California Legislature prohibits all advance fees by loan modification service providers
Governor Schwarzenegger today signed Senate Bill 94 which could effectively eliminate all fee-based loan modification services provided by real estate licensees, attorneys, or anyone else in the State of California. By its terms (PDF), the Bill prohibits the charging of advance fees as follows:
(a) Notwithstanding any other provision of law, it shall be unlawful for any person who negotiates, attempts to negotiate, arranges, attempts to arrange, or otherwise offers to perform a mortgage loan modification or other form of mortgage loan forbearance for a fee or other compensation paid by the borrower, to do any of the following:
(1) 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 or she would perform.
(2) Take any wage assignment, any lien of any type on real or personal property, or other security to secure the payment of compensation.
(3) Take any power of attorney from the borrower for any purpose.
(Civil Code Section 2944.7, emphasis added.)
In addition to Senate Bill 94's prohibition on charging any advance fee for loan modification services, any person seeking to provide loan modification services for any fee must, before entering into any fee arrangement with a borrower, provide the following statement to the borrower 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.
(Civil Code Section 2944.6(a) , emphasis added.)
It is important to note that the Governor vetoed the more onerous Assembly Bill 764, that would have conditioned the collection of fees upon the completion of loan modification, with the following veto message:
Although I support the prohibition of individuals charging advance fees for mortgage loan modifications, I do not agree with the provision of this bill that will only allow fees to be collected if a modification is successful. This could adversely affect legitimate businesses that provide loan modification services. As such, I am signing SB 94 that accomplishes this prohibition against advance fees without unnecessarily harming legitimate companies.
The impact upon legitimate loan modification service providers is unknown and unknowable at this time.
Senate Bill 94 was an "urgency" bill that went into effect immediately upon signing. Whether SB 94 will "unnecessarily harm" - to use the Governor's words - legitimate fee-based loan modification service companies currently operating in the marketplace remains to be seen. Because loan-modification negotiations are typically measured in months, not days or weeks, it may be unreasonable to expect a real estate licensee or lawyer or anyone else to work for months on behalf of a borrower without compensation, and without any security for being compensated, until after fully performing each and every service contracted to be performed on behalf of the borrower.
The video press conference promoting this legislation indicates that Senate Bill 94 was a reaction to scammers and con artists taking advantage of borrowers impacted by the current mortgage crisis. The unfortunate side-effect of SB 94 is to paint all real estate licensees and attorneys who happen to provide loan modification services with the same brush as the scammers and con artists. The borrowing public is now left with a choice between:
- self-help ("call your lender"); or
- non-profit and government-funded service providers; or
- for-profit loan modification companies that are ready, willing and able to act like non-profits until after their work is done.
Non-profits are an important source of help to distressed borrowers, but It remains to be seen whether the public will be well-served by Senate Bill 94.
