California Foreclosure Legislation

A number of bills were introduced in the California Legislature this year designed to respond to the mortgage foreclosure crisis. Several community groups supported these measures, though success was limited:

SB 1137 (Perata)
Status: This bill was passed by both houses and signed by the Governor!
Description: This bill implements important foreclosure process reforms to protect the hundreds of thousands of Californians who are in danger of losing their homes due to the mortgage crisis. The bill takes several important steps to reduce the number of foreclosure sales by requiring lenders to contact borrowers to provide loan restructuring options, taking steps to ensure that foreclosed properties do not contribute to neighborhood blight, and providing additional protections to tenants living in investor owned properties. We support all of these important provisions.

AB 69 (Lieu)
Status: The bill was passed out of the Senate in its weakened form.
Description: This bill would expand current reporting by lenders and servicers to the Department of Corporations to include information on the number of loans that are in default or foreclosure, the number of modifications to loans offered to troubled borrowers and the result of those “workouts.” With a new round of interest rate “resets” expected on adjustable rate loans, it is critical that policymakers and the public have information on how many borrowers are being assisted and by which companies. The critical piece of this bill was its original requirement that each loan servicer report its data to the Department of Corporations, and that this data be made available to the public on a servicer-specific basis for each company. In this way, just like with the Home Mortgage Disclosure Act (HMDA) lending data, the public could see which companies were doing a good job and which were not. The bill’s author deleted the servicer-specific reporting requirement on the urging of the Chair of the Senate Banking Committee. Accordingly, CRC opposed the bill.

AB 1830 (Lieu)
Status: This bill was substantially weakened in the Senate Banking Committee and passed out of the committee. The leaders of both houses are currently negotiating an anti-predatory lending bill.
Description: This bill would outlaw certain abusive practices and loan terms that have led hundreds of thousands of Californians down the path to foreclosure. Specifically, it would require that lenders make high cost, subprime or nontraditional loans only to those borrowers who evidence an ability to repay the loan at the fully indexed rate; prohibit loans based only on “stated income,” which has been an invitation for broker fraud; restrict prepayment penalties which trap borrowers in bad loans or strip equity; limit yield spread premiums which incent brokers to put borrowers in more expensive loans; and provide additional and needed protections for consumers against the evils of loan flipping, steering, and negatively amortizing loans which leave borrowers owing more than they borrowed. This bill would protect California homeowners and restore common sense underwriting to the market and, in so doing, will restore investor confidence and increase liquidity.

AB 2880 (Wolk)
Status: The bill was voted down.
Description: This bill would have ended several of the practices that have helped fuel our current foreclosure crisis. Specifically, it would have clarified that brokers operate as fiduciaries for borrowers, which most borrowers reasonably believe is the case today. The bill would have also addressed current perverse incentives brokers have to enrich themselves at the expense of their clients. Importantly, the bill would have created civil and criminal liability for brokers who fail to comply with its provisions. Additionally, the bill would have required the filing of reports, the payment of fees, and the acquisition of larger bonds which would have augmented the state’s ability to police, and consumers’ ability to seek redress from, the brokers who touch the lives of so many Californians. We believed this bill would have protected California homeowners from abusive practices by mortgage brokers whom borrowers reasonably rely on for the best deal.

AB 2359 (Jones)
Status: The bill was voted down in the Senate Banking Committee.
Description: This bill would have encouraged more responsible due diligence on the part of the secondary market for mortgage loans by making subsequent holders or assignees of high-cost, subprime or nontraditional mortgages subject to all claims and defenses that the borrower could have asserted against the original lender. In effect, the bill would have sent a strong message that Wall Street and the secondary market must be responsible for financing bad loans. The bill would have also restricted the practice by lenders and brokers of requiring that borrowers waive legal rights or agree to mandatory arbitration of any claims in order to get a loan.

AB 2740 (Brownley)
Status: The Senate Banking Committee refused to take a vote on this measure.
Description: This bill would have established that home loan servicers owe a duty of good faith and fair dealing to borrowers. The bill would have regulated the charging of certain fees, and required loan servicers to respond within 10 days of a request from a borrower for information or dispute resolution. Servicers have tremendous authority to decide who can remain in their homes and who will be foreclosed upon, yet there are virtually no rules, no oversight, and no clear data regulating this critical business role. CRC surveys of home loan counseling agencies confirm that loan servicers are not effectively working to keep Californians in their homes. This bill would have set some basic parameters for servicers that are needed to produce better outcomes.

AB512 (Lieber)
Status: The Senate Banking Committee unceremoniously refused to consider this measure.
Description: This bill would have addressed the widespread practice of brokers and lenders negotiating home loan contracts with borrowers in non-English languages, but providing Enlish-only documents. Most counseling agencies responding to CRC's survey of home loan counselors identified this as a very common occurrence. Borrowers literally cannot bargain for or understand their loan documents if they are written in another language. This is a fairness and fair lending issue. This bill would have required translation of certain loan documents in certain circumstances.