(Without Reference to File)

SENATE THIRD READING

STR Bill Id:SB 1447

Author:(Bradford, et al.)

As Amended Ver:August 27, 2020

Majority vote. Tax Levy

SUMMARY:

Allows, for each taxable year beginning on or after January 1, 2020, and before January 1, 2021, a small business hiring credit to a "qualified small business employer" that receives a tentative credit reservation.

Major Provisions

1. Provides that the credit shall equal $1,000 for each net increase in "qualified employees", as specified. The credit, however, is capped at $100,000 per "qualified small business employer".
2. Defines a "qualified small business employer" as a taxpayer meeting both of the following requirements:
   1. Employed 100 or fewer employees as of December 31, 2019; and,
   2. Experienced a 50% decrease in gross receipts determined by comparing gross receipts for the three-month period beginning on April 1, 2020, and ending June 30, 2020, with the gross receipts for the three-month period beginning on April 1, 2019, and ending June 30, 2019, if it would have met the requirement of having a significant decline in gross receipts for that quarter as determined under Section 2301(c)(2)(B)(i) of Public Law 116-136.
3. Provides that a "qualified small business employer" does not include a taxpayer required to be included in a combined report under Revenue and Taxation Code (R&TC) Section 25101 or 25110, or authorized to be included in a combined report under R&TC Section 25101.15.
4. Defines a "qualified employee" as an employee paid "qualified wages" by a qualified small business employer. A "qualified employee" shall not, however, include an employee whose wages are included in calculating any other credit allowed under the Personal Income Tax (PIT) Law or the Corporation Tax (CT) Law.
5. Defines "qualified wages" as wages subject to Unemployment Insurance Code Section 13000 et seq.
6. Provides that the net increase in qualified employees shall be determined by subtracting the amount determined in paragraph a) from the amount determined in paragraph b):
   1. The average "monthly full-time equivalent" qualified employees employed during the three-month period beginning April 1, 2020, and ending June 30, 2020, by the qualified small business employer. The average "monthly full-time equivalent" qualified employees shall be determined by adding the total "monthly full-time equivalent" qualified employees employed by the qualified small business employer for all three months and dividing the total by three; and,
   2. The average "monthly full-time equivalent" qualified employees employed during the five-month period beginning July 1, 2020, and ending November 30, 2020, by the qualified small business employer. The average "monthly full-time equivalent" qualified employees shall be determined by adding the total "monthly full-time equivalent" qualified employees employed by the qualified small business employer for all five months and dividing the total by five.
7. Defines "monthly full-time equivalent" as either of the following:
   1. In the case of a qualified employee paid hourly qualified wages, "monthly full-time equivalent" means the total number of hours worked per month for the qualified small business employer by the qualified employee, not to exceed 167 hours per month per qualified employee, divided by 167; and,
   2. In the case of a salaried qualified employee, "monthly full-time equivalent" means the total number of weeks worked per month for the qualified small business employer by the qualified employee divided by 4.33 multiplied by the "time base" the qualified employee worked.
8. Provides that any deduction otherwise allowed for qualified wages shall be reduced by the amount of the credit allowed.
9. Provides that a credit shall only be allowed on timely filed original returns.
10. Provides that the date a return is received shall be determined by the Franchise Tax Board (FTB).
11. Authorizes the FTB, notwithstanding existing law, to provide information to the California Department of Tax and Fee Administration (CDTFA) related to the credit, including the qualified small business employer names, amounts of tax credits allowed, and the net increase in qualified employees.
12. Provides that the statutory provisions authorizing the income tax credit shall remain in effect only until December 1, 2021, and are repealed as of that date.
13. Directs CDTFA to allow a qualified small business employer that has made an irrevocable election pursuant to this bill to apply the small business hiring credit amount against "qualified sales and use taxes" imposed on the qualified small business employer, as follows:
    1. For monthly filers, the credit shall apply to amounts due and payable for the month beginning on March 1, 2021, ending on March 31, 2021, and due April 30, 2021;
    2. For quarterly filers, the credit shall apply to amounts due and payable for the quarter beginning on January 1, 2021, ending on March 31, 2021, and due April 30, 2021; and,
    3. For annual filers, fiscal year filers, or a qualified small business owner on any other reporting basis, the credit shall apply to amounts due and payable on the first return due on or after April 30, 2021.
14. Defines "qualified sales or use taxes" as any sales and use taxes imposed by R&TC Section 6001 et seq. and Section 35 of Article XIII of the California Constitution, local sales and use taxes imposed in accordance with the Bradley-Burns Uniform Local Sales and Use Tax Law, and local transactions and use taxes imposed in accordance with the Transactions and Use Tax Law.
15. Establishes the Small Business Hiring Credit Fund in the State Treasury for the sole purpose of applying the small business hiring credit allowed by this bill. Any unused money remaining in the fund shall be transferred to the General Fund by June 1, 2026.
16. Directs qualified small business employers to submit an application to CDTFA, as specified, for a tentative credit reservation amount for the small business hiring tax credit allowed under the PIT Law, the CT Law, or both.
17. Caps at $100 million the aggregate amount of credit that may be allocated under this bill's provisions.
18. Takes immediate effect as a tax levy.

COMMENTS:

What would this bill do? This bill would allow, for taxable years beginning on or after January 1, 2020, and before January 1, 2021, a "small business hiring credit" to qualified small business employers that apply for and receive a tentative credit reservation. This credit would be available to taxpayers filing under either the PIT Law or the CT Law. To qualify for the credit, however, the small business employer would have to meet two requirements: First, as of December 31, 2019, the employer must have employed 100 or fewer employees and, second, the employer must have experienced a 50% decrease in gross receipts. This calculation would be made by comparing 2020 Second Quarter gross receipts with 2019 Second Quarter gross receipts.

For qualifying taxpayers, the credit amount would equal $1,000 for each net increase in qualified employees. This net increase, in turn, would be calculated by comparing the taxpayer's average number of employees for the Second Quarter of 2020, with the average number of employees for the five-month period beginning July 1, 2020, and ending November 30, 2020. The credit itself would be capped at $100,000 per taxpayer.

Unlike the vast majority of income tax credits, this bill would also allow qualified small business employers to make an irrevocable election to apply the credit amount against qualified sales and use taxes imposed on the employer. This is likely being done to assist retailers that have limited income tax liability but do have sales and use tax liabilities for sales of TPP.

Finally, this bill caps at $100 million the aggregate amount of credit that may be allocated under this bill's provisions.

According to the Author:

Senator Bradford, who is a joint author of this measure, notes the following:

Since the start of the COVID-19 pandemic, many small businesses have been struggling to stay afloat. In May, McKinsey released data indicating that more than a third of vulnerable private-sector workers in California were employed by small businesses. Small businesses are vital not only as a way for hardworking individuals and their families to build wealth, but also as an engine of job growth. This is especially true of minority-owned and other diverse business enterprises. California has sought to assist struggling small businesses in a variety of complementary ways, including zero-interest sales and use tax deferrals. SB 1447 further assists small businesses by providing those that hire new employees with a tax credit that can also offset sales and use tax liabilities, helping them to persist through this state of emergency.

Arguments in Support:

This bill is supported by the California Chamber of Commerce, which notes:

Businesses of all sizes are reeling from the catastrophic impacts of COVID-19 and California is experiencing unemployment levels similar to those seen during the Great Depression. SB 1447 begins to address these pervasive issues and provides employers impacted by the pandemic with an avenue to begin the economic recovery process.

Arguments in Opposition:

None on file

FISCAL COMMENTS:

Unknown

VOTES:

SENATE FLOOR: 39-0-1

YES: Allen, Archuleta, Atkins, Bates, Beall, Borgeas, Bradford, Caballero, Chang, Dahle, Dodd, Durazo, Galgiani, Glazer, Lena Gonzalez, Grove, Hertzberg, Hill, Hueso, Jackson, Jones, Leyva, McGuire, Melendez, Mitchell, Monning, Moorlach, Morrell, Nielsen, Pan, Portantino, Roth, Rubio, Skinner, Stern, Umberg, Wieckowski, Wiener, Wilk

ABS, ABST OR NV: Hurtado

ASM JUDICIARY: 11-0-0

YES: Mark Stone, Gallagher, Chau, Chiu, Gonzalez, Holden, Kalra, Kiley, Limón, Obernolte, Reyes

ASM REVENUE AND TAXATION: 10-1-0

YES: Burke, Chu, Gray, Mayes, Mullin, Petrie-Norris, Quirk, Luz Rivas, Kiley, Mathis

NO: Levine

UPDATED:

VERSION: August 27, 2020

CONSULTANT: M. David Ruff / REV. & TAX. / (916) 319-2098 FN: 0003656

 UNFINISHED BUSINESS  

Bill No: SB 1447

Author: Bradford (D), Caballero (D) and Cervantes (D), et al.

Amended: 8/27/20

Vote: 21

PRIOR VOTES NOT RELEVANT

ASSEMBLY FLOOR: Not available

SUBJECT: Income tax: sales and use tax: credit: small business.

SOURCE: Author

DIGEST:

This bill allows a Sales and Use Tax or Income Tax credit for certain small businesses.

Assembly Amendments

delete the bill’s previous provisions and replace them with language that creates a new tax credit for certain small businesses.

ANALYSIS:

Existing law:

1. Allows various income tax credits, deductions, exemptions, and exclusions. The Legislature enacts such tax incentives to either compensate taxpayers for incurring certain expenses, such as child adoption, or to influence certain behavior, such as charitable giving.
2. Allows taxpayers engaged in a trade or business to deduct all expenses that are considered ordinary and necessary in conducting that trade or business. This includes expenses for employee wages, rent, utilities and other things reasonable and necessary to conducting their business.
3. Requires California taxpayers to file tax returns using the combined reporting method of corporate taxation, which requires a corporation computing its California tax liability to include the tax returns of its “unitary” subsidiaries and affiliates into one report, and divide the corporation’s overall income among the taxing jurisdictions in which it does business.

This bill:

1. Provides an allocated tax credit to certain qualified small businesses for the 2020 taxable year, equal to $1,000 for each net increase in qualified employees, not to exceed $100,000 per employer.
2. Requires the California Department of Tax and Fee Administration (CDTFA) to allocate the credit to qualified small businesses on a first-come-first-served basis, up to $100 million.
3. Specifies that the qualified small business must apply to CDTFA between December 1, 2020, and January 15, 2021, to obtain a credit allocation. The credit may be used to reduce the qualified small business’s sales and use tax or income tax liability. On the application, the qualified small business must make a non-revocable election to apply the amount of the credit to their sales and use taxes. If no election is included, the taxpayer must use the credit to reduce the qualified small business’s income taxes.
4. Requires that a “qualified small business” must:
   1. Pay “qualified wages”
   2. As of December 1, 2019, employ 100 or fewer employees
   3. Have a 50 percent decrease in gross receipts as determined by comparing gross receipts for the three-month period between April 1, 2019, and June 30, 2019, compared to the three-month period between April 1, 2020, and June 30, 2020.
   4. Not be a taxpayer required to be included in a combined report.
5. Defines “qualified wages” to mean wages paid subject to the Unemployment Insurance Code, and “Qualified employees” to mean employees paid qualified wages and employed the by the qualified small business taxpayer.
6. Calculates the credit based on the net increase in qualified employees on a monthly full-time equivalent basis:
   1. The taxpayer calculates their average monthly full-time equivalent number of employees employed between April 1, 2020, and June 30, 2020.
   2. The taxpayer then calculates their average monthly full-time equivalent number of qualified employees employed between July 1, 2020, and November 30, 2020.
   3. If the taxpayer has increased its number of average monthly full-time equivalents from the first period to the second, the amount of the credit is equal to $1,000 times the number of additional full-time equivalents, up to $100,000.
7. Defines “monthly full-time equivalent” basis as either:
   1. In the case of a qualified employee paid hourly qualified wages, monthly full-time equivalent means the total number of hours worked, for the qualified small business by the qualified employee, not to exceed 167 hours per qualified employee divided by 167, or
   2. In the case of a salaried qualified employee, monthly full-time equivalent means the total number of weeks worked for the qualified small business employer by the qualified employee divided by 4.33 and multiplied by the time base the qualified employee works.
8. Requires taxpayers to reduce the normal business deduction allowed for wages paid by the amount of credit claimed.
9. Precludes wages paid used to calculate this credit to calculate any other credit.
10. Affirms that the taxpayer can only claim the credit on an original, timely-filed return.
11. Allows the taxpayer to carry forward the credit for up to five taxable years.
12. Requires any credits against sales and use taxes to be claimed only on returns filed on or before April 30, 2026.

Background

In recent years, the Legislature has enacted two income tax credits to spur employment growth. The New Jobs Credit (ABX3 15 (Krekorian)/SBX3 15 (Calderon), 2009) which expired on January 1, 2014, offered $3,000 for every new employee hired in certain geographically-targeted areas. Additionally, in 2013, the Legislature enacted AB 93 (Committee on Budget) and SB 90 (Committee on Budget and Fiscal Review), which reformed California’s economic development policies by eliminating enterprise zones and other geographically-targeted economic development area, including the New Employment Credit. Taxpayers may claim this credit for wages paid to qualified employees within former enterprise zones and other areas that suffer from high levels of poverty and unemployment. The credit lasts from the 2014 taxable year until the 2026 taxable year. The credit is only available to those employers for the portion of wages paid between 150% and 350% of minimum wage. Additionally, the credit is calculated only on the increase in employees calculated employed as compared to a base year.

COVID-19 pandemic. The COVID-19 pandemic, also known as the coronavirus pandemic, is an ongoing, widespread outbreak of the disease caused by a strain of the coronavirus. This severe, acute respiratory syndrome was first identified in Wuhan, China in late December 2019. The first cases in the United States occurred in early 2020 and the first California case was confirmed in late January. To control the spread of the disease, California, and other states, issued mandatory “stay-at-home” orders. These devastated the economy and left thousands out of work and struggling to pay for necessities. California’s unemployment rate rose to a record high 16.3 percent in May as the state’s employer’s lost 2,415,000 nonfarm payroll jobs, according to the Employment Development Department. According to Federal Reserve Bank Chair Jerome Powell, 40 percent of households earning less than $40,000 annually lost their jobs in March.

Comments

1) Windfall? This bill allows a credit to employers that happened to have met the various requirements indicated in the bill: a decrease in gross receipts year over year, and have increase the number of employees between July 1, 2020, and November 30, 2020, in excess of the amount of their employees employed between April 1, 2020, and June 30, 2020. Although the credit is for employees hired between July 1, 2020, and November 30, 2020, at the time this bill would be enacted, most of this time period for meeting these requirements has already elapsed. Thus, this bill will serve as a reward for employers who already hired employees. Additionally, it is unclear whether employers will hire additional workers they would not have hired anyway in exchange for a $1,000 nonrefundable tax credit.

2) No newbies. SB 1447 applies only to qualified small business employers that had a reduction in gross receipts between April 1, 2019, and June 30, 2019 compared to between April 1, 2020, and June 30, 2020. If a business began operations after June 30, 2019, they could not qualify for this credit. As a result, this bill excludes new small businesses that may have equally suffered from the impacts of the pandemic.

3) Sales and use tax too. Because many small businesses are not consistently profitable, especially given the effects of the COVID-19 pandemic, they may be unable to benefit from a nonrefundable income tax credit. As a result, SB 1447 allows the credit to offset a taxpayer’s sales and use tax liability as well, similar to the Film and TV production credit. The Legislature will also consider SB 115 (Committee on Budget and Fiscal Review), which provides $100 million to offset revenue losses of local agencies resulting from SB 1447’s credit.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

Unknown.

SUPPORT: (Verified 8/31/20)

California Capital Financial Development Corporation
California Chamber of Commerce
National Association of Women Business Owners California
National Association of Women Business Owners Sacramento Valley
Small Business California

OPPOSITION: (Verified 8/31/20)

None received

ARGUMENTS IN SUPPORT: According to the California Chamber of Commerce, “Businesses of all sizes are reeling from the catastrophic impacts of COVID-19 and California is experiencing unemployment levels similar to those seen during the Great Depression. SB 1447 begins to address these pervasive issues and provides employers impacted by the pandemic with an avenue to begin the economic recovery process. Specifically, SB 1447 would create the Small Business Hiring Credit Fund in the State Treasury for the sole purpose of applying the credits. The fund would be capped at $100,000,000 and would allocate tax credits to employers who employed 100 or fewer employees as of December 19, 2019 and lost at least 50% of their typical revenue between April 1 and June 30, 2020. SB 1447 would establish a baseline for a company’s headcount between April 1 and June 30, 2020. Businesses would then be eligible for a tax credit of $1,000 for each employee hired above that baseline between July 1 and November 30, 2020 that could be used to offset state taxes owed through 2026. SB 1447

encourages job growth since and also strengthens one of California’s true competitive advantages – our skilled workforce ”

Prepared by: Jessica Deitchman / GOV. & F. / (916) 651-4119

8/31/20 22:03:06

**** END ****

Date of Hearing: August 30, 2020

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Autumn R. Burke, Chairwoman

SBPCA Bill Id:SB 1447

Author:(Bradford) – As Amended Ver:August 27, 2020

Majority vote. Tax levy. Fiscal committee.

SENATE VOTE: 39-0

SUBJECT: Income tax: sales and use tax: credit: small business

SUMMARY: Allows, for each taxable year beginning on or after January 1, 2020, and before January 1, 2021, a small business hiring credit to a "qualified small business employer" that receives a tentative credit reservation. Specifically, this bill:

1. Provides that the credit shall equal $1,000 for each net increase in "qualified employees", as specified. The credit, however, is capped at $100,000 per "qualified small business employer".
   
2. Defines a "qualified small business employer" as a taxpayer meeting both of the following requirements:
   
   1. Employed 100 or fewer employees as of December 31, 2019; and,
      
   2. Experienced a 50% decrease in gross receipts determined by comparing gross receipts for the three-month period beginning on April 1, 2020, and ending June 30, 2020, with the gross receipts for the three-month period beginning on April 1, 2019, and ending June 30, 2019, if it would have met the requirement of having a significant decline in gross receipts for that quarter as determined under Section 2301(c)(2)(B)(i) of Public Law 116-136.
      
3. Provides that a "qualified small business employer" does not include a taxpayer required to be included in a combined report under Revenue and Taxation Code (R&TC) Section 25101 or 25110, or authorized to be included in a combined report under R&TC Section 25101.15.
4. Defines a "qualified employee" as an employee paid "qualified wages" by a qualified small business employer. A "qualified employee" shall not, however, include an employee whose wages are included in calculating any other credit allowed under the Personal Income Tax (PIT) Law or the Corporation Tax (CT) Law.
   
5. Defines "qualified wages" as wages subject to Unemployment Insurance Code Section 13000 et seq.
   
6. Provides that the net increase in qualified employees shall be determined by subtracting the amount determined in paragraph (a) from the amount determined in paragraph (b):
   
   1. The average "monthly full-time equivalent" qualified employees employed during the three-month period beginning April 1, 2020, and ending June 30, 2020, by the qualified small business employer. The average "monthly full-time equivalent" qualified employees shall be determined by adding the total "monthly full-time equivalent" qualified employees employed by the qualified small business employer for all three months and dividing the total by three; and,
      
   2. The average "monthly full-time equivalent" qualified employees employed during the five-month period beginning July 1, 2020, and ending November 30, 2020, by the qualified small business employer. The average "monthly full-time equivalent" qualified employees shall be determined by adding the total "monthly full-time equivalent" qualified employees employed by the qualified small business employer for all five months and dividing the total by five.
      
7. Defines "monthly full-time equivalent" as either of the following:
   
   1. In the case of a qualified employee paid hourly qualified wages, "monthly full-time equivalent" means the total number of hours worked per month for the qualified small business employer by the qualified employee, not to exceed 167 hours per month per qualified employee, divided by 167; and,
      
   2. In the case of a salaried qualified employee, "monthly full-time equivalent" means the total number of weeks worked per month for the qualified small business employer by the qualified employee divided by 4.33 multiplied by the "time base" the qualified employee worked.
      
8. Defines "time base" as the fraction of full-time employment that the qualified employee works.
   
9. Provides that, in cases where the credit amount exceeds the taxpayer's tax liability, the excess credit amount may be carried over to reduce the tax liability in the following year, and succeeding four years if necessary, until the credit is exhausted.
   
10. Provides that any deduction otherwise allowed for qualified wages shall be reduced by the amount of the credit allowed.
    
11. Provides that all employees of the trades or businesses that are treated as related under Internal Revenue Code Section 267, 318, or 707 shall be treated as employed by a single qualified small business employer.
    
12. Provides that a credit shall only be allowed on timely filed original returns.
    
13. Provides that the date a return is received shall be determined by the Franchise Tax Board (FTB).
    
14. Provides that the FTB's determination with respect to whether a return has been timely filed for purposes of this credit may not be reviewed in any administrative or judicial proceeding.
    
15. Provides that any disallowance of a credit claimed shall be treated as a mathematical error appearing on the return. Any amount of tax resulting from such disallowance may be assessed by the FTB in the same manner as provided by R&TC Section 19051.
    
16. Authorizes the FTB to prescribe any regulations necessary or appropriate to carry out the purposes of this credit. Specifically, the FTB may prescribe rules, guidelines, procedures, or other guidance to carry out the purposes of this bill and the Administrative Procedure Act shall not apply to any regulation, rule, guideline, procedure, or other guidance prescribed by the FTB.
    
17. Authorizes the FTB, notwithstanding existing law, to provide information to the California Department of Tax and Fee Administration (CDTFA) related to the credit, including the qualified small business employer names, amounts of tax credits allowed, and the net increase in qualified employees.
    
18. Provides that the statutory provisions authorizing the income tax credit shall remain in effect only until December 1, 2021, and are repealed as of that date.
    
19. Directs CDTFA to allow a qualified small business employer that has made an irrevocable election pursuant to this bill to apply the small business hiring credit amount against "qualified sales and use taxes" imposed on the qualified small business employer, as follows:
    
    1. For monthly filers, the credit shall apply to amounts due and payable for the month beginning on March 1, 2021, ending on March 31, 2021, and due April 30, 2021;
       
    2. For quarterly filers, the credit shall apply to amounts due and payable for the quarter beginning on January 1, 2021, ending on March 31, 2021, and due April 30, 2021; and,
       
    3. For annual filers, fiscal year filers, or a qualified small business owner on any other reporting basis, the credit shall apply to amounts due and payable on the first return due on or after April 30, 2021.
       
20. Defines "qualified sales or use taxes" as any sales and use taxes imposed by R&TC Section 6001 et seq. and Section 35 of Article XIII of the California Constitution, local sales and use taxes imposed in accordance with the Bradley-Burns Uniform Local Sales and Use Tax Law, and local transactions and use taxes imposed in accordance with the Transactions and Use Tax Law.
    
21. Provides that any excess credit applied to sales and use taxes shall be carried over and shall not be refunded, as follows:
    
    1. In cases where the credit amount exceeds the sales and use taxes due and payable as described, CDTFA shall apply the excess credit against amounts due and payable for periods following those described in this bill on returns due and filed on or before April 30, 2026; and,
       
    2. Any remaining excess credit amount after April 30, 2026, shall not be refunded and shall be forfeited.
       
22. Provides that R&TC Section 6961 shall apply to any credit, or part thereof, that is erroneously allowed under this bill.
    
23. Provides that, notwithstanding existing law, CDTFA shall provide information to the FTB, in a form and manner agreed upon by both parties, regarding the qualified small business employers that have been assigned a credit, and have made an irrevocable election, and the credit amount claimed by each qualified small business employer.
    
24. Authorizes CDTFA to prescribe, adopt, and enforce any emergency regulations as necessary to implement, administer, and enforce its duties under this bill. Any emergency regulation shall be adopted in accordance with the Administrative Procedure Act and, for purposes of that law, the adoption of the regulation is an emergency and shall be considered by the Office of Administrative Law as necessary for the immediate preservation of the public peace, health and safety, and general welfare. Additionally, notwithstanding any other law, the emergency regulations adopted by CDTFA may remain in effect for two years from adoption.
25. Establishes the Small Business Hiring Credit Fund in the State Treasury for the sole purpose of applying the small business hiring credit allowed by this bill. Any unused money remaining in the fund shall be transferred to the General Fund by June 1, 2026.
    
26. Directs qualified small business employers to submit an application to CDTFA, as specified, for a tentative credit reservation amount for the small business hiring tax credit allowed under the PIT Law, the CT Law, or both.
    
27. Specifies that the application shall include the following:
    
    1. The net increase in qualified employees;
       
    2. Whether the credit will be applied under the PIT Law, the CT Law, or both;
       
    3. Whether the qualified small business employer makes an irrevocable election to apply the credit against qualified sales and use taxes in lieu of claiming the credit allowed under the PIT or CT Laws; and,
       
    4. Any other information deemed necessary by CDTFA.
       
28. Provides that qualified small business employers shall submit, and CDTFA shall accept, applications for tentative credit reservation amounts during the period beginning December 1, 2020, and ending January 15, 2021, or any earlier date determined by CDTFA when the maximum cumulative total allocation limit is reached.
    
29. Provides that applications shall not be accepted by CDTFA after January 15, 2021, or any other date determined by CDTFA. The date and time an application is received shall be determined by CDTFA. Additionally, the determination of CDTFA with respect to the date and time an application is received may not be reviewed in any administrative or judicial proceeding.
    
30. Provides that CDTFA shall allocate a tentative credit reservation to qualified small business employers on a first-come, first-served basis. For each application received, the total amount of credit available for allocation shall be reduced by an amount equal to the allocated tentative credit reservation amount.
    
31. Provides that the tentative credit reservation amount shall be equal to the net increase in qualified employees as reported on the application multiplied by $1,000 and shall not exceed $100,000 per qualified small business employer.
    
32. Directs CDTFA to promptly notify applicants, no more than 30 days after the application is received, of the tentative credit reservation amount. The amount allocated shall not constitute a determination by CDTFA with respect to any of the requirements of this bill or eligibility for the credit.
    
33. Requires CDTFA to periodically provide on its website the aggregate allocated tentative credit reservation amount, and remaining credit amount available for allocation.
    
34. Provides that, notwithstanding existing law, CDTFA shall provide the FTB, in the form and manner agreed upon by CDTFA and the FTB, any and all information provided by each applicant and any other information deemed necessary by CDTFA and the FTB to administer and enforce this bill.
    
35. Caps at $100 million the aggregate amount of credit that may be allocated under this bill's provisions.
36. Provides that, in accordance with R&TC Section 41, the purpose of the small business hiring credit is to provide financial relief for the economic disruptions resulting from COVID-19 that have resulted in unprecedented job losses.
    
37. Provides that, to measure whether the credit achieves its intended purpose, the following performance indicators shall be used:
    
    1. The number of applications received for tentative credit reservation;
       
    2. The net increase in number of qualified employees represented on applications for tentative credit reservation; and,
       
    3. The average credit amount on tax returns claiming the credit.
       
38. Provides that, by April 1, 2022, or earlier if data are available, the FTB shall report to the Legislature the information above for credits claimed under the PIT Law and the CT Law and CDTFA shall report to the Legislature for credits claimed under the Sales and Use Tax Law. These reports shall be submitted in compliance with Government Code Section 9795.
39. Takes immediate effect as a tax levy.

EXISTING LAW:

1. Allows various tax credits under both the PIT Law and the CT Law. These credits are generally designed to encourage socially beneficial behavior or to provide relief to taxpayers that incur specified expenses.
   
2. Allows taxpayers engaged in a trade or business to deduct expenses considered ordinary and necessary in conducting that trade or business.
   
3. Imposes a sales tax on retailers for the privilege of selling tangible personal property (TPP), absent a specific exemption. The tax is based upon the retailer's gross receipts from TPP sales in this state.
4. Imposes a complimentary use tax on the storage, use, or other consumption of TPP generally purchased out-of-state and brought into California. The use tax is imposed on the purchaser; and unless the purchaser pays the use tax to an entity registered to collect California's use tax, the purchaser remains liable for the tax. The use tax is set at the same rate as the state's sales tax and must generally be remitted to the CDTFA.
5. Requires any bill introduced on or after January 1, 2020, that authorizes a new tax expenditure, to contain all of the following:
   
   1. Specific goals, purposes, and objectives that the tax expenditure will achieve;
      
   2. Detailed performance indicators for the Legislature to use when measuring whether the tax expenditure meets the goals, purposes, and objectives stated in the bill; and,
      
   3. Specified data collection requirements to enable the Legislature to determine whether the tax expenditure is meeting, failing to meet, or exceeding those specific goals, purposes, and objectives.

FISCAL EFFECT: Unknown

COMMENTS:

1. Senator Bradford, who is a joint author of this measure, notes the following:
   

Since the start of the COVID-19 pandemic, many small businesses have been struggling to stay afloat. In May, McKinsey released data indicating that more than a third of vulnerable private-sector workers in California were employed by small businesses. Small businesses are vital not only as a way for hardworking individuals and their families to build wealth, but also as an engine of job growth. This is especially true of minority-owned and other diverse business enterprises. California has sought to assist struggling small businesses in a variety of complementary ways, including zero-interest sales and use tax deferrals. SB 1447 further assists small businesses by providing those that hire new employees with a tax credit that can also offset sales and use tax liabilities, helping them to persist through this state of emergency.

1. Assemblymember Cervantes, who is a joint author of this measure, notes the following:

Small business owners, especially women- and BIPOC*-owners, have been especially hard hit in the economic fallout of the COVID-19 pandemic.

As businesses have closed, opened, closed, and tried to re-open again, small business owners have struggled to implement new e-commerce business practices, make lease payments, repay pre-COVID debt, meet payroll, and access and purchase PPE to keep workers and customers safe. While technically available, many California small businesses were denied or found to be ineligible to receive federal disaster grants and loans.

Small businesses [that] are unable to pivot to meet these new market dynamics, including retaining and hiring a workforce to support new models, will not survive. The impact of these small business closures will go well beyond the loss of a single business or place of work, and will have a rippling effect across the California economy. As the Legislature considers recovery proposals, bills like SB 1447 that address the needs of small businesses and their workers must be a priority. [*BIPOC is an acronym that stands for Black, Indigenous, and People of Color.]

1. Committee Staff Comments:
   1. California's existing hiring tax credit: In 2013, Governor Brown signed legislation that reformed California's economic development policies. [AB 93 (Committee on Budget), Chapter 69, Statutes of 2013.] The new law eliminated enterprise zones and other geographically targeted economic development areas and, instead, created three new economic development tax incentives: (i) a temporary tax credit for wages paid by a taxpayer engaged in a trade or business within a designated census tract, as defined, or a former enterprise zone to certain full-time employees (the "New Employment Credit"); (ii) a temporary sales and use tax exemption on purchases of manufacturing equipment made by qualified taxpayers, capped at $200 million annually per taxpayer; and (iii) the California Competes Tax Credit program - a negotiated incentive administered by the Governor's Office of Business and Economic Development.
      
   2. The New Employment Credit: Existing law provides a hiring tax credit for taxable years beginning on or after January 1, 2014, and before January 1, 2026. The credit is available to taxpayers that hire a qualified full-time employee and pay qualified wages attributable to work performed by that employee in a designated census tract or economic development area. The taxpayer must also receive a tentative credit reservation for that qualified full-time employee, and the credit may only be claimed on a timely filed original return.
      
      The New Employment Credit is available for wages paid to certain full-time employees (e.g., ex-offenders previously convicted of a felony) who perform at least 50% of their activities in the designated areas. Additionally, the qualified full-time employee must receive starting wages that are at least 150% of the minimum wage.
      
      Except for small businesses, certain employers are specifically prohibited from receiving this credit. For example, prohibited businesses include:
      1. Those providing temporary help services, as described in Code 561320 of the North American Industry Classification System (NAICS);
         
      2. Those providing retail trade services, as described in Sector 44-45 of the NAICS;
      3. Those primarily engaged in providing food services, as described in Code 711110, 722511, 722513, 722514, or 722515 of the NAICS; and,
      4. Sexually oriented businesses, as defined.
         
   3. What would this bill do? This bill would allow, for taxable years beginning on or after January 1, 2020, and before January 1, 2021, a "small business hiring credit" to qualified small business employers that apply for and receive a tentative credit reservation. This credit would be available to taxpayers filing under either the PIT Law or the CT Law. To qualify for the credit, however, the small business employer would have to meet two requirements: First, as of December 31, 2019, the employer must have employed 100 or fewer employees and, second, the employer must have experienced a 50% decrease in gross receipts. This calculation would be made by comparing 2020 Second Quarter gross receipts with 2019 Second Quarter gross receipts.

For qualifying taxpayers, the credit amount would equal $1,000 for each net increase in qualified employees. This net increase, in turn, would be calculated by comparing the taxpayer's average number of employees for the Second Quarter of 2020, with the average number of employees for the five-month period beginning July 1, 2020, and ending November 30, 2020. The credit itself would be capped at $100,000 per taxpayer.

Unlike the vast majority of income tax credits, this bill would also allow qualified small business employers to make an irrevocable election to apply the credit amount against qualified sales and use taxes imposed on the employer. This is likely being done to assist retailers that have limited income tax liability but do have sales and use tax liabilities for sales of TPP.

Finally, this bill caps at $100 million the aggregate amount of credit that may be allocated under this bill's provisions.

• 1. How does this bill differ from the existing hiring credit? As noted above, existing law already provides a hiring credit known as the New Employment Credit for taxable years beginning on or after January 1, 2014, and before January 1, 2026. The New Employment Credit is available to taxpayers that hire a qualified full-time employee and pay qualified wages attributable to work performed by that employee in a designated census tract or economic development area. The New Employment Credit differs from the credit this bill proposes in numerous respects, including the following:
     1. The New Employment Credit only applies with respect to work performed by employees in a designated census tract or economic development area. This bill's credit, in turn, would apply statewide and would not preference hiring that takes place in economically-depressed regions of the state;
     2. The New Employment Credit is only available for wages paid to certain full-time employees, in an effort to encourage the employment of "hard-to-hire" individuals. Qualifying employees include those unemployed for six months immediately preceding employment, veterans who separated from service within the 12 months preceding employment, recipients of the federal Earned Income Tax Credit, ex-offenders previously convicted of a felony, and recipients of either CalWORKs or general assistance. This bill's credit, in turn, would apply to all employees without distinction;
     3. The New Employment Credit specifies that a qualified full-time employee must receive starting wages that are at least 150% of the minimum wage. This bill's credit, in turn, includes no such requirement; and,
     4. Except in the case of a "small business", defined as one with gross receipts of less than $2 million, the New Employment Credit is not available to taxpayers engaged in specified lines of work. These excluded business categories include certain retail trade services, temporary help services, those primarily engaged in providing food services, and sexually oriented businesses. This bill's credit, however, makes no such distinctions.
  2. Do hiring tax credits work? In the wake of the Great Recession, some advocated job creation tax credits as a means of revitalizing the struggling economy. The question, however, is whether such credits actually work. Mr. Daniel Wilson, assistant director of the Center for the Study of Innovation and Productivity at the Federal Reserve Bank of San Francisco, attempted to answer this question. In a paper co-authored with Robert Chirinko of the University of Illinois at Chicago, Wilson examined the period between January 1990 and August 2009 and found that among states where employers could qualify for credits immediately after enactment of the credit legislation there was a slight employment increase of 0.12%. These findings suggest that hiring credits, at least at the state level, have some impact but appear to be a very blunt tool for stimulating job growth.
  3. Incentive or assistance? While hiring credits have a mixed track record of actually stimulating job growth, this bill does not appear to be primarily designed for this purpose. Indeed, this bill's "Section 41" provisions specifically note that the proposed credit is meant to provide financial relief for the economic disruptions resulting from COVID-19. This bill's primary aim can also be inferred from the way this bill's credit is calculated – namely, by comparing the taxpayer's net increase in employment from the Second Quarter of 2020, to the five-month period beginning July 1, 2020. Assuming this bill were to go into effect on September 1, 2020, it would still be conferring a tax benefit for hiring decisions that occurred for two months preceding its operative date and for which this credit would obviously not have provided an incentive.
  4. The impact of COVID-19: The impact of the COVID-19 pandemic can only be described as tragic. An estimated 5.85 million Americans have been infected, and over 180,000 Americans have lost their lives to this deadly virus. California has not been spared from this devastation. In this state alone, there have been 688,000 confirmed cases and 12,549 deaths. The pandemic has also battered this state's economy. According to the Employment Development Department, California's unemployment rate grew from 4% in June 2019, to a staggering 16.4% in May of this year, before coming down slightly to 14.9% in June. California's small businesses have been particularly hard hit. According to the Facebook & Small Business Roundtable, roughly one-third had temporarily ceased operations nationwide by mid-April; and by the following month, more than one-half had laid off or furloughed employees. (State of Small Business Report, Facebook & Small Business Roundtable, May 2020.) McKinsey & Company, in turn, estimated that, before accounting for intervention, between 1.4 million and 2.1 million of these small businesses could close permanently as a result of the disruption experienced in just the first four months of the pandemic. (Which Small Businesses are Most Vulnerable to COVID-19 – and When, McKinsey & Company, June 18, 2020.)
  5. Is this credit appropriately tailored to those most in need? Given that this bill's credit appears primarily designed to confer relief on taxpayers struggling in the wake of the pandemic-induced economic crisis, it raises the question of whether this relief is appropriately tailored to help those most in need. This bill does require employers to have experienced a significant 50% decrease in year-over-year gross receipts. However, this bill provides the most generous credit amounts to those businesses that have been able, for whatever reason, to hire back their workforce during the five-month period beginning July 1, 2020. Thus, it could be argued that this bill confers the most generous benefits on those businesses that are well on their way to recovery, as opposed to those businesses currently unable to operate at anything comparable to a pre-pandemic normal. This credit is also not limited to those employer categories most impacted by the current crisis, such as the struggling restaurant industry. Additionally, this bill's definition of "small business" is rather expansive. Instead of defining a small business by reference to annual gross receipts, this bill defines a small business as one with 100 or fewer employees, apparently modeling the definition off of recent federal relief efforts. This could arguably confer benefits on businesses that are relatively large in terms of gross receipts but with a small employment footprint. Finally, because this bill provides the credit on a first-come, first-served basis, it is possible that this bill will primarily benefit relatively sophisticated businesses at the larger end of the small business range. These businesses often benefit from accounting and legal advice unavailable or underutilized by truly "mom and pop" operations.
  6. Policy on tax expenditures: Both R&TC Section 41 and Committee policy require any tax expenditure bill to outline specific goals, purposes, and objectives that the tax expenditure will achieve, along with detailed performance indicators for the Legislature to use when measuring whether the tax expenditure meets those stated goals, purposes, and objectives.  A tax expenditure bill will not be eligible for a Committee vote unless it has complied with these requirements.  This bill, in turn, complies with R&TC Section 41.
     
     In addition to the R&TC Section 41 requirements, this Committee's policy also requires that all tax expenditure proposals contain an appropriate sunset provision to be eligible for a vote.  According to the new policy, an "appropriate sunset provision" shall mean five years, except in the case of a tax expenditure measure providing relief to California veterans, in which case "appropriate sunset provision" shall mean ten years. This bill is only operative for one taxable year and, as such, complies with this Committee's sunset policy.

REGISTERED SUPPORT / OPPOSITION:

Support

None on file

Opposition

None on file

Analysis Prepared by: M. David Ruff / REV. & TAX. / (916) 319-2098

SENATE THIRD READING

STR Bill Id:SB 1447

Author:(Bradford)

As Amended Ver:August 6, 2020

Majority vote

SUMMARY:

Expands, for a two-year period, Homeowner Bill of Rights protections to cover tenant-occupied residential real property of 1-4 units in which at least one tenant has been unable to pay rent due to a COVID-19-related reduction in income.

Major Provisions

1. Expands protections contained in specified provisions of the Homeowner Bill of Rights (HBOR) to encompass first lien mortgages and deeds of trust secured by residential real property that meets the following criteria:
   1. It is the principal residence of at least one tenant who has been unable to pay rent due to a reduction in income resulting from the novel coronavirus;
   2. It contains no more than four dwelling units;
   3. It is owned by an individual who owns no more than three residential real properties, each of which contains no more than four dwelling units; and
   4. It is occupied by a tenant who entered into a lease before, and in effect on, March 4, 2020, which was entered into in good faith and for valuable consideration, and which reflects the fair market value for the rental in the open market between informed and willing parties.
2. Clarifies that relief shall be available under HBOR only for so long as the real property remains the principal residence of a tenant pursuant to a lease that meets the criteria set forth in 1) d), above.
3. Sunsets the expanded protections referenced in 1) above as of January 1, 2023 except for borrowers who meet the following criteria:
   1. The borrower was approved in writing for a first lien loan modification or other foreclosure prevention alternative.
   2. The borrower submitted a complete application for a first lien loan modification before January 1, 2023 but, as of that date, either i) the mortgage servicer had not yet determined whether the borrower qualified for the modification, or ii) the appeal period from a denial had not yet expired.
4. Amends the list of activities that a person may offer to perform for compensation, so as to meet the definition of "foreclosure consultant," to include the act of stopping or postponing a delinquency on a mortgage or deed of trust.

COMMENTS:

This bill should increase housing stability for small landlords and their tenants who are struggling to cope with the economic effects of the COVID-19 pandemic.

The pandemic is causing many tenants to lose income, whether due to unemployment, reduced working hours, or small business closures. Their loss of income, in turn, may mean that they are unable to pay their full rent. Landlords' consequent loss of rental income means that some are unable to pay the mortgages on their rental properties, increasing the risk that they will be foreclosed on. A foreclosure sale can result ultimately in the eviction and displacement of the tenants who live in the property, which risks exacerbating the state's homelessness crisis and increasing the spread of COVID-19.

In response to the last foreclosure crisis, California enacted the Homeowner Bill of Rights (HBOR), a set of procedural protections meant to avert avoidable foreclosure on owner-occupied residential real property that contains no more than four units. This bill proposes to mitigate the anticipated harms outlined in the previous paragraph by extending HBOR to many tenant-occupied residential real properties of no more than four units. These additional protections would remain in place for a two-year period, beginning on January 1, 2021.

The bill would also permanently expand the statutory definition of "foreclosure consultant" to include a person who engages in the act of stopping or postponing a delinquency on a mortgage or deed of trust, thereby reducing the chances that vulnerable homeowners are preyed upon as they seek to stave off a mortgage default.

How would an expanded HBOR protect small landlords facing foreclosure (and their tenants)? Current protections under the Homeowner Bill of Rights apply to owners of residential property containing up to four units include the following:

1. At least 30 days before filing a Notice of Default, the mortgage servicer must contact the borrower to explore foreclosure prevention alternatives.
2. The servicer must provide a "single point of contact," who is knowledgeable about the borrower's situation, to any borrower seeking a foreclosure prevention alternative.
3. If the borrower submits a first lien modification application or supporting documents, the servicer must provide written acknowledgement of receipt and provide important additional information, such as an estimate of how long it will take to make a decision regarding the application, the amount of time the borrower will have to consider a loan modification offer, a description of any omissions in the application, and deadlines for submitting missing documents
4. If the borrower submits a complete first lien loan modification application, the foreclosure process must halt while the application is being considered.
5. If a borrower is denied a loan modification, the borrower has a right of appeal.
6. If the servicing rights on the loan are transferred, the new servicer must honor any foreclosure prevention alternative offered by the previous servicer.
7. The borrower must be notified of any postponement in a foreclosure sale that lasts ten business days or longer.

However, under HBOR, these protections are currently only available to borrowers who live in a property facing foreclosure. Under this bill, these protections would be expanded to a fully tenant-occupied property with one to four units, if the following conditions were met:

1. The landlord owns no more than three such residential real properties, each of which contains no more than four dwelling units.
2. The property for which the landlord is seeking protection is occupied by at least one tenant who has been unable to pay rent due to COVID-19 reduction in income.
3. The property for which the landlord is seeking protection is occupied by at least one tenant who entered into a market-rate lease that was in effect on March 4, 2020. The property must continue to be the principal residence of such a tenant throughout the time the landlord is seeking HBOR protections.

These conditions are meant to ensure that the temporary HBOR expansion applies only to small landlords who are facing a loss of income due to COVID and who continue to house at least one bona fide tenant.

Ensuring expanded protections last beyond the sunset date for borrowers in the HBOR process. The expansion of HBOR to tenant-occupied properties under this bill will sunset after two years. This date was chosen because the author currently projects that 2021 will see a substantial increase in mortgage defaults by small landlords, numbers that should fall by the end of 2022. If the state of the economy in 2022 indicates that small landlords will need these protections for a longer period of time, the Legislature could then extend the sunset date.

Regardless of whether the sunset date is extended in the future, the existence of the sunset might create problems for landlords who are in the midst of being considered for a foreclosure alternative when the bill's provisions expire. To take the simplest example, what happens if a landlord applies for a loan modification in November 2022, is approved for the modification in late December 2022, and the servicing rights transfer in January 2023, before the landlord and the previous servicer enter into a binding agreement?

In order to avoid such a result, and to ensure that landlords in the midst of the HBOR process continue to be able to complete their search for a foreclosure alternative, this bill includes a saving clause. A landlord will continue to be eligible for the expanded protections under the bill, even after the sunset, as long as they are approved in writing for a foreclosure prevention alternative or submitted a complete application for a first lien loan modification before the sunset date.

In the author's view, the affirmative step of submitting a completed first lien mortgage loan modification application provides a bright-line delineation between those landlords who are actively working to stave off foreclosure and those who may not be exercising their rights. This standard may disadvantage landlords who default shortly before the sunset date and are unable to timely file a loan modification application, but it does give servicers and lenders certainty as to their ongoing obligations.

If foreclosures are still at a heightened level in 2022 and it appears that many more small landlords may need HBOR protections, the Legislature would have the opportunity to address this issue by extending the bill's sunset date at that time.

Expansion of definition of "foreclosure consultant." The state's last foreclosure crisis yielded a rash of fraudulent foreclosure prevention and rescue scams in which desperate homeowners were cheated out of their remaining savings by individuals who falsely promised to save their homes from foreclosure. The Legislature passed several bills in response to these scams, including AB 2325 (Lieu), Chapter 596, Statues of 2010 which amended the statutory definition of "foreclosure consultant" to include individuals who offered to arrange a forensic audit of a loan secured by a home in foreclosure in exchange for compensation. This bill would similarly amend the definition of "foreclosure consultant" to include individuals who offer to stop or postpone a delinquency on a mortgage or deed of trust. The rationale for this amendment is described by the author as follows:

California's existing foreclosure consultant law only applies once a home is in delinquency; it fails to cover the period of time during a financial hardship, before that hardship leads to a mortgage delinquency. Most of the federal and state homeowner relief announced in response to COVID-19 includes mortgage forbearance. Because homeowners who have been provided mortgage forbearance from their servicers are not considered delinquent, they could be preyed upon by unscrupulous individuals not covered by California's foreclosure consultant law.

It is hoped that amending the definition of "foreclosure consultant" in this manner will help protect homeowners during the ongoing COVID-19 crisis.

According to the Author:

In 2012, California enacted a comprehensive set of protections for homeowners, which were intended to prevent avoidable foreclosures on owner-occupied principal residences…. However, existing California law will not provide needed relief to individuals who own investment properties they rent out to tenants if those tenants' inability to afford their rent payments forces the property owners into mortgage delinquency. Lack of foreclosure protections for owners of rental properties could force tenants onto the streets, if the owners of the homes those tenants are occupying are foreclosed upon. […] SB 1447 … provides protections against foreclosure for mom-and-pop landlords.

Arguments in Support:

The California Apartment Association celebrates the author's efforts to protect small landlords:

We appreciate your work to expand the protections of the Homeowner Bill of Rights, especially for mom and pop landlords who can be exposed to these scams during times of economic crises. SB 1447 will help to ensure that they keep their housing and keep their tenants in place. You are taking the important steps needed to prevent unscrupulous servicers and other third parties from interfering with a homeowner's ability to manage their mortgage debt successfully.

Arguments in Opposition:

None on file

FISCAL COMMENTS:

None

VOTES:

SENATE FLOOR: 39-0-1

YES: Allen, Archuleta, Atkins, Bates, Beall, Borgeas, Bradford, Caballero, Chang, Dahle, Dodd, Durazo, Galgiani, Glazer, Lena Gonzalez, Grove, Hertzberg, Hill, Hueso, Jackson, Jones, Leyva, McGuire, Melendez, Mitchell, Monning, Moorlach, Morrell, Nielsen, Pan, Portantino, Roth, Rubio, Skinner, Stern, Umberg, Wieckowski, Wiener, Wilk

ABS, ABST OR NV: Hurtado

ASM JUDICIARY: 11-0-0

YES: Mark Stone, Gallagher, Chau, Chiu, Gonzalez, Holden, Kalra, Kiley, Limón, Obernolte, Reyes

UPDATED:

VERSION: August 6, 2020

CONSULTANT: Jith Meganathan / JUD. / (916) 319-2334 FN: 0003374

Date of Hearing: August 12, 2020

ASSEMBLY COMMITTEE ON JUDICIARY

Mark Stone, Chair

SBPCA Bill Id:SB 1447

Author:(Bradford) – As Amended Ver:August 6, 2020

PROPOSED CONSENT

SENATE VOTE: 39-0

SUBJECT: Mortgages and deeds of trust: foreclosure

KEY ISSUE: Should THE homeowner bill of rights be EXPANDED FOR A TWO-YEAR PERIOD to apply to some tenant-occupied SINGLE-FAMILY RESIDENTIAL PROPERTIES so that small landlords whose tenants EXPERIENCE covid-19-related financial hardships are protected from foreclosure?

SYNOPSIS

This beneficial author-sponsored bill was introduced in direct response to the COVID-19 crisis. It would allow small landlords facing foreclosure to avail themselves, for the first time, of the procedural protections set forth in the Homeowner Bill of Rights, including the ability to halt a non-judicial foreclosure temporarily through the filing of a completed application for a first lien loan modification, and permanently halt such foreclosure proceedings if a loan modification is granted. In order to qualify for these protections, at least one tenant in the property facing foreclosure must have been unable to pay rent due to a COVID-19-related reduction in income, and the landlord may own no more than three residential rental properties of 1-4 units.

In anticipation of increased foreclosure rescue fraud activity, the bill would also expand the definition of “foreclosure consultant” to include a person who acts to stop or postpone a mortgage delinquency in exchange for compensation.

This bill is supported by the California Apartment Association, Center for Responsible Lending, Consumer Reports, and Housing and Economic Rights Advocates. It has no opposition on file.

SUMMARY: Expands, for a two-year period, Homeowner Bill of Rights protections to cover tenant-occupied residential real property of 1-4 units in which at least one tenant has been unable to pay rent due to a COVID-19-related reduction in income. Specifically, this bill:

1. Expands protections contained in specified provisions of the Homeowner Bill of Rights (HBOR) to encompass first lien mortgages and deeds of trust secured by residential real property that meets the following criteria:
   1. It is the principal residence of at least one tenant who has been unable to pay rent due to a reduction in income resulting from the novel coronavirus;
   2. It contains no more than four dwelling units;
   3. It is owned by an individual who owns no more than three residential real properties, each of which contains no more than four dwelling units; and
   4. It is occupied by a tenant who entered into a lease before, and in effect on, March 4, 2020, which was entered into in good faith and for valuable consideration, and which reflects the fair market value for the rental in the open market between informed and willing parties.
2. Clarifies that relief shall be available under HBOR only for so long as the real property remains the principal residence of a tenant pursuant to a lease that meets the criteria set forth in 1) d) above.
3. Sunsets the expanded protections referenced in 1) above as of January 1, 2023 except for borrowers who meet the following criteria:
   1. The borrower was approved in writing for a first lien loan modification or other foreclosure prevention alternative.
   2. The borrower submitted a complete application for a first lien loan modification before January 1, 2023 but, as of that date, either (i) the mortgage servicer had not yet determined whether the borrower qualified for the modification, or (ii) the appeal period from a denial had not yet expired.
4. Amends the list of activities that a person may offer to perform for compensation, so as to meet the definition of “foreclosure consultant,” to include the act of stopping or postponing a delinquency on a mortgage or deed of trust.

EXISTING LAW:

1. States that the purpose of enacting the Homeowner Bill of Rights is to ensure that, as part of the nonjudicial foreclosure process, borrowers are considered for, and have a meaningful opportunity to obtain, loss mitigation services such as loan modifications or other alternatives to foreclosure, while in no way requiring that the process yield a particular result. (Civil Code Section 2923.4.)
2. Requires mortgage servicers to, at least 30 days prior to the filing of a notice of default against a property, contact the borrower in order to assess the borrower’s financial situation and explore options for the borrower to avoid foreclosure. (Civil Code Section 2923.5.)
3. Excuses a servicer’s failure to contact a borrower if the failure occurs despite the servicer’s “due diligence,” as defined. (Ibid.)
4. Enumerates additional actions that must be taken prior to recording a notice of default, including providing specified written information to the borrower and properly handling any complete application for a first lien loan modification that a borrower submits. (Civil Code Section 2923.55.)
5. Prohibits recording a notice of default or notice of sale, or conducting a trustee’s sale, while the borrower’s complete first lien loan modification application is pending. Provides procedures to address the denial of such an application, including a right of appeal. Specifies that the mortgage servicer has no duty to evaluate successive applications submitted by the borrower unless the borrower has had a material change in their financial circumstances and provides documentation of this change. (Civil Code Section 2923.6.)
6. Requires the mortgage servicer to provide a “single point of contact,” as defined, to a borrower who requests a foreclosure prevention alternative, until such time as all loss mitigation options offered by, or through, the servicer have been exhausted or the borrower’s account becomes current. (Civil Code Section 2923.7.)
7. Requires a mortgage servicer, within five business days of recording a notice of default, to provide the borrower with specified information regarding foreclosure prevention alternatives, unless the borrower has already exhausted the loan modification process offered by, or through, the servicer. (Civil Code Section 2924.9.)
8. Requires a mortgage servicer to provide written acknowledgment within five business days of receiving a complete first lien modification application submitted by a borrower or any document submitted in connection with such an application. Specifies information that must be included in the initial acknowledgment, including an estimate of how long it will take to make a decision regarding the application, the amount of time the borrower will have to consider a loan modification offer, identification of any omissions in the application, and deadlines for submitting missing documents. (Civil Code Section 2924.10.)
9. Prohibits a servicer from charging an application, processing, or other fee for a first lien loan modification or other foreclosure prevention alternative. Also prohibits a servicer from collecting late fees while a complete first lien loan modification application is under consideration or a denial is being appealed, the borrower is making timely modification payments, or a foreclosure prevention alternative is being evaluated or utilized. (Civil Code Section 2924.11.)
10. Clarifies that neither a notice of default nor a notice of sale may be recorded, and a trustee’s sale may not be conducted, if the borrower is in compliance with the terms of a loan modification, forbearance, or repayment plan, or if a foreclosure prevention alternative has been approved in writing by all parties and proof of funds or financing has been provided to the servicer. (Ibid.)
11. Requires that if the borrower is approved for a first lien loan modification or other foreclosure prevention alternative, and the servicing of that borrower’s loan is transferred or sold, then the subsequent servicer must honor that previously-approved alternative. (Ibid.)
12. Forbids, if a borrower submits an application for a first lien loan modification no later than five business days before a scheduled foreclosure sale, the recording of a notice of default or notice of sale, or conducting a trustee’s sale, until the borrower has been provided with a written determination by the servicer regarding the borrower’s eligibility for the modification. (Civil Code Section 2924.18.)
13. Provides that 2)-12) above apply only to first lien mortgages or deeds of trust that are secured by owner-occupied residential real property containing no more than four dwelling units. (Civil Code Section 2924.15.)
14. Requires that a notice of default, notice of sale, assignment of a deed of trust, substitution of trustee, and specified declarations be accurate, complete, and supported by competent and reliable evidence, and that before recording or filing any of these documents, that the servicer ensure that it has reviewed such evidence to substantiate the underlying default and the right to foreclosure. (Civil Code Section 2924.17.)
15. Authorizes enforcement of 4)-9) and 14) above by a borrower through an action for injunctive relief or actual damages, as appropriate. (Civil Code Section 2924.12.)
16. Permits a previously-noticed foreclosure sale to be postponed for a period of up to 365 days from the date listed in the original notice of sale. (Civil Code Section 2924g (c).)
17. Requires that a borrower is provided with written notice of any foreclosure sale that has been postponed by at least 10 business days, and that this notice include the new sale date and time. (Civil Code Section 2924 (a)(5).)
18. Makes findings and declarations regarding the risk to homeowners of fraud, deception, harassment, and unfair dealing by foreclosure consultants. (Civil Code Section 2945 (a).)
19. Defines a “foreclosure consultant” as any person who either offers to, or does, perform for compensation any of nine enumerated services which the person represents will assist a homeowner facing foreclosure, including stopping or postponing a foreclosure sale, obtaining a forbearance from the lender, avoiding or ameliorating an impairment of credit, and recovering the residual proceeds from a foreclosure sale. (Civil Code Section 2945.1 (a).)
20. Exempts persons licensed in California as accountants, attorneys, proraters, or real estate brokers from the definition of “foreclosure consultant.” (Civil Code Section 2945.1 (b).)
21. Establishes a statutory scheme regulating the activities of foreclosure consultants, including a requirement to register with the California Department of Justice before performing designated foreclosure consultant services. (Civil Code Sections 2945-2945.11.)

FISCAL EFFECT: As currently in print this bill is keyed non-fiscal.

COMMENTS: Less than a decade after California last endured a foreclosure crisis, the ongoing economic harms caused by the COVID-19 pandemic threatens to trigger another wave of foreclosures, once again displacing homeowners and tenants throughout the state.

The pandemic is causing many tenants to lose income, whether due to unemployment, reduced working hours, or small business closures. Their loss of income, in turn, may mean that they are unable to pay their full rent. Landlords’ consequent loss of rental income means that some are unable to pay the mortgages on their rental properties, increasing the risk that they will be foreclosed on. A foreclosure sale can result ultimately in the eviction and displacement of the tenants who live in the property, which risks exacerbating the state’s homelessness crisis and increasing the spread of COVID-19.

In response to the last foreclosure crisis, California enacted the Homeowner Bill of Rights (HBOR), a set of procedural protections meant to avert avoidable foreclosure on owner-occupied residential real property that contains no more than four units. This bill proposes to mitigate the anticipated harms outlined in the previous paragraph by extending HBOR to many tenant-occupied residential real properties of no more than four units. These additional protections would remain in place for a two-year period, beginning on January 1, 2021.

The bill would also permanently expand the statutory definition of “foreclosure consultant” to include a person who engages in the act of stopping or postponing a delinquency on a mortgage or deed of trust, thereby reducing the chances that vulnerable homeowners are preyed upon as they seek to stave off a mortgage default.

According to the author:

In 2012, California enacted a comprehensive set of protections for homeowners, which were intended to prevent avoidable foreclosures on owner-occupied principal residences (AB 278, Eng et al., Chapter 86, Statutes of 2012 and SB 900, Leno et al., Chapter 87, Statutes of 2012). California made those provisions permanent in 2018 (SB 818, Beall, Chapter 404, Statutes of 2018). Those provisions should offer California homeowners protection against avoidable foreclosures, if the COVID-19 mortgage relief provided at the state and federal level fails to keep these homeowners from falling delinquent on their mortgages. However, existing California law will not provide needed relief to individuals who own investment properties they rent out to tenants if those tenants’ inability to afford their rent payments forces the property owners into mortgage delinquency. Lack of foreclosure protections for owners of rental properties could force tenants onto the streets, if the owners of the homes those tenants are occupying are foreclosed upon. […]

SB 1447 is a direct response to the economic devastation being caused by COVID-19. SB 1447 focuses on keeping roofs over peoples’ heads by building on legislation we enacted during the 2007-2009 foreclosure crisis. The measure provides protections against foreclosure for mom-and-pop landlords. […] I firmly believe that the state will have to do a great deal more to protect vulnerable Californians from the economic devastation caused by COVID-19, but I hope this measure can provide some incremental relief to homeowners who are struggling and are desperate to keep their homes.

Central argument for this bill: ensuring housing stability during and after the COVID-19 state of emergency. The central argument for this bill is that it will increase housing stability for small landlords and their tenants who are struggling to cope with the economic effects of the COVID-19 pandemic.

Some five months after Governor Newsom first proclaimed the COVID-19 State of Emergency in California, Americans now collectively owe more than $21.5 billion in past-due rent. (Michelle Conlin, U.S. renters owe $21.5 billion in back rent; Republicans offer no eviction relief, Reuters, (Jul. 29, 2020) available at https://www.reuters.com/article/us-usa-housing-evictions/u-s-renters-owe-21-5-billion-in-back-rent-republicans-offer-no-eviction-relief-idUSKCN24U394.) An estimated 21% of tenants nationally did not pay their rent in July. (Ibid.) This non-payment of rent is particularly hard for landlords who depend on rental income to pay the mortgages on their rental property, heightening their risk of default and foreclosure. A recent report by the U.C. Berkeley Terner Center for Housing Innovation notes that “[r]enters have been disproportionately impacted by job losses, [which] has had a profound effect not only on tenants but also on landlords who aren’t as capitalized as large rental properties.” (Terner Center, How are Smaller Landlords Weathering the COVID-19 Pandemic (Jul. 2020), available at http://ternercenter.berkeley.edu/uploads/NAHREP-Terner-Center-Survey-Factsheet-July-2020.pdf.) Accompanying survey results revealed that fewer than 50% of tenants paid their full rent in the previous month, and that two in five landlords lacked confidence that they would be able to cover their operating costs in the 3rd quarter of 2020. (Ibid.)

Law professor Emily Benfer summarizes the logical outcome of this situation as follows: “Risk of eviction increases, risk of foreclosure and bankruptcy follows, property taxes go unpaid leaving communities and schools under-resourced.” (Conlin, supra.)

This bill is a meaningful attempt to help mitigate an entirely-foreseeable disaster.

How would an expanded HBOR protect small landlords facing foreclosure (and their tenants)? Current protections under the Homeowner Bill of Rights apply to owners of residential property containing up to four units include the following:

• At least 30 days before filing a Notice of Default, the mortgage servicer must contact the borrower to explore foreclosure prevention alternatives.
• The servicer must provide a “single point of contact,” who is knowledgeable about the borrower’s situation, to any borrower seeking a foreclosure prevention alternative.
• If the borrower submits a first lien modification application or supporting documents, the servicer must provide written acknowledgement of receipt and provide important additional information, such as an estimate of how long it will take to make a decision regarding the application, the amount of time the borrower will have to consider a loan modification offer, a description of any omissions in the application, and deadlines for submitting missing documents
• If the borrower submits a complete first lien loan modification application, the foreclosure process must halt while the application is being considered.
• If a borrower is denied a loan modification, the borrower has a right of appeal.
• If the servicing rights on the loan are transferred, the new servicer must honor any foreclosure prevention alternative offered by the previous servicer.
• The borrower must be notified of any postponement in a foreclosure sale that lasts ten business days or longer.

However, under HBOR, these protections are currently only available to borrowers who live in a property facing foreclosure. Under this bill, these protections would be expanded to a fully tenant-occupied property with one to four units, if the following conditions were met:

1. The landlord owns no more than three such residential real properties, each of which contains no more than four dwelling units.
2. The property for which the landlord is seeking protection is occupied by at least one tenant who has been unable to pay rent due to COVID-19 reduction in income.
3. The property for which the landlord is seeking protection is occupied by at least one tenant who entered into a market-rate lease that was in effect on March 4, 2020. The property must continue to be the principal residence of such a tenant throughout the time the landlord is seeking HBOR protections.

These conditions are meant to ensure that the temporary HBOR expansion applies only to small landlords who are facing a loss of income due to COVID and who continue to house at least one bona fide tenant.

Ensuring expanded protections last beyond the sunset date for borrowers in the HBOR process. The expansion of HBOR to tenant-occupied properties under this bill will sunset after two years. This date was chosen because the author currently projects that 2021 will see a substantial increase in mortgage defaults by small landlords, numbers that should fall by the end of 2022. If the state of the economy in 2022 indicates that small landlords will need these protections for a longer period of time, the Legislature could then extend the sunset date.

Regardless of whether the sunset date is extended in the future, the existence of the sunset might create problems for landlords who are in the midst of being considered for a foreclosure alternative when the bill’s provisions expire. To take the simplest example, what happens if a landlord applies for a loan modification in November 2022, is approved for the modification in late December 2022, and the servicing rights transfer in January 2023, before the landlord and the previous servicer enter into a binding agreement? Civil Code Section 2924.11 (g) requires that the new servicer honor the previously-approved modification. But absent that provision, and given that “[t]he normal rule in a civil case is that we judge it in accordance with the law as it exists at the time of our decision,” (Tully v. Mobil Oil Corp. (1982) 455 U.S. 245, 247), a court might find that the new servicer is under no obligation to honor the loan modification. This principle is echoed in the California Government Code, which provides: “Any statute may be repealed at any time, except when vested rights would be impaired. Persons acting under any statute act in contemplation of this power of repeal.” (Government Code Section 9606.)

In order to avoid such a result, and to ensure that landlords in the midst of the HBOR process continue to be able to complete their search for a foreclosure alternative, this bill now includes a saving clause. A landlord will continue to be eligible for the expanded protections under the bill, even after the sunset, as long as they are approved in writing for a foreclosure prevention alternative or submitted a complete application for a first lien loan modification before the sunset date.

In the author’s view, the affirmative step of submitting a completed first lien mortgage loan modification application provides a bright-line delineation between those landlords who are actively working to stave off foreclosure and those who may not be exercising their rights. This standard may disadvantage landlords who default shortly before the sunset date and are unable to timely file a loan modification application, but it does give servicers and lenders certainty as to their ongoing obligations. If foreclosures are still at a heightened level in 2022 and it appears that many more small landlords may need HBOR protections, the Legislature would have the opportunity to address this issue by extending the bill’s sunset date at that time.

Expansion of definition of “foreclosure consultant.” The state’s last foreclosure crisis yielded a rash of fraudulent foreclosure prevention and rescue scams in which desperate homeowners were cheated out of their remaining savings by individuals who falsely promised to save their homes from foreclosure. The Legislature passed several bills in response to these scams, including AB 2325 (Lieu, Stats. 2010, Chap. 596) which amended the statutory definition of “foreclosure consultant” to include individuals who offered to arrange a forensic audit of a loan secured by a home in foreclosure in exchange for compensation.

This bill would similarly amend the definition of “foreclosure consultant” to include individuals who offer to stop or postpone a delinquency on a mortgage or deed of trust. The rationale for this amendment is described by the author as follows:

California’s existing foreclosure consultant law only applies once a home is in delinquency; it fails to cover the period of time during a financial hardship, before that hardship leads to a mortgage delinquency. Most of the federal and state homeowner relief announced in response to COVID-19 includes mortgage forbearance. Because homeowners who have been provided mortgage forbearance from their servicers are not considered delinquent, they could be preyed upon by unscrupulous individuals not covered by California’s foreclosure consultant law.

It is hoped that amending the definition of “foreclosure consultant” in this manner will help protect homeowners during the ongoing COVID-19 crisis.

Deletion of provision addressing cause for attorney discipline. One other aspect of this bill necessitates comment. As originally introduced, this bill would have amended Business & Professions Code Section 6106.3 to provide that conduct in violation of Civil Code Section 2944.7 constitutes cause for attorney discipline. At the request of the Committee, the author agreed to remove this provision from the bill. An explanation of the Committee’s reasoning in making this request follows.

Existing Business and Professions Code Section 6106.3 provides that “[i]t shall constitute cause for the imposition of discipline of an attorney within the meaning of [chapter 4 of the Business and Professions Code, regulating attorneys] for an attorney to engage in any conduct in violation of Section 2944.6 of the Civil Code.” Section 2944.6, in turn, requires that any person who offers, in exchange for compensation, to assist a homeowner in obtaining a mortgage loan modification or forbearance must provide a statutorily-required notice to the homeowner before entering into a fee agreement. Therefore, Section 2944.6, by its own terms, applies to attorneys; attorneys are not exempt from its requirements. The inclusion of Section 2944.6 in the Business and Professions Code as cause for attorney discipline makes it easier for the State Bar of California to prosecute violations of the statute.

Civil Code Section 2944.7, which this bill originally included as “cause” for attorney discipline, provides, in pertinent part:

(a) Notwithstanding any other law, it shall be unlawful for any person who negotiates, attempts to negotiate, arranges, attempts to arrange, or otherwise offers to perform a mortgage loan modification or other form of mortgage loan forbearance for a fee or other compensation paid by the borrower, to do any of the following:

(1) Claim, demand, charge, collect, or receive any compensation until after the person has fully performed each and every service the person contracted to perform or represented that he or she would perform.

(2) Take any wage assignment, any lien of any type on real or personal property, or other security to secure the payment of compensation.

(3) Take any power of attorney from the borrower for any purpose.

Essentially, Section 2944.7 forbids any person from charging or accepting upfront compensation in exchange for offering to obtain a mortgage loan modification or forbearance for a borrower; a person can only charge or accept compensation after the service is performed. As with Section 2944.6, there is no exception for attorneys or any other licensed professionals from the requirements of Section 2944.7.

From 2009 until 2017, Business and Professions Code Section 6106.3 stated that Section 2944.7 was cause for attorney discipline; however, this provision expired as the result of a sunset provision on January 1, 2017. It is the Committee’s view that this sunset was appropriate because the inclusion of the Section 2944.7 as cause for discipline previously led to overzealous, overinclusive prosecution by the State Bar of attorneys who were seeking loan modifications for their clients as part of their good-faith litigation-related activities.

There is an inherent tension between Section 2944.7 (which became effective in 2009) and the Homeowner Bill of Rights (which became effective four years later), for at least three reasons. First, HBOR contemplates attorney representation of a homeowner in that it provides homeowners with a private right of action for HBOR violations. Second, the principal device that HBOR offers to avoid foreclosure is the submission of an application for a loan modification. If litigation is necessary to enforce HBOR and stave off foreclosure, it is almost inevitable that an attorney will eventually have to assist a client in submitting an application for a loan modification, typically in settlement discussions. Third, it is difficult for an attorney to take an HBOR case on a contingency basis because HBOR’s attorney fee provision is permissive (“A court may award a prevailing borrower reasonable attorney’s fees and costs in an action brought pursuant to this section”), not mandatory, meaning that an attorney may prevail in litigation, yet not be awarded fees by the court. The risk of non-payment is too great for most private attorneys to take such cases, meaning that they have to enter into hybrid fee agreements with their clients, in which they are paid a retainer for conducting the litigation that will at least cover their costs if it fails to yield an attorney fee award.

Yet if the attorney is paid to represent an HBOR client in litigation and submits a loan modification application on behalf of their client, that attorney is technically in violation of Civil Code Section 2944.7. The reality is that borrowers who sue their servicers don’t always get loan modifications through no fault of the attorney. For example, a borrower may sue their servicer, enter into a trial payment plan as a condition of obtaining a permanent loan modification, but then fail to complete the trial plan because the borrower lost their job.

This is not a hypothetical situation. Clients who are unhappy with such outcomes (i.e. no loan modification but fees owed to their former attorney) can, and do, file complaints with the State Bar. As a result any California attorneys who believed they were submitting loan modification applications in good faith as part of HBOR litigation but faced inquiries or discipline from the State Bar for allegedly violating Section 2944.7 contacted the Committee to express their dismay prior to January 1, 2017, when violations of Section 2944.7 explicitly were cause for attorney discipline. The Committee concluded that the Bar was employing “cause for imposition of discipline” in a non-nuanced way, by pursuing attorneys acting in good faith under HBOR. When Committee staff met with the State Bar Office of Chief Trial Counsel (OCTC) seeking more nuanced prosecutions, OCTC refused and insisted that if the Legislature wanted a change in prosecutorial practices, then it should change the law. After the earlier version of Business and Professions Code Section 6106.3 expired, complaints to the Committee of overzealous discipline have largely ceased.

The State Bar of California advocates for re-inserting Section 2944.7 into Business and Professions Code Section 6106.3, writing:

In 2017, the section of 6106.3 that specified that it was a "cause" for discipline to accept advanced fees for a loan modification, sunsetted.

. . .

After the sunset, attorneys and their defenders have argued that it is not an ethical violation to accept upfront fees. The argument is that if the legislature had intended it to be, they would not have allowed the sunset.

We have taken the position, successfully, that because it is still a violation under Civil Code 2944.7, OCTC can bring a charge under Business and Professions Code section 6068(a) which is a catch-all - "obey all laws" statute.

So, as a practical matter, we can still bring charges against attorneys who take fees for loan modifications upfront. But, as a policy matter: 1) it is inconsistent, on the one hand, to specify that it is a cause for discipline not to give up-front notices and on the other, not treat the actual collection of the up-front fees the same way and; 2) by removing it as a specific "cause for discipline" statute, it has sent an erroneous message to the public and attorney licensees that it is no longer an ethical violation.

The Committee is not blind to the fact that a new foreclosure crisis may lead to a new wave of attorney foreclosure fraud, of the sort that led to the passage of SB 94 (Calderon, Stats. 2009, Chap. 630), which enacted Section 2944.7. As noted by this Committee in its analysis of SB 980 (Vargas, Stats. 2012, Chap. 563), dated July 3, 2012:

Since the enactment of SB 94 in October of [2009], the State Bar alone has received over 8,600 complaints alleging misconduct in loan modification matters. These complaints have resulted in investigations against nearly 800 attorneys. Over 110 attorneys have been disciplined, 50 cases are pending before the State Bar Court, and 50 attorneys are awaiting discipline by the Supreme Court

Nonetheless, without minimizing the harms caused by attorney fraud in this area, these numbers must be balanced against the danger that attorneys will be unwilling to take HBOR cases if Section 2944.7 were again specified to be a cause for attorney discipline. That chilling effect could be so great that it would offset any protections that HBOR already provides for homeowners, and that HBOR would provide in the future to small landlords if this bill were enacted. If a servicer flouts its obligations under HBOR, borrowers will have little recourse if lawyers are unwilling to represent them in asserting these protections.

Omitting Civil Code Section 2944.7 as an explicit basis of attorney discipline in Business and Professions Code Section 6106.3 seems to strike the appropriate balance between these competing interests for two persuasive reasons. First, Section 2944.7, even taken alone, already appears to be the strongest law prohibiting attorney foreclosure rescue fraud in the United States. While there are a plethora of federal and state laws that address foreclosure rescue fraud, all of which include attorney exemptions. (See, e.g., 12 CFR Section 1015.7 [“An attorney is exempt from this part, with the exception of Section 1015.5, if the attorney….”], New Jersey Statutes Section 46:10B-54 [“‘Foreclosure consultant’…shall not include…a person licensed to practice law in this State while acting under the authority of that license….”], Colorado Revised Statutes Section 6-1-1103 [‘Foreclosure consultant’ does not include…[a] person licensed to practice law in this state while performing any activity related to the person’s attorney-client relationship with a home owner….].) None of these exemptions are backstopped by prohibitions of the kind currently in Civil Code Section 2944.7.

The second point—one acknowledged by the State Bar itself—is that attorney violations of Civil Code Section 2944.7 can be prosecuted by its Office of Chief Trial Counsel under Business and Professions Code Section 6068 (a). While such a prosecution may be more difficult than if Civil Code Section 2944.7 were once again explicitly made cause for attorney discipline, this additional hurdle also requires OCTC to examine the details of the particular alleged violation in order to distinguish actual malefactors from attorneys representing clients in good faith.

The Committee acknowledges the inconsistency pointed out by the State Bar, that violations of Section 2944.6 remain explicit cause for attorney discipline under the Business and Professions Code, while violations of Section 2944.7 do not. The solution to this contradiction is not to re-insert Section 2944.7 as cause for discipline, thereby once again leading to overinclusive prosecution by the State Bar and clients in need of HBOR representation being unable to retain attorneys. Rather, the solution is to establish a more nuanced regulatory scheme in this area. The demands of the present legislative session, shortened as it has been by the pandemic, preclude such a solution at this time. Nevertheless, Committee staff is committed to working with the author’s office, the State Bar, and attorneys practicing in this area in an effort to resolve these contradictions and find a way to protect the public from attorneys who are acting in bad faith, without chilling the desire of attorneys to take on these cases in good faith and assist clients seeking foreclosure relief.

ARGUMENTS IN SUPPORT: The California Apartment Association celebrates the author’s efforts to protect small landlords:

We appreciate your work to expand the protections of the Homeowner Bill of Rights, especially for mom and pop landlords who can be exposed to these scams during times of economic crises. SB 1447 will help to ensure that they keep their housing and keep their tenants in place. You are taking the important steps needed to prevent unscrupulous servicers and other third parties from interfering with a homeowner’s ability to manage their mortgage debt successfully.

Consumer Reports recognizes the need to broaden the definition of “foreclosure consultant”:

The bill would also expand protections in the foreclosure consultant law (SB 94) passed after the last financial crisis to prevent unscrupulous foreclosure consultants from marketing expensive services to homeowners falling behind on their mortgages. The law bans advance fees and requires company registration with the Department of Justice; however, it currently only covers services marketed to borrowers already in delinquency. SB 1447 would apply these requirements to companies offering to help stop or postpone delinquency, so that homeowners still in forbearance are also protected.

REGISTERED SUPPORT / OPPOSITION:

Support

California Apartment Association

Center for Responsible Lending

Consumer Reports

Housing and Economic Rights Advocates

Opposition

None on file

Analysis Prepared by: Jith Meganathan / JUD. / (916) 319-2334

 THIRD READING  

Bill No: SB 1447

Author: Bradford (D)

Amended: 5/5/20

Vote: 21

SENATE BANKING & F.I. COMMITTEE: 7-0, 5/19/20

AYES: Bradford, Chang, Caballero, Dahle, Durazo, Hueso, Portantino

SUBJECT: Mortgages and deeds of trust: foreclosure

SOURCE: Author

DIGEST:

This bill expands Homeowner Bill of Rights protections to homeowners who rent their properties out to tenants, as specified; re-enacts a provision of California’s advance fee ban that had been allowed to sunset; and expands California’s foreclosure consultant law to cover actions taken to prevent foreclosure prior to a mortgage delinquency.

ANALYSIS:

Existing law:

1. Provides a series of protections for homeowners, collectively known as the Homeowner Bill of Rights (HBOR), which are intended to prevent avoidable foreclosures on owner-occupied principal residences. Provisions of HBOR apply to first lien mortgages and deeds of trust secured by owner-occupied residential real property containing no more than four dwelling units. A nonexhaustive list of the provisions of HBOR include the following:
   1. Prohibits servicers from recording a notice of default (NOD) until at least 30 days after making contact with a borrower to discuss options for avoiding foreclosure or undertaking due diligence, as specified, to make borrower contact (Civil Code Section 2923.5).
   2. Requires servicers to provide a written notice to borrowers informing them that they may request specified account documentation regarding their mortgages and that they may be eligible for protections under the federal Servicemembers’ Civil Relief Act (Civil Code Section 2923.55).
   3. Contains prescriptive, anti-dual tracking provisions prohibiting servicers from taking the next step in the foreclosure process while a complete loan modification application is pending or is under appeal. Allows borrowers to re-apply for a foreclosure prevention alternative following a documented, material change in their financial circumstances. Provides specified timelines for the acceptance of loan modification offers by borrowers. Requires servicers to include specified information in their denial notices. Requires servicers to allow borrowers to appeal loan modification denials. Requires borrowers to submit their final first lien loan modification applications at least five business days before a scheduled foreclosure sale in order to be eligible for HBOR protections (Civil Code Sections 2923.6, 2924.11, and 2924.18).
   4. Requires servicers to notify borrowers in writing whenever a foreclosure sale is postponed for more than ten days (Civil Code Section 2924).
   5. Requires servicers to provide a written notice to borrowers within five business days following recordation of a NOD, advising them of foreclosure prevention alternatives and outlining the loss mitigation process (Civil Code Section 2924.9).
   6. Requires servicers to assign a single point of contact (SPOC) to any borrower who requests a foreclosure prevention alternative. The SPOC is either an individual or a team of personnel, each of whom has the ability and authority to undertake several responsibilities specified in statute, and each of whom is knowledgeable about the borrower’s situation and current status in the loss mitigation process. The requirement to offer a SPOC concludes when the servicer determines that all loss mitigation options offered by or through that servicer have been exhausted, or when the borrower’s account becomes current (Civil Code Section 2923.7).
   7. Requires servicers to acknowledge receipt of every document submitted by a borrower in connection with their application for a foreclosure prevention alternative, identify any missing items, and provide borrowers with the deadline by which the missing items must be submitted (Civil Code Section 2924.10).
   8. Prohibits servicers from charging application, processing or other fees to borrowers who apply for foreclosure prevention alternatives. Prohibits servicers from charging late fees while they are reviewing loan modification applications or appeals or receiving timely payments under a modified loan. Requires servicers that approve borrowers for a permanent foreclosure prevention alternative to provide borrowers with a fully executed copy of that agreement. Requires servicers to rescind the NOD and cancel any pending trustee’s sale once a borrower executes a permanent foreclosure prevention alternative. (Civil Code Section 2924.11).
   9. Requires a servicer, before recording any one of several different types of documents that are required in the context of nonjudicial foreclosures, to ensure that it has reviewed competent and reliable evidence to substantiate the borrower’s default and the servicer’s right to foreclose. Requires all foreclosure-related documents recorded by or on behalf of a mortgage servicer must be accurate and complete and supported by competent and reliable evidence (Civil Code Section 2924.17).
   10. Authorizes state regulators to enforce violations of the aforementioned rules as violations of state lending laws. Authorizes private rights of action for material violations of the aforementioned requirements that go uncorrected by a servicer. Authorizes borrowers to bring actions for injunctive relief prior to the completion of a trustee sale and for actual economic damages following a trustee sale. Successful plaintiffs, defined as those who receive injunctive relief or are awarded damages, are also entitled to reasonable attorney’s fees and costs (Civil Code Section 2924.12).
2. Provides for the following, pursuant to SB 94 (Calderon, Chapter 630, Statutes of 2009), and subsequent legislation making the provisions of SB 94 permanent:
   1. Makes it unlawful for any person who negotiates, attempts to negotiate, arranges, attempts to arrange, or otherwise offers to perform a mortgage loan modification or other form of mortgage loan forbearance for a fee or other compensation paid by the borrower, to do any of the following in connection with a mortgage or deed of trust secured by residential real property containing four or fewer dwelling units (Civil Code Section 2944.7 and Business and Professions Code Section 10085.6):
      1. Claim, demand, charge, collect, or receive any compensation until after the person has fully performed each and every service the person contracted to perform or represented that they would perform.
      2. Take any wage assignment, any lien of any type on real or personal property, or other security to secure the payment of compensation.
      3. Take any power of attorney from the borrower for any purpose.
   2. Requires any person who negotiates, attempts to negotiate, arranges, attempts to arrange, or otherwise offers to perform a mortgage loan modification or other form of mortgage loan forbearance for a fee or other compensation paid by the borrower, to provide the following to the borrower, as a separate statement, in not less than 14-point bold type, prior to entering into any fee agreement with the borrower (Civil Code Section 2944.6 and Business and Professions Code Section 10147.6):

“It is not necessary to pay a third party to arrange for a loan modification or other form of forbearance from your mortgage lender or servicer. You may call your lender directly to ask for a change in your loan terms. Nonprofit housing counseling agencies also offer these and other forms of borrower assistance free of charge. A list of nonprofit housing counseling agencies approved by the United States Department of Housing and Urban Development (HUD) is available from your local HUD office or by visiting www.hud.gov.”

• 1. Provides that if loan modification or other mortgage loan forbearance services are offered or negotiated in one of the languages set forth in Civil Code Section 1632, a translated copy of the aforementioned statement must be provided to the borrower in that foreign language (Civil Code Section 2944.6 and Business and Professions Code Section 10147.6).
  2. Provides that a violation of Civil Code Section 2944.6 by an attorney constitutes cause for the imposition of discipline against that attorney under the State Bar Act.

1. Regulates mortgage foreclosure consultants pursuant to Article 1.5 of Chapter 2 of Title 14 of Part 4 of Division 3 of the Civil Code (Civil Code Section 2945 et seq.), as follows:
   1. Contains findings and declarations that homeowners whose residences are in foreclosure are subject to fraud, deception, harassment, and unfair dealing by foreclosure consultants from the time a NOD is recorded until a foreclosure sale is concluded (Civil Code Section 2945).
   2. Defines a foreclosure consultant as any person who makes any solicitation, representation, or offer to any homeowner to perform for compensation, or who, for compensation, performs any service which the person in any manner represents will stop or postpone a foreclosure sale, obtain any forbearance from any beneficiary or mortgagee (i.e., from a lender or servicer), help a homeowner reinstate their ownership of a property, obtain a waiver of an acceleration clause contained in a promissory note secured by a mortgage or deed of trust, help a homeowner obtain a loan or advance of funds, or avoid or mitigate the impairment of a homeowner’s credit resulting from the recordation of a NOD or the completion of a foreclosure sale (Civil Code Section 2945.1).
   3. Exempts a variety of professionals from the definition of a foreclosure consultant, including attorneys, as specified; real estate licensees; depository institutions; finance lenders; residential mortgage lenders; proraters; accountants; and persons acting under the express authority of the federal government. These exemptions have the effect of subjecting the exempt entities to the provisions of SB 94, described above (Civil Code Section 2945.1).
   4. Requires foreclosure consultants to register with the Department of Justice (Civil Code Section 2945.45) and prohibits foreclosure consultants from doing any of the following (Civil Code Section 2945.4):
      1. Claiming, demanding, charging, collecting, or receiving any compensation until after they have fully performed each and every service they have contracted to perform or represented they would perform, as specified.
      2. Taking any wage assignment, any lien of any type on real or personal property, or other security to secure the payment of compensation.
      3. Acquiring any interest in a residence in foreclosure from a homeowner with whom the foreclosure consultant has contracted.
      4. Taking any power of attorney from a homeowner for any purpose.
      5. Entering into an agreement to help the homeowner secure the release of surplus funds following a foreclosure sale, as specified.
   5. Specifies the wording of contracts used by foreclosure consultants; requires these contracts to be translated into the same language used by the consultant to describe his or her services, as specified; and provides individuals five days in which to rescind a contract with a foreclosure consultant (Civil Code Sections 2945.2 and 2945.3).

This bill:

1. Extends HBOR protections, from January 1, 2021 until January 1, 2023, to first lien mortgages and deeds of trust on properties secured by tenant-occupied residential real property containing no more than four dwelling units.
   1. To qualify for HBOR relief, all of the following conditions must be met:
      1. The property must be owned by an individual who owns no more than three residential real properties, each of which contains no more than four dwelling units.
      2. The property must have been occupied by a tenant pursuant to a lease entered into pursuant to an arm’s length transaction, as defined, prior to and in effect on March 4, 2020 (the date of the State of Emergency declared by Governor Newsom in response to the novel coronavirus).
      3. The tenant occupying the property must have been unable to pay rent due to a reduction in income resulting from the novel coronavirus.
   2. Relief is available as long as the property remains the principal residence of a tenant pursuant to a lease entered into in an arm’s length transaction, as defined.
2. Provides that a violation of Civil Code Section 2944.7 by an attorney constitutes cause for the imposition of discipline against that attorney under the State Bar Act.
3. Amends the foreclosure consultant law to cover situations where an economic crisis threatens the ability of a homeowner to afford their mortgage payments, as follows:
   1. Amends the findings and declarations to recognize that a homeowner whose residence is not yet in foreclosure is at risk of harm from foreclosure consultants from the time an economic crisis threatens that homeowner’s ability to afford their mortgage payments.
   2. Amends the definition of a foreclosure consultant to add the act of stopping or postponing a delinquency on a mortgage or deed of trust.

Background

This bill has three provisions, each of which is discussed below.

HBOR Expansion. In 2012, California enacted a comprehensive set of protections for homeowners, which were intended to prevent avoidable foreclosures on owner-occupied principal residences [HBOR; AB 278 (Eng et al., Chapter 86, Statutes of 2012) and SB 900 (Leno et al., Chapter 87, Statutes of 2012)]. California made those provisions permanent in 2018 [SB 818 (Beall, Chapter 404, Statutes of 2018)]. Those provisions should offer California homeowners protection against avoidable foreclosures on their principal residences, if the COVID-19 mortgage relief provided at the state and federal level fails to prevent these homeowners from becoming delinquent on their mortgages. However, existing California law will not provide needed relief to individuals who own investment properties that they rent out to tenants, if those tenants’ inability to afford their rent payments forces the property owners into mortgage delinquency. Lack of foreclosure protections for owners of rental properties could force tenants onto the streets, if the owners of the homes those tenants are occupying are foreclosed upon.

The provisions of SB 1447 are drafted in a manner intended to keep roofs over tenants’ heads while also minimizing the potential for abuse of the mortgage relief. This bill is limited to individuals who own three or fewer residential properties, to focus on mom-and-pop landlords. In order to qualify for relief, a landlord must have had a tenant in the property paying market rate rent as of the date the State of Emergency was declared by Governor Newsom (March 4, 2020), that tenant must have been unable to pay their rent due to a reduction in income related to the novel coronavirus, and the landlord must continue renting the home out while he or she seeks HBOR relief from foreclosure. Notably, this bill does not require that the tenant who occupied the property as of March 4, 2020, continue living in the property in order for a homeowner to claim relief. Relief is available as long as the property is occupied by a tenant subject to an arms’ length lease. The arms’ length lease requirement is intended to minimize the potential for a homeowner to request relief on a home that is unoccupied or is occupied by a squatter.

Restoring All of the Protections in SB 94 from 2009 (Advance Fee Ban). In 2009, California led the nation by prohibiting people who offer to help individuals obtain loan modifications or other forms of mortgage relief from collecting money up front for their services [SB 94 (Calderon, Chapter 630, Statutes of 2009)].  SB 94 requires anyone seeking payment for helping a homeowner avoid foreclosure to perform all of the services they are contractually obligated to perform before they may seek payment from the homeowner.  Most of that original law is still on the books, but one provision, which expressly allows the State Bar to sanction an attorney who violates the advance fee ban, ended up sunsetting due to chaptering issues. This bill restores the sunsetted provision, ensuring that the entirety of SB 94 is permanently restored.

Restoring the sunsetted provision is intended to make it easier for the State Bar to bring disciplinary action against attorneys who violate the advance fee ban. According to policy committee analyses of SB 980 (Vargas) from 2012, during the depths of the foreclosure crisis, the State Bar received over 8,600 complaints alleging misconduct in loan modification matters, resulting in investigations of nearly 800 attorneys, and the imposition of discipline against over 110 of them. One of the key lessons learned during the 2007 to 2009 time period is that it is far easier to proactively put rules in place intended to prevent fraud than it is to stop fraud once it is prevalent.

Expanding the Foreclosure Consultant Law to Cover Actions Taken to Prevent Foreclosure Prior to a Borrower Delinquency. In 2008, AB 180 (Bass, Chapter 278, Statutes of 2008) added extensive new consumer protections to California’s mortgage foreclosure consultant law and, among its provisions, required persons wishing to engage in business as mortgage foreclosure consultants to register with the California Department of Justice. However, California’s existing foreclosure consultant law only applies once a mortgage is in delinquency; it fails to cover the period of time during a financial hardship, before that hardship leads to a mortgage delinquency. Most of the federal and state homeowner relief announced in response to COVID-19 includes mortgage forbearance, which technically keeps borrowers out of delinquency. Because homeowners who have been provided mortgage forbearance from their servicers are not considered delinquent, they could be preyed upon by unscrupulous individuals not covered by California’s foreclosure consultant law. SB 1447 closes that loophole.

FISCAL EFFECT: Appropriation: No Fiscal Com.: No Local: No

SUPPORT: (Verified 5/19/20)

Center for Responsible Lending

Consumer Reports

Housing and Economic Rights Advocates

OPPOSITION: (Verified 5/19/20)

None received

ARGUMENTS IN SUPPORT: Housing and Economic Rights Advocates (HERA) writes that “At HERA, we have seen a resurgence of foreclosure rescue scams over the last several years as the homeowner and small property owner population ages and becomes more vulnerable financially, physically and emotionally. Small owners at any age are vulnerable with the expense of a mortgage and fluctuations in cashflow....We are in danger of seeing affordable rental housing lost to foreclosure in our state en masse which includes single family homes, duplexes, triplexes, and four-plexes. SB 1447 takes a significant, necessary step towards giving owners a chance to prevent this loss.”

Prepared by: Eileen Newhall / B. & F.I. /

5/21/20 10:08:43

**** END ****

SENATE COMMITTEE ON

BANKING AND FINANCIAL INSTITUTIONS

Senator Steven Bradford, Chair

2019 - 2020 Regular

Bill No: Hearing Date: May 19, 2020

Subject:

SUMMARY

This bill expands Homeowner Bill of Rights protections to homeowners who rent their properties out to tenants, as specified; re-enacts a provision of California’s advance fee ban that had been allowed to sunset; and expands California’s foreclosure consultant law to cover actions taken to prevent foreclosure prior to a mortgage delinquency.

EXISTING LAW

1. Provides a series of protections for homeowners, collectively known as the Homeowner Bill of Rights (HBOR), which are intended to prevent avoidable foreclosures on owner-occupied principal residences. Provisions of HBOR apply to first lien mortgages and deeds of trust secured by owner-occupied residential real property containing no more than four dwelling units. A nonexhaustive list of the provisions of HBOR include the following:
   
   1. Prohibits servicers from recording a notice of default (NOD) until at least 30 days after making contact with a borrower to discuss options for avoiding foreclosure or undertaking due diligence, as specified, to make borrower contact (Civil Code Section 2923.5).
      
   2. Requires servicers to provide a written notice to borrowers informing them that they may request specified account documentation regarding their mortgages and that they may be eligible for protections under the federal Servicemembers’ Civil Relief Act (Civil Code Section 2923.55).
      
   3. Contains prescriptive, anti-dual tracking provisions prohibiting servicers from taking the next step in the foreclosure process while a complete loan modification application is pending or is under appeal. Allows borrowers to re-apply for a foreclosure prevention alternative following a documented, material change in their financial circumstances. Provides specified timelines for the acceptance of loan modification offers by borrowers. Requires servicers to include specified information in their denial notices. Requires servicers to allow borrowers to appeal loan modification denials. Requires borrowers to submit their final first lien loan modification applications at least five business days before a scheduled foreclosure sale in order to be eligible for HBOR protections (Civil Code Sections 2923.6, 2924.11, and 2924.18).
      
   4. Requires servicers to notify borrowers in writing whenever a foreclosure sale is postponed for more than ten days (Civil Code Section 2924).
      
   5. Requires servicers to provide a written notice to borrowers within five business days following recordation of a NOD, advising them of foreclosure prevention alternatives and outlining the loss mitigation process (Civil Code Section 2924.9).
      
   6. Requires servicers to assign a single point of contact (SPOC) to any borrower who requests a foreclosure prevention alternative. The SPOC is either an individual or a team of personnel, each of whom has the ability and authority to undertake several responsibilities specified in statute, and each of whom is knowledgeable about the borrower’s situation and current status in the loss mitigation process. The requirement to offer a SPOC concludes when the servicer determines that all loss mitigation options offered by or through that servicer have been exhausted, or when the borrower’s account becomes current (Civil Code Section 2923.7).
      
   7. Requires servicers to acknowledge receipt of every document submitted by a borrower in connection with their application for a foreclosure prevention alternative, identify any missing items, and provide borrowers with the deadline by which the missing items must be submitted (Civil Code Section 2924.10).
      
   8. Prohibits servicers from charging application, processing or other fees to borrowers who apply for foreclosure prevention alternatives. Prohibits servicers from charging late fees while they are reviewing loan modification applications or appeals or receiving timely payments under a modified loan. Requires servicers that approve borrowers for a permanent foreclosure prevention alternative to provide borrowers with a fully executed copy of that agreement. Requires servicers to rescind the NOD and cancel any pending trustee’s sale once a borrower executes a permanent foreclosure prevention alternative. (Civil Code Section 2924.11).
      
   9. Before recording any one of several different types of documents that are required in the context of nonjudicial foreclosures, requires a servicer to ensure that it has reviewed competent and reliable evidence to substantiate the borrower’s default and the servicer’s right to foreclose. Requires all foreclosure-related documents recorded by or on behalf of a mortgage servicer must be accurate and complete and supported by competent and reliable evidence (Civil Code Section 2924.17).
      
   10. Authorizes state regulators to enforce violations of the aforementioned rules as violations of state lending laws. Authorizes private rights of action for material violations of the aforementioned requirements that go uncorrected by a servicer. Authorizes borrowers to bring actions for injunctive relief prior to the completion of a trustee sale and for actual economic damages following a trustee sale. Successful plaintiffs, defined as those who receive injunctive relief or are awarded damages, are also entitled to reasonable attorney’s fees and costs (Civil Code Section 2924.12).
2. Pursuant to SB 94 (Calderon), Chapter 630, Statutes of 2009, and subsequent legislation making the provisions of SB 94 permanent:
   
   1. Makes it unlawful for any person who negotiates, attempts to negotiate, arranges, attempts to arrange, or otherwise offers to perform a mortgage loan modification or other form of mortgage loan forbearance for a fee or other compensation paid by the borrower, to do any of the following in connection with a mortgage or deed of trust secured by residential real property containing four or fewer dwelling units (Civil Code Section 2944.7 and Business and Professions Code Section 10085.6):
      
      1. Claim, demand, charge, collect, or receive any compensation until after the person has fully performed each and every service the person contracted to perform or represented that they would perform.
         
      2. Take any wage assignment, any lien of any type on real or personal property, or other security to secure the payment of compensation.
         
      3. Take any power of attorney from the borrower for any purpose.
         
   2. Requires any person who negotiates, attempts to negotiate, arranges, attempts to arrange, or otherwise offers to perform a mortgage loan modification or other form of mortgage loan forbearance for a fee or other compensation paid by the borrower, to provide the following to the borrower, as a separate statement, in not less than 14-point bold type, prior to entering into any fee agreement with the borrower (Civil Code Section 2944.6 and Business and Professions Code Section 10147.6):
      
      “It is not necessary to pay a third party to arrange for a loan modification or other form of forbearance from your mortgage lender or servicer. You may call your lender directly to ask for a change in your loan terms. Nonprofit housing counseling agencies also offer these and other forms of borrower assistance free of charge. A list of nonprofit housing counseling agencies approved by the United States Department of Housing and Urban Development (HUD) is available from your local HUD office or by visiting www.hud.gov.”
      
   3. Provides that if loan modification or other mortgage loan forbearance services are offered or negotiated in one of the languages set forth in Civil Code Section 1632, a translated copy of the aforementioned statement must be provided to the borrower in that foreign language (Civil Code Section 2944.6 and Business and Professions Code Section 10147.6).
      
   4. Provides that a violation of Civil Code Section 2944.6 by an attorney constitutes cause for the imposition of discipline against that attorney under the State Bar Act.
      
3. Regulates mortgage foreclosure consultants pursuant to Article 1.5 of Chapter 2 of Title 14 of Part 4 of Division 3 of the Civil Code (Civil Code Section 2945 et seq.), as follows:
   
   1. Contains findings and declarations that homeowners whose residences are in foreclosure are subject to fraud, deception, harassment, and unfair dealing by foreclosure consultants from the time a NOD is recorded until a foreclosure sale is concluded (Civil Code Section 2945).
      
   2. Defines a foreclosure consultant as any person who makes any solicitation, representation, or offer to any homeowner to perform for compensation, or who, for compensation, performs any service which the person in any manner represents will stop or postpone a foreclosure sale, obtain any forbearance from any beneficiary or mortgagee (i.e., from a lender or servicer), help a homeowner reinstate their ownership of a property, obtain a waiver of an acceleration clause contained in a promissory note secured by a mortgage or deed of trust, help a homeowner obtain a loan or advance of funds, or avoid or mitigate the impairment of a homeowner’s credit resulting from the recordation of a NOD or the completion of a foreclosure sale (Civil Code Section 2945.1).
      
   3. Exempts a variety of professionals from the definition of a foreclosure consultant, including attorneys, as specified; real estate licensees; depository institutions; finance lenders; residential mortgage lenders; proraters; accountants; and persons acting under the express authority of the federal government. These exemptions have the effect of subjecting the exempt entities to the provisions of SB 94, described above (Civil Code Section 2945.1).
      
   4. Requires foreclosure consultants to register with the Department of Justice (Civil Code Section 2945.45) and prohibits foreclosure consultants from doing any of the following (Civil Code Section 2945.4):
      
      1. Claiming, demanding, charging, collecting, or receiving any compensation until after they have fully performed each and every service they have contracted to perform or represented they would perform, as specified.
         
      2. Taking any wage assignment, any lien of any type on real or personal property, or other security to secure the payment of compensation.
         
      3. Acquiring any interest in a residence in foreclosure from a homeowner with whom the foreclosure consultant has contracted.
         
      4. Taking any power of attorney from a homeowner for any purpose.
         
      5. Entering into an agreement to help the homeowner secure the release of surplus funds following a foreclosure sale, as specified.
         
   5. Specifies the wording of contracts used by foreclosure consultants; requires these contracts to be translated into the same language used by the consultant to describe his or her services, as specified; and provides individuals five days in which to rescind a contract with a foreclosure consultant (Civil Code Sections 2945.2 and 2945.3).

THIS BILL

1. From January 1, 2021 until January 1, 2023, extends HBOR protections to first lien mortgages and deeds of trust on properties secured by tenant-occupied residential real property containing no more than four dwelling units.
   
   1. To qualify for HBOR relief, all of the following conditions must be met:
      
      1. The property must be owned by an individual who owns no more than three residential real properties, each of which contains no more than four dwelling units.
         
      2. The property must have been occupied by a tenant pursuant to a lease entered into pursuant to an arm’s length transaction, as defined, prior to and in effect on March 4, 2020 (the date of the State of Emergency declared by Governor Newsom in response to the novel coronavirus).
         
      3. The tenant occupying the property must have been unable to pay rent due to a reduction in income resulting from the novel coronavirus.
         
   2. Relief is available as long as the property remains the principal residence of a tenant pursuant to a lease entered into in an arm’s length transaction, as defined.
      
2. Provides that a violation of Civil Code Section 2944.7 by an attorney constitutes cause for the imposition of discipline against that attorney under the State Bar Act.
   
3. Amends the foreclosure consultant law to cover situations where an economic crisis threatens the ability of a homeowner to afford their mortgage payments, as follows:
   
   1. Amends the findings and declarations to recognize that a homeowner whose residence is not yet in foreclosure is at risk of harm from foreclosure consultants from the time an economic crisis threatens that homeowner’s ability to afford their mortgage payments.
      
   2. Amends the definition of a foreclosure consultant to add the act of stopping or postponing a delinquency on a mortgage or deed of trust.
      

COMMENTS

1. Purpose: This bill is sponsored by the author as a direct response to the economic disruption caused by the COVID-19 pandemic. It is intended to provide protections against foreclosure for mom-and-pop landlords who may be experiencing income disruption due to the virus and close loopholes that could allow unscrupulous individuals to prey on scared and desperate homeowners.
   
2. Background and Discussion: This bill has three provisions, each of which is discussed below.
   
   1. HBOR Expansion. In 2012, California enacted a comprehensive set of protections for homeowners, which were intended to prevent avoidable foreclosures on owner-occupied principal residences (HBOR; AB 278, Eng et al., Chapter 86, Statutes of 2012 and SB 900, Leno et al., Chapter 87, Statutes of 2012). California made those provisions permanent in 2018 (SB 818, Beall, Chapter 404, Statutes of 2018). Those provisions should offer California homeowners protection against avoidable foreclosures on their principal residences, if the COVID-19 mortgage relief provided at the state and federal level fails to prevent these homeowners from becoming delinquent on their mortgages. However, existing California law will not provide needed relief to individuals who own investment properties that they rent out to tenants, if those tenants’ inability to afford their rent payments forces the property owners into mortgage delinquency. Lack of foreclosure protections for owners of rental properties could force tenants onto the streets, if the owners of the homes those tenants are occupying are foreclosed upon.
      
      The provisions of SB 1447 are drafted in a manner intended to keep roofs over tenants’ heads while also minimizing the potential for abuse of the mortgage relief. The bill is limited to individuals who own three or fewer residential properties, to focus on mom-and-pop landlords. In order to qualify for relief, a landlord must have had a tenant in the property paying market rate rent as of the date the State of Emergency was declared by Governor Newsom (March 4, 2020), that tenant must have been unable to pay their rent due to a reduction in income related to the novel coronavirus, and the landlord must continue renting the home out while he or she seeks HBOR relief from foreclosure. Notably, the bill does not require that the tenant who occupied the property as of March 4, 2020 continue living in the property in order for a homeowner to claim relief. Relief is available as long as the property is occupied by a tenant subject to an arms’ length lease. The arms’ length lease requirement is intended to minimize the potential for a homeowner to request relief on a home that is unoccupied or is occupied by a squatter.
      
   2. Restoring All of the Protections in SB 94 from 2009 (Advance Fee Ban). In 2009, California led the nation by prohibiting people who offer to help individuals obtain loan modifications or other forms of mortgage relief from collecting money up front for their services (SB 94, Calderon, Chapter 630, Statutes of 2009).  SB 94 requires anyone seeking payment for helping a homeowner avoid foreclosure to perform all of the services they are contractually obligated to perform before they may seek payment from the homeowner.  Most of that original law is still on the books, but one provision, which expressly allows the State Bar to sanction an attorney who violates the advance fee ban, ended up sunsetting due to chaptering issues. This bill restores the sunsetted provision, ensuring that the entirety of SB 94 is permanently restored.
      
      Restoring the sunsetted provision is intended to make it easier for the State Bar to bring disciplinary action against attorneys who violate the advance fee ban. According to policy committee analyses of SB 980 (Vargas) from 2012, during the depths of the foreclosure crisis, the State Bar received over 8,600 complaints alleging misconduct in loan modification matters, resulting in investigations of nearly 800 attorneys, and the imposition of discipline against over 110 of them. One of the key lessons learned during the 2007 to 2009 time period is that it is far easier to proactively put rules in place intended to prevent fraud than it is to stop fraud once it is prevalent.
      
   3. Expanding the Foreclosure Consultant Law to Cover Actions Taken to Prevent Foreclosure Prior to a Borrower Delinquency. In 2008, AB 180 (Bass), Chapter 278, Statutes of 2008 added extensive new consumer protections to California’s mortgage foreclosure consultant law and, among its provisions, required persons wishing to engage in business as mortgage foreclosure consultants to register with the California Department of Justice. However, California’s existing foreclosure consultant law only applies once a mortgage is in delinquency; it fails to cover the period of time during a financial hardship, before that hardship leads to a mortgage delinquency. Most of the federal and state homeowner relief announced in response to COVID-19 includes mortgage forbearance, which technically keeps borrowers out of delinquency. Because homeowners who have been provided mortgage forbearance from their servicers are not considered delinquent, they could be preyed upon by unscrupulous individuals not covered by California’s foreclosure consultant law. SB 1447 closes that loophole.
      
3. This Bill Would Have Been Double-Referred: Due to the COVID-19 Pandemic and the unprecedented nature of the 2020 Legislative Session, all Senate policy committees are working under a compressed timeline. This timeline does not allow this bill to be referred to and heard by more than one committee, as a typical timeline would allow. In order to fully vet the contents of this measure for the benefit of Senators and the public, Committee staff reached out to Senate Judiciary Committee staff to seek their input on the measure. The analysis above incorporates input provided by Senate Judiciary Committee staff.
   
4. Support:
   
   1. Housing and Economic Rights Advocates (HERA) writes that “At HERA, we have seen a resurgence of foreclosure rescue scams over the last several years as the homeowner and small property owner population ages and becomes more vulnerable financially, physically and emotionally. Small owners at any age are vulnerable with the expense of a mortgage and fluctuations in cashflow....We are in danger of seeing affordable rental housing lost to foreclosure in our state en masse which includes single family homes, duplexes, triplexes, and four-plexes. SB 1477 takes a significant, necessary step towards giving owners a chance to prevent this loss.”
      
   2. Consumer Reports echoes those comments and observes, “It is crucial to ensure that homeowners can manage their mortgages effectively during the crisis, to protect them as well as the tenants who rely on them for housing...At a time of grave stress and uncertainty for homeowners, it is imperative that the Legislature take decisive action to prevent servicers and other third parties from interfering with a homeowner’s ability to manage their mortgage debt.”
      
   3. The Center for Responsible Lending echoes the comments of HERA and Consumer Reports and adds, “Policymakers must ensure that they are proactive in making sure unscrupulous individuals cannot take advantage of homeowners who are at risk of predatory activity and scams when they are seeking assistance against foreclosure. We are glad to see that SB 1447 also takes steps to address this issue.”
5. Opposition: None received.
   
6. Prior and Related Legislation:
   
   1. AB 278, Eng et al., Chapter 86, Statutes of 2012 and SB 900, Leno et al., Chapter 87, Statutes of 2012: Enacted the original version of HBOR, which contained some permanent protections and other protections that sunset on January 1, 2018.
      
   2. SB 818 (Beall), Chapter 404, Statutes of 2018, reenacted and made permanent all of the HBOR provisions that had sunsetted on January 1, 2018, and made additional changes, including automatically assigning a SPOC to any homeowner who requests a foreclosure prevention alternative and requiring a borrower to submit his or her complete application for a first lien loan modification at least five business days before a scheduled foreclosure sale in order to be eligible for HBOR protections.
      
   3. SB 94 (Calderon), Chapter 630, Statutes of 2009 prohibited persons who offer to help individuals obtain loan modifications or other forms of mortgage relief from collecting money up front for their services and instead required them to perform all of the services they were contractually obligated to perform before they could seek payment from the homeowner. Some provisions of SB 94 were permanent; others, including Civil Code Section 2944.7 and the application of Business and Professions Code Section 6106.3 to violations of Civil Code Section 2944.7 by attorneys, sunsetted January 1, 2013.
      
   4. SB 980 (Vargas), Chapter 563, Statutes of 2012 extended the sunset date on the changes in Civil Code Section 2944.7 and Business and Professions Code Section 6106.3 to January 1, 2017.
      
   5. AB 1950 (Davis), Chapter 569, Statutes of 2012 made Civil Code Section 2944.7 permanent but failed to make permanent the parallel change to Business and Professions Code Section 6106.3. That provision was allowed to sunset on January 1, 2017.
      
   6. AB 180 (Bass), Chapter 278, Statutes of 2008 added extensive new consumer protections to California’s mortgage foreclosure consultant law and, among its provisions, required persons wishing to engage in business as mortgage foreclosure consultants to register with the California Department of Justice.
      

LIST OF REGISTERED SUPPORT/OPPOSITION

Support

Center for Responsible Lending

Consumer Reports

Housing and Economic Rights Advocates

Opposition

None received

-- END --