MORTGAGE LOAN FRAUD LAW SENT TO THE GUV
As financial carnage from the housing free fall continues across California, state lawmakers have sent several bills that crack down on mortgage fraud to Gov. Arnold Schwarzenegger’s desk.
While it might seem like trying to close the barn door after the horse got out, first, the Assembly and Senate have jointly passed bills to ban loan modification companies from asking for upfront fees and make mortgage brokers put their customers’ financial needs ahead of their own commissions. This does not seem to change existing law except to the extent that it eliminates upfront fees altogether, even in cases where the broker has an approved plan on file with the DRE. This provision doesn’t seem to address the original problem but seems to attack a possible solution to the problem. Who is going to work on a loan modification for a troubled borrower when their chances of getting paid are not good?
Next, is a a limitation on the size of pre-payment penalties. One of the sponsors of the bill, Assemblyman Ted Lieu, D-Torrance. stated that although no one was doing risky loans right now, the bills were intended to prevent abuse in five or 10 years to ensure that controls are in place. Assembly bill 260 would bans so-called subprime “negative amortization” loans where the principal amount owed increases even as the borrower makes payments.
It also prevents mortgage brokers from receiving thousands of dollars in special fees for originating subprime loans and those with pre-payment penalties. The bill also limits the size of pre-payment penalties for borrowers who pay off their loans early.
Lastly, and to further encourage litigation in this area, it states that that mortgage brokers have a fiduciary duty to borrowers – that is, they must place the “economic interest of the borrower ahead of the broker’s own economic interest” when making loans.
That provision is especially controversial and opposed by the California Association of Mortgage Brokers. Fred Arnold, a Santa Clarita-area broker and the group’s past president, riled against the bill’s definition of fiduciary duty as vague and warned that it was an invitation to “frivolous lawsuits.” “It’s not necessary,” he said, pointing out that brokers already have a fiduciary duty under the Department of Real Estate.” This appears also to be consistent with the case law.
This is also the second time around for Lieu’s bill. Last year, the governor vetoed a similar broad-based bill by Lieu to rein in mortgage industry practices. Lieu hopes that a compromise can be reached this time, no doubt trying to capitalize on the legislatures recent heroic precedents in this area.
The bills land on Schwarzenegger’s desk as California continues wrestling with more than 410,000 foreclosures since the start of 2007.
Proponents of bill say it’s necessary in the aftermath of unfettered lending practices, painting a picture of rapacious mortgage brokers earning in excess of $20,000 or more for making risky subprime adjustable-rate loans, often to unsuspecting borrowers. Critics of the bill point out that missing, of course, is an IQ test for the borrowers or even a financial quiz to see whether they can afford it. There does not appear to be any suggestion of qualification for a loan and puts all the onus on the lenders.
The California District Attorneys is also among those pushing for new felony penalties for mortgage fraud. The group sponsored a bill now before the governor, Senate Bill 239, by Sen. Fran Pavley, D- Agoura Hills. It would create a specific category of felony mortgage fraud, which the DA’s group calls “one of the linchpins in the demise of the California real estate market and the related crises in the financial sectors.” According to the DA’s Association, the FBI ranks the Sacramento area seventh among U.S. metropolitan areas in reporting mortgage fraud complaints to the FBI.