberately makes any misstatement, misrepresentation, or omission during the mortgage lending process with the intention that it be relied on by a mortgage lender, borrower, or any other party to the mortgage lending process;
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Deliberately uses or facilitates the use of any misstatement, misrepresentation, or omission, knowing the same to contain a misstatement, misrepresentation, or omission, during the mortgage lending process with the intention that it be relied on by a mortgage lender, borrower, or any other party to the mortgage lending process;
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Receives any proceeds or any other funds in connection with a mortgage loan closing that the person knew resulted from a violation of the foregoing; or,
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Files or causes to be filed with any county recorder any document related to a mortgage transaction that the person knows to contain a deliberate misstatement, misrepresentation, or omission.
These provisions become effective on January 1, 2010. (Stats. 2009, Ch. 174, S.B. 239, approved on October 11, 2009).
Assembly Bill 957 - Buyer’s Right to Choose Title Insurer
AB 957 establishes the Buyer’s Choice Act, which provides that a mortgagee or beneficiary who acquires title to one-to-four family residential real property at a foreclosure sale may not directly or indirectly require, as a condition of selling the property, that the subsequent buyer purchase title insurance through a particular title insurer or escrow services through a particular escrow agent. The Act does permit the seller to recommend a particular title insurer or escrow agent if the seller first provides the consumer with written notice of the right to make an independent selection of a title insurer or escrow agent. The Buyer’s Choice Act became effective on October 11, 2009, and will sunset on January 1, 2015. (Stats. 2009, Ch. 264, A.B. 957, approved on October 11, 2009).
Assembly Bill 1160 - Expanded Scope of Foreign Language Translation Requirement
AB 1160 expands the scope of entities that are subject to California’s foreign translation of contracts requirements and provides certain mortgage lenders with an alternative method for compliance with such requirements. Specifically, “supervised financial organizations” will be permitted to comply with the foreign translation of contracts requirements by providing a form developed by the Department of Corporations and the Department of Financial Institutions, which summarizes the terms of the contract or agreement. The form must be delivered to the consumer no later than three business days after receipt of a written application and, if any of the summarized terms materially change after the delivery of the form, an updated version of the form must be delivered to the consumer prior to consummation of the transaction. For the purposes of this alternative translation requirement, a supervised financial organization includes all residential real estate lenders, except licensees under California’s Real Estate Law, and federally chartered banks, credit unions, savings banks, or thrifts. AB 1160 will become effective on the later of: July 1, 2010; or, 90 days after the publication of the form developed by the Department of Corporations and the Department of Financial Institutions. (Stats. 2009, Ch. 274, A.B. 1160, approved on October 11, 2009).
Senate Bill 94 - Requirements for Persons Offering Loan Modification Services
SB 94 requires, among other things, the provision of a disclosure by any person (other than the owner or servicer for the owner of the loan) who negotiates, attempts to negotiate, arranges, attempts to arrange or otherwise offers to perform loan modification services for a fee or other compensation with respect to a mortgage loan secured by one-to-four family residential real property. The disclosure must be provided to the borrower prior to entering into any fee agreement and must state, in not less than 14-point bold type: “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.” The disclosure must be translated if the modification or forbearance services are offered in Chinese, Korean, Spanish, Tagalog or Vietnamese.
SB 94 also prohibits any person (other than the owner or servicer for the owner of the loan) who negotiates, attempts to negotiate, arranges, attempts to arrange or otherwise offers to perform for a fee or other compensation a modification or forbearance on a mortgage loan secured by one-to-four family residential real property from collecting that fee or any other compensation prior to the completion of the services. These provisions became effective on October 11, 2009, and will sunset on January 1, 2013. (Stats. 2009, Ch. 630, S.B. 94, approved on October 11, 2009).
Assembly Bill 329 - Reverse Mortgage Protections
AB 329 establishes the Reverse Mortgage Elder Protection Act of 2009, which prohibits lenders and any other person that participates in the origination of a reverse mortgage loan from, among other things:
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Participating in, being associated with, or employing any party that participates in or is associated with any other financial or insurance activity, unless the lender maintains procedural safeguards designed to ensure that individuals participating in the origination of the mortgage have no involvement with, or incentive to provide a prospective borrower with, any other financial or insurance product; and,
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Referring a borrower to anyone for the purchase of an annuity or other financial or insurance product prior to the closing of the reverse mortgage or before the expiration of the right of the borrower to rescind the reverse mortgage agreement.
These provisions exclude lender referrals for title insurance, hazard, flood, or other peril insurance, or other similar products that are customary and normal under a reverse mortgage loan. AB 329 also requires lenders to provide the prospective borrower with a list of not fewer than 10 California HUD-approved nonprofit counseling agencies and requires the lender or counselor to provide the prospective borrower with a checklist of specific issues that the borrower should discuss with the counselor. The applicant is required to sign the checklist and a lender may not approve a loan application until it receives the signed checklist. The Reverse Mortgage Elder Protection Act of 2009 becomes effective on January 1, 2010. (Stats. 2009, Ch. 236, A.B. 329, approved on October 11, 2009).
Dana Frederick Clarke is a partner in the California office of Hudson Cook, LLP. Basis Points readers can reach Dana at 310-349-8433 or by email at dclarke@hudco.com.