Loan Modification Law - California State Senate passes Bill 94

The California State Senate has passed Senate Bill 94 (”SB 94?), legislation proposed by Sen. Ron S. Calderon (D-Montebello), Chairman of the Banking, Finance & Insurance Committee. The senate passed the bill on May 21, 2009, by a vote of 21 to 14. It is now in the state assembly where it has been read once and “held at desk,” which means that it’s awaiting referral to a committee.

Senate Bill 94 is intended to protect California homeowners from scam loan modification companies.

In my view, the problems with SB 94, as written include:

1. It was created to protect consumers from loan modification “scammers” who charge distressed homeowners up front fees and deliver nothing in return, but it was written without the benefit of accurate data on the contribution being made by the legitimate loan modification industry in California. Without knowing how many homeowners the private sector loan modification firms save each month, or the sustainability of the modifications obtained by the private sector, it would not be possible to design a solution in the best interests of homeowners and the state’s economy.

2. The SB 94 bill, as written, is based on a fundamental misconception. As stated in the in bill’s narrative:

“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.”

While both of these statements are technically true, this language ignores the fact that there are also reputable private sector firms that homeowners may choose to hire to help them negotiate with their banks when seeking a modification of their mortgages. Private sector firms, including those licensed by the state’s Department of Real Estate and/or law firmsoffering that such services, have helped tens of thousands of California homeowners get their mortgages modified. With the number of foreclosures continuing to increase each month, it would seem clear that the state’s homeowners would not benefit from any legitimate avenue being overlooked or unfairly maligned.




3. Defrauding a homeowner has always been against California law, so in that sense, SB 94 is redundant. When you consider that “scammers” who did in fact defraud consumers in conjunction with the promise of a loan modification, did so in violation of existing law, it would seem that a new law making it illegal to charge an advance fee when offering to assist a homeowner with a loan modification would be unlikely to prevent future scammers from attempting to do the same.

4. Legitimate firms offering to assist troubled homeowners could be regulated and monitored, without requiring these firms to operate at a financial disadvantage by disallowing advance fees. The process of obtaining a loan modification is not similar to other real estate transactions in several key ways:

A. The process can take six weeks, or six months… and in some cases even longer. The lenders and servicers are not consistent in how loan modifications are handled or on what basis they are granted.

B. There is no escrow, or objective standard for “satisfaction,” in conjunction with a loan modification transaction, and therefore there is no assurance that a company would receive payment from the homeowner once the mortgage has been modified.

These are just a few of the issues with SB 94. The law is attempting to protect homeowners, but is actually protecting the lender guaranteeing that homeowners will not be adequately represented when dealing with the lender. The lenders will take advantage of this and will offer homeowners loan modifications that do not help their situation.

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About the Author

August Blass

Stephen Hoshida is the Manager of the NLA Legal Portal. Mr. Hoshida is responsible for design, research, and management of all information... (show bio)