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Financial Services Law Insights and Observations

California Enacts Law Prohibiting Up-Front Fees for Foreclosure Relief Services

State Issues

On October 11, California Governor Arnold Schwarzenegger signed into law S.B. 94, a bill that, until January 1, 2013, prohibits any person who offers to perform residential mortgage loan modifications or other forms of mortgage loan forbearance for compensation paid by a borrower from (i) demanding or receiving any pre-performance compensation, (ii) requiring any security as collateral for final compensation, or (iii) taking a power of attorney from a borrower. A violation of these prohibitions constitutes a misdemeanor or is subject to specified fines. The new law does not apply to certain actions taken by a person who offers loan modification or other loan forbearance services for a loan owned or serviced by that person, including, but not limited to, collecting principal, interest, or other charges under the terms of a loan before the loan is modified, including charges to establish a new payment schedule for a non-delinquent loan. The new law also requires any person who offers to perform residential mortgage loan modifications or other forms of mortgage loan forbearance, as specified, for compensation paid by a borrower, to provide a specified 14-point bold type statement regarding loan modification fees, and makes a violation of this prohibition a misdemeanor or subject to specified fines. Lastly, the new law adds to the California Finance Lenders Law a prohibition on making a materially false or misleading statement or representation to a borrower about the terms or conditions of that borrower’s loan, when making or brokering a loan. The new law became effective immediately upon signing.

The court evaluated each of the plaintiff’s claims in the context of a motion to dismiss filed by the defendant and a motion for leave to file a second amended complaint filed by the plaintiff. With respect to the plaintiff’s claims that the defendant violated FCRA’s adverse action provisions by furnishing inaccurate credit information concerning the plaintiff to CRAs and by failing to notify the plaintiff of the adverse action, the court held that the plain language of FCRA expressly reserves the right to enforce FCRA’s adverse action provisions to state and federal agencies. However, the court explained that FCRA does provide a private right of action with respect to § 1681-2(b), which sets forth a furnisher of information’s duty to reinvestigate disputed information upon receipt of a notice of dispute from a CRA. Accordingly, the court dismissed each of the plaintiff’s FCRA claims, with the exception of the plaintiff’s claim stated pursuant to § 1681s-2(b).

Additionally, the court did not dismiss the plaintiff’s claim that the defendant violated the CCCRA by providing information concerning the plaintiff to CRAs that the defendant knew or should have known was inaccurate, holding that FCRA does not preempt a plaintiff’s private right of action to enforce the CCCRA. However, the court dismissed the plaintiff’s claim that the defendant violated the CCCRA by failing to notify her that it had reported negative information to CRAs, noting that the defendant, as an insurance company, was expressly exempt from the requirement. Finally, the court found that the plaintiff’s allegation of defamation with malice overcame FCRA’s qualified preemption of state law defamation claims.