(June 23, 2010) A California Chamber of Commerce-opposed bill that seeks to make substantive statutory changes to foreclosure law and residential loan modification efforts, passed an Assembly policy committee this week.

SB 1275 (Leno; D-San Francisco), a “job killer” bill, hinders recovery of the residential construction industry by reducing the availability of credit due to delays in resolving delinquent loans by requiring lenders to determine a borrower’s eligibility for a loan modification prior to the filing of a notice of default.

This measure continues a trend of delaying or stretching out the foreclosure process by requiring a lender/servicer, among other things, to determine a borrower’s eligibility for a loan modification or other foreclosure avoidance efforts before filing a notice of default.

CalChamber’s primary concern with the bill is its potential to have a negative impact on the availability of credit in California and thus further delaying recovery of the state’s crippled construction industry and its many supporting industries. California’s economic recovery is already lagging behind the rest of the nation. While there has been a slight nationwide uptick in construction jobs, the state continues its downward trend, losing 1,400 construction jobs in April, adding to the nearly 400,000 lost since 2006. This sluggish recovery in California will only be exacerbated by measures that unnecessarily expand the foreclosure process and further delay recovery of the housing market.

Furthermore, the Legislature has appropriately responded over the past several years to help mitigate California’s mortgage crisis. Members of the financial services industry have successfully worked collaboratively with policymakers, consumer groups, and members of the administration to enact meaningful reforms designed to assist struggling borrowers. These efforts include, but are not limited to, SB 1137 (Perata; D-Oakland), AB 1160 (Fong; D-Cupertino), and AB 260 (Lieu; D-Torrance). Each of these measures involved good faith negotiations among interested parties, conducted over a period of months to ensure the outcome would be thoughtful public policy. More specifically, in 2008, industry members spent months collaboratively negotiating on SB 1137. The changes proposed in SB 1275 dramatically change the pre-foreclosure and foreclosure notice and outreach requirements enacted by SB 1137.

SB 1275 exemplifies an overly complicated formula that will be layered on top of recently enacted borrower outreach efforts to further frustrate and prolong existing foreclosure and loss mitigation efforts. CalChamber believes the measure will add to the complexity of navigating these processes for loan servicers, thereby creating a series of procedural traps that will lead to ever-increasing litigation. How this measure interacts mechanically and chronologically with recent state and federal regulatory and statutory changes is unclear. The lack of clarity will result in compliance hurdles and a detrimental distraction from lenders’ efforts to assist their customers.

Given recent changes to President Obama’s and the U.S. Treasury Department’s Home Affordable Modification Program, CalChamber believes that SB 1275 is unnecessary and may conflict with federal programs. At a minimum, SB 1275 continues a trend of delaying or stretching out the foreclosure process. This will delay economic recovery, further frustrate local governments struggling with properties in disrepair while continuing the trend of reduced property tax revenue for local governments, and will artificially sustain depressed property values.

Key Vote

SB 1275 passed the Assembly Banking and Finance Committee on a vote of 7-4.

Ayes: Eng (D-Monterey Park), Evans (D-Santa Rosa), Fong (D-Cupertino), Fuentes (D-Sylmar), Nava (D-Santa Barbara), Ruskin (D-Redwood City), Torres (D-Pomona).

Noes: Gaines (R-Roseville), Harkey (R-Dana Point), Niello (R-Fair Oaks), Tran (R-Garden Grove).

Absent, Abstaining, Not Voting: Mendoza (D-Norwalk).

The bill will next be heard in the Assembly Judiciary Committee on June 29.

Staff Contact: Robert Callahan