LEGISLATIVE ASSAULT CONTINUES

As the California Legislature returns to Sacramento on January 4, 2010 for the second year of the 2009-2010 two-year session, it is evident that the assault on real estate lending is likely to continue. Despite a veritable avalanche of legislation in recent years increasing regulation of product, providers, and foreclosures, key legislators remain interested in dramatic changes in mortgage regulation.

Just days before the legislature recessed for the fall on September 11, 2009, far-reaching provisions were introduced in AB 1588. Carried by powerful Assembly members, including the Speaker, Rules Committee chair, and Banking Committee chair, the language provides nothing less than binding arbitration of residential loans prior to foreclosure.

Under the provisions of AB 1588 as amended, notices of default on residential loans must include a separate notice of the borrowers right to participate in a “Monitored Mortgage Workout Program.." Once the borrower has exercised this right, no further actions may be taken to exercise the power of sale under the deed of trust.

The “monitoring” program would be operated by the California Housing Finance Agency (CHFA). CHFA would select monitors from an eligible list; individuals would be required to possess four years of experience in real estate litigation, including mediation, and have experience in federal loan modification programs. Compensation of monitors, capped at $750, would be paid by trustees.

In order to participate in the monitoring program, borrowers would be required to deposit 60 percent of the monthly payments on their mortgages, for as long as the monitoring sessions last. Borrowers must additionally bring specified documentation to the first monitoring session.

Should the monitor determine that the “trustee” has failed to “meaningfully participate” in the monitoring program, the borrower is authorized to commence a legal action. Additionally, the monitor may develop a mortgage modification proposal, which if rejected by the lender, must be enforced by a superior court in an “expedited proceeding." The modification plan may include any combination of rate reductions, term extensions, interest deferrals, or principal reductions.

Although AB 1588 uses the term “monitoring,” in reality it amounts to binding arbitration of loan disputes prior to foreclosure. An unelected monitor is given the power to unilaterally modify key provisions in loans, and judges would be provided no discretion but to enforce the recommendations of the monitor. The bill is based upon, but goes even further than, a bill already in effect in Nevada.

Introduced just prior to the fall recess, AB 1588 was not acted upon during this year. As an urgency measure, however, the bill will be alive until the conclusion of the session on August 31, 2010. Urgency bills require two-thirds votes in each house, meaning that small numbers of Republicans must vote “AYE," but the urgency clause could be removed and the vote requirement lowered to a simple majority. Clearly, given the ongoing attention focused on mortgage defaults and foreclosures, even a radical measure like AB 1588 must be taken very, very seriously.

CMA is participating in a large coalition of real estate and lending groups strongly opposed to AB 1588. It is likely that more information will be available on the bill shortly after the legislature’s return in January. Of course, a slew of other new bills will be introduced during January and February, and given recent history we should expect a significant number of them to relate to real estate lending. Stay tuned to this column for updates, and PLEASE, continue to support CMA, fighting for YOU!