BILL ANALYSIS                                                                                                                                                                                                    



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          ASSEMBLY THIRD READING
          AB 529 (Torrico)
          As Amended  January 22, 2008
          Majority vote 

           BANKING & FINANCE   8-2                                         
           
           -------------------------------- 
          |Ayes:|Lieu, Coto, Fuentes,      |
          |     |Mendoza, Parra, Swanson,  |
          |     |Torrico, Wolk             |
          |     |                          |
          |-----+--------------------------|
          |Nays:|Gaines, Walters           |
          |     |                          |
           -------------------------------- 
           SUMMARY  :  Requires a lender who provides a loan secured by  
          property improved by four or fewer residential units, with an  
          interest rate that is initially fixed and then becomes  
          adjustable, to notify the borrower of specified items of  
          information 120 days, 60 days, and 30 days prior to an interest  
          rate adjustment.  Specifically,  this bill  :  

          1)Includes specified items as:

             a)   Current interest rate and a projected interest rate,  
               which shall be the amount of the consumer's interest rate  
               if the rate adjustment occurred on the date of the  
               notification;

             b)   Current loan payment, the estimated payment resulting  
               from the projected interest rate, and a statement  
               describing whether the estimate of the payment includes  
               insurance and property tax;

             c)   Duration of the new payment before the next interest  
               rate adjustment;

             d)   Frequency of future interest rate adjustments; and,

             e)   Information on who the borrower may contact to seek  
               additional assistance regarding modifying or refinancing  
               their existing loan.









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          2)Requires the notification to be provided on or within five  
            days prior to the dates specified by first class mail or  
            personally delivered.  

           EXISTING FEDERAL LAW  :


          1)Under the Truth in Lending Act (TILA) Regulation Z an  
            adjustment to the interest rate with or without a  
            corresponding adjustment to the payment in a variable-rate  
            transaction subject to 226.19(b) is an event requiring new  
            disclosures to the consumer. At least once each year during  
            which an interest rate adjustment is implemented without an  
            accompanying payment change, and at least 25, but no more than  
            120, calendar days before a payment at a new level is due, the  
            following disclosures, as applicable, must be delivered or  
            placed in the mail:

             a)   The current and prior interest rates;

             b)   The index values upon which the current and prior  
               interest rates are based;


             c)   The extent to which the creditor has foregone any  
               increase in the interest rate;


             d)   The contractual effects of the adjustment, including the  
               payment due after the adjustment is made, and a statement  
               of the loan balance; and,


             e)   The payment, if different from that referred to in  
               paragraph (c)(4) of this section, that would be required to  
               fully amortize the loan at the new interest rate over the  
               remainder of the loan term


          2)Provides that except where applicable by Federal law, state  
            laws that obstruct, impair, or condition a national bank's  
            ability to fully exercise its federally authorized real estate  
            lending powers do not apply to national banks.









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           EXISTING STATE LAW  :
           
           1)"Adjustable-rate residential mortgage loan" means any loan or  
            credit sale which is primarily for personal, family, or  
            household purposes which bears interest at a rate subject to  
            change during the term of the loan, whether predetermined or  
            otherwise, and which is made upon the security of  real  
            property containing not less than one nor more than four  
            dwelling units.

          2)"Lender" means any person, association, corporation,  
            partnership, limited partnership, or other business entity  
            making, in any 12-month period, more than 10 loans or credit  
            sales upon the security of residential real property  
            containing not less than one nor more than four dwelling  
            units.

          3)An obligee may not accelerate the maturity date of the  
            principal and accrued interest on any loan secured by a  
            mortgage or deed of trust on residential real property solely  
            by reason of any one or more of the following transfers in the  
            title to the real property: 

             a)   A transfer resulting from the death of an obligor where  
               the transfer is to the spouse who is also an obligor;

             b)   A transfer by an obligor where the spouse becomes a  
               coowner of the property;

             c)   A transfer resulting from a decree of dissolution of the  
               marriage or legal separation or from a property settlement  
               agreement incidental to such a decree which requires the  
               obligor to continue to make the loan payments by which a  
               spouse who is an obligor becomes the sole owner of the  
               property;

             d)   A transfer by an obligor or obligors into an inter vivos  
               trust in which the obligor or obligors are beneficiaries;

             e)   Such real property or any portion thereof is made  
               subject to a junior encumbrance or lien;

             f)   Any waiver of the provisions of this section by an  
               obligor is void and unenforceable and is contrary to public  








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               policy;

             g)    For the purposes of this section, "residential real  
               property" means any real property which contains at least  
               one but not more than four housing units; or,

             h)     This act applies only to loans executed or refinanced  
               on or after January 1, 1976.

          4)The term of the loan shall not be less than 29 years,  
            repayable in monthly installments amortized over a period of  
            not less than 30 years.  At least 60 days prior to the due  
            date of a monthly installment to be revised due to a change in  
            the interest rate, notice shall be mailed to the borrower of  
            the following:

             a)   The base index; 

             b)   The most recently published index at the date of the  
               change in the rate;

             c)   The interest rate in effect as a result of the change;

             d)   The amount of the unpaid principal balance;

             e)   If the interest scheduled to be paid on the due date  
               exceeds the amount of the installment, a statement to that  
               effect, including the amount of excess and extent of  
               borrower options as described in paragraph (4) of  
               subdivision (b);

             f)   The amount of the revised monthly installment;

             g)   The borrower's right to prepayment under paragraph (8)  
               of subdivision (b); or, 

             h)   The address and telephone number of the office of the  
               lender to which inquiries may be made.
           
          FISCAL EFFECT  :  None

           COMMENTS  :  The subprime crisis is severe and is not expected to  
          improve this year.  This past quarter had the highest number of  
          foreclosures in American history.  Estimates show there will be  








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          3.5 million more foreclosures nationwide over the next two and a  
          half years. 

          RealtyTrac, which publishes the largest and most comprehensive  
          national database of foreclosure and bank-owned properties found  
          that California foreclosure activity decreased nearly 2% in  
          November but the state's foreclosure rate of one foreclosure  
          filing for every 258 households still ranked second highest  
          among the states. A total of 50,401 foreclosure filings were  
          reported in the state for November, more than triple the number  
          reported in October 2006.

          According to a survey released in October, 2007, nearly half of  
          homeowners with adjustable rate mortgages (ARM) admit that they  
          do not know how their ARMs adjust or reset, and nearly three-  
          quarters do not know how much their monthly mortgage payments  
          will increase when they do.

          The survey, conducted Sept. 13-25, 2007 by Peter D. Hart  
          Research Associates for the American Federation of  
          Labor-Congress of Industrial Organizations (AFL-CIO), reveals  
          that ARM holders are generally not concerned about mortgage  
          payments until their rates reset. Then anxiety sets in as they  
          realize their payments have risen substantially. The use of ARMs  
          for home financing has grown dramatically over the past few  
          years and particularly among higher risk subprime borrowers.   
          The survey shows that many homeowners simply are not prepared  
          for the steep rise in mortgage payments that this market  
          inflicts on ARM holders.

          Nearly four out of 10 homeowners in the poll say they wouldn't  
          know who to turn to for help if they had difficulty paying their  
          mortgage.  Two in three (64%) of those whose rate has reset do  
          not recall their lender telling them how much more their payment  
          would increase, and 32% don't recall being told when their  
          interest rate would increase. Twenty-three percent of all  
          respondents said they had been late making a mortgage payment at  
          least once in the past 12 months. And that proportion jumps to  
          37% among those whose rate has increased. 

          Notification gives customers an opportunity to try to work out  
          loan modifications.  As written, the bill covers both prime and  
          subprime borrowers.  Although, statistics show the majority of  
          borrowers in default are subprime, those who are considered  








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          prime borrowers are also at risk if in an ARM scheduled to  
          reset.  The distinction between the two is not important when  
          related to the notification process of informing borrowers of  
          their soon to be inflated interest rate.  

          Although, several lenders already practice the act of informing  
          borrowers months in advance of a scheduled ARM reset, this bill  
          will encourage good practice across the board requiring any and  
          all lenders with customers with ARMs to notify them in a timely  
          manner.  Allowing a customer the opportunity to "workout" their  
          loan with the lender will prevent future foreclosures.

          In September, 2007, Department of Corporations (DOC),  
          Commissioner DuFauchard released a press release that stated,

             "Servicers should attempt to contact subprime (ARM)  
             borrowers prior to the loan reset to determine whether  
             the borrower can afford the new, higher payments, or  
             whether the higher payments create a reasonable risk of  
             default. If it is clear, after reviewing all the  
             available facts and circumstances, that the borrower  
             will be unable to make the new payment when the loan  
             resets, then the servicer may presume that default on  
             the mortgage is reasonably likely to occur. This  
             conclusion may permit the servicer to modify the loan."   


          In October, 2007, Countrywide announced a program to work on  
          identifying and contacting prime and subprime borrowers who are  
          current but unable to qualify for a refinance and are likely to  
          have difficulty affording an upcoming reset. Countrywide put in  
          place an early notification letter to borrowers by calling no  
          later than three months prior to the reset to determine their  
          financial circumstances and develop affordable solutions. As a  
          result of this initiative, Countrywide will successfully modify  
          $4.0 billion in loans for approximately 20,000 borrowers in  
          existing ARMs through the end of 2008.

          In November, 2007, Bay Area officials asked institutions such as  
          Bank of America, Wells Fargo, Citigroup and Washington Mutual to  
          agree to contact borrowers at risk of default, or who have  
          already defaulted on their loans, at least six months before  
          their interest rates are scheduled to go up. 









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          Other companies such as JPMorgan notifies customers by mail and  
          phone, two to five months in advance when mortgage rates reset,  
          as well as, what their rates and monthly payments might be.  

          Only a few borrowers fully understand their mortgage options.  A  
          2006 Federal Reserve study found that 20% of all ARM borrowers  
          did not know their original loan rate and 35% had no idea how  
          much their monthly payment could increase with each adjustment.   
          Forty-one percent didn't even know the maximum interest rate for  
          their loans. 

          In a 2007 study, the Federal Trade Commission (FTC) came to  
          similar conclusions: 

          1)Current mortgage cost disclosures failed to convey key  
            mortgage costs to many consumers. 

          2)Both prime and subprime borrowers failed to understand key  
            loan terms when viewing the current disclosures, and both  
            benefited from improved disclosures. 

          3)Improved disclosures provided the greatest benefit for more  
            complex loans, where both prime and subprime borrowers had the  
            most difficulty understanding loan terms. 

          Notification should be part of every loan application, whether  
          subprime or prime. As the FTC found better disclosures and  
          notification has the potential to help all borrowers, regardless  
          of their credit standing.

           Pending legislation  :

           State  :  SB 926 (Perata, Corbett & Machado) would require  
          notification at 120, 90, and 45 days prior to any projected  
          change in a mortgage payment amount. 

           Federal  :  H.R. 3705 (Sutton) Fair Disclosure for Homeowners Act  
          would amend TILA to require notice to consumers of an upcoming  
          adjustment or reset date with respect to hybrid adjustable rate  
          mortgages, and for other purposes.


           Analysis Prepared by  :    Kathleen O'Malley / B. & F. / (916)  
          319-3081 








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