A California Senate bill intended to pressure mortgage lenders to take more effective debt negotiation actions before they foreclose on struggling homeowners has cleared the Banking, Finance and Insurance Committee. There are additional hurdles before the bill could reach a full Senate floor vote.

The foreclosure prevention bill, Senate Bill 1275, would force banks and loan services to make greater efforts to secure loan modifications that are workable for borrowers before proceeding with the home foreclosure process. In addition to endeavoring to reduce the likelihood of foreclosures, the bill seeks to hold banks accountable for unwieldy or even illegal collection practices.

If passed, the bill would give mistreated borrowers the right to have their foreclosures voided by the courts and to seek monetary damages.

According to First American CoreLogic, at the end of February, 8.7 of home mortgage holders nationwide -- and 11.7 percent of California borrowers -- were more than 90 days delinquent, in the midst of foreclosure or involved with the sale of a bank-owned home. The bill, which is supported by housing rights advocates, labor unions, loan counselors and consumer groups, is considered one of the key measures Democrats will undertake this year to reduce the impact of the foreclosure crisis.

A lawyer for the Oakland-based advocacy group Housing and Economic Rights Advocates, along with other supporters, testified that lender disorganization, including lost paperwork, unnecessary delays and repeated demands for the same information, is widespread and is causing many homeowners to unfairly lose their homes.

A case in point, homeowner Stephanie Burriel of Exeter testified about her yearlong struggle with her loan servicer. The married mother of six filled out three separate loan modification applications and was repeatedly told not to worry. In September 2009 she was told that a modification deal was imminent. She learned in November that her house had been sold at auction the month before.

Citing a host of similar stories from their own constituents, Republicans Dave Cox and Dave Cogdill suggested that the Senate seek sworn testimony from lenders as to their loan modification and foreclosure processes.

Representatives of the mortgage industry conceded that problems exist but attributed them to the scope of the economic downturn and noted that lenders are getting better. The California Mortgage Bankers Association, along with lobbyists for the financial industry, argues that the bill would result in a complete halt to the foreclosure process. They recommended allowing the federal government to move forward with streamlining the process instead of passing bills state by state.

Related Resource

Bill to ease mortgage modifications advances in California Senate (Sacramento Bee, April 8, 2010)