Modification Bill Fails, UTA Bill Passes

By Michael Belote, Esq., California Advocates

UTA members doing business in California received a double dose of good news in the final weeks of the legislative session, as the California Assembly rejected a controversial bill on mortgage modifications, and Governor Schwarzenegger signed into law UTA-sponsored SB 1221.  For the state as a whole, the news from the legislative session is less upbeat, as the $19 billion budget deficit has prevented the enactment of a 2010-2011 state spending plan, and California is preparing to issue warrants to vendors who count on payments from the state.

The Assembly’s rejection of the modification bill, SB 1275, brought a dramatic end to a protracted debate between consumer groups supporting the bill, and real estate groups, including UTA, who were opposed.  The failure of SB 1275 to pass this session means that the bill will not be enacted this year, as the regular business of the 2009-2010 two-year session of the Legislature has now concluded.  The bill would have to be re-introduced and begin the legislative process from scratch when the new Legislature convenes next year.

Prior to the defeat of SB 1275, the California Legislature had created an almost unbroken record of passing mortgage bills supported by consumer groups.  In all, at least two dozen bills have been enacted in California over the past two years dealing with defaults and foreclosures.  UTA members are well aware of the enactment of major bills including SB 1137, requiring specified contact with borrowers prior to recording notices of default, and SB and ABx2  7 (collectively referred to as “the sevens”) which added 90 days to the period between NOD and NOS unless the beneficiary could demonstrate the existence of a comprehensive modification program.

This year’s proposed SB 1275 has been described as “SB 1137 on steroids”.  Basically the bill created a private right of action for HAMP lenders which failed to adhere to HAMP guidelines, with similar provisions for non-HAMP lenders.  The bill was amended many times as it moved through the legislative process, but the changes always failed to address what opponents viewed as the major defect in the bill, which was that it created extensive, confusing requirements which would subject virtually every residential foreclosure in California to a potential lawsuit, with statutory damages and in some cases, rescission of the foreclosure.

SB 1275 was vigorously opposed at each step of the legislative process, by a coalition of organizations including UTA, the California Bankers Association, California Mortgage Bankers Association, California Mortgage Association, California Independent Bankers Association, and others.  Over heavy opposition, the bill was approved by the full Senate on a very divided vote of 21-12, the bare number required for passage.

During the last week of session, AB 1275 failed twice on the Assembly floor, first receiving 27 votes, and later, after having been granted reconsideration, 30 votes.  Because 41 votes were required for passage, the defeats were quite significant.  Also the votes were significant because the Senate bill author and leadership were lobbying Assembly members quite heavily for “AYE” votes, to little avail.

Assembly members who might normally have been “AYE” votes on a bill dealing with mortgage modifications indicated a belief that the bill “went too far”, would have spawned extensive litigation, and should not have been crafted to exclude credit unions.  There also seemed to be a growing sense of exhaustion with repeated government attempts to address foreclosures, instead of allowing the real estate market to rebound more organically.  Nevertheless, as long as defaults and foreclosures remain at high levels, we should expect further legislative proposals, in California and elsewhere, next year.

On a positive note, on August 23 Governor Schwarzenegger signed into law UTA-sponsored SB 1221, dealing with recording notices of sale.  The need for the bill arose last year with the passage of SB 306, when the time for recording and publishing notices was conformed at 20 days prior to sale.  The technical problem was that if the recording was not accomplished precisely on the given date, sales might have to be postponed, whereas prior law had created a six-day “cushion” between publication and recording.

In response, SB 1221 allows for recordation of notices of sale to be done up to five days prior to the expiration of three months from the notice of default, to build some cushion back into the system.  The sale date is not moved up, but must still wait until the expiration of three months plus 20 days from the NOD.  UTA was successful in convincing legislators and committee consultants that the change proposed in SB 1221 is designed solely to prevent inadvertent mistakes, and would not disadvantage borrowers in any way.  The bill becomes operative on January 1, 2011.