Finally, I wondered how long it would take?
Loan modification firms that promise to help struggling borrowers get their mortgages rewritten have been banned immediately from asking for cash upfront.
Attorneys, too, who specialize in loan modifications are no longer allowed to ask consumers for payment before they perform services. The ban expires on Jan. 1, 2013.
The abrupt change in California law comes after Gov. Arnold Schwarzenegger Sunday signed Senate Bill 94, by Sen. Ron Calderon, D-Montebello. As an urgency measure, the bill takes effect immediately.
Calderon, in an interview Monday, called the signing "a very big victory."
Schwarzenegger's action follows massive numbers of complaints to the state Department of Real Estate from consumers who said they paid up to $4,000 upfront to firms that often abandoned them.
Schwarzenegger also moved Sunday on a second mortgage front, cracking down on risky lending that fueled the housing boom. He signed Assembly Bill 260, which prevents mortgage brokers from earning lucrative special fees for originating high-risk loans.
The bill limits the size of prepayment penalties and bans more special fees to brokers for making loans with such penalties. When the new law goes into effect Jan. 1, mortgage brokers will have a fiduciary duty to borrowers, meaning they must put borrowers' financial interests above their own when making loans.
The bill also bans negative amortization loans. Those are loans that grow larger if a borrower makes only a minimum payment that doesn't even cover interest costs. Thousands of Sacramento-area borrowers and more statewide are struggling with such so-called pay option loans.
The bill's author, Assemblyman Ted Lieu, D-Torrance, said, "This bans some of the worst practices in the subprime mortgage industry. These are practices that led to the foreclosure crisis that eventually caused a financial crisis that triggered a recession."
Most of the loans banned by the bill have already been suspended by lenders, which have greatly tightened credit rules.
In the wake of the mess left by such mortgages, loan modification firms have proliferated, many demanding upfront fees. SB 94 aims to stop abuse of borrowers in trouble.
Loan-modification firms have made relentless pitches to borrowers through radio and television ads, postcards and telephone calls. Many desperate people have turned to them, often coughing up a few thousand dollars for help that didn't come.
"This is a huge problem, and the signing of this (bill) will help," said Tom Pool, spokesman for the California Department of Real Estate. He said the department has 1,300 complaints on file and has issued 400 cease and desist orders against loan modification firms. The law banning advance fees aplies to firms in California or elsewhere that solicit clients in California.
The new law also specifies that loan modification firms must tell potential clients they can get the same services for free from government-approved nonprofit mortgage counselors. The firms cannot receive payment until they have performed all services promised in a contract with the borrower. Borrowers must pay the loan modification firm for services provided, even if the firm can't get the loan modified.
Lawmakers passed the ban on upfront fees with a two-thirds vote, backed by a coalition that included the California Association of Realtors, cities hard hit by foreclosures, organized labor and consumer groups.
The ban on advance fees was made temporary in recognition that many firms follow the rules, said Pool. It also recognizes that the loan meltdown will eventually end.
"We didn't want to put a permanent ban on legitimate business during a temporary crisis," he said.
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