L.A. Times Editorial Calls for California to Pass Bill Forcing Lenders to Notify Borrowers About Loan Modification Programs

The L.A. Times has published an editorial in support of SB 1275 (Leno), a bill which would require mortgage lenders to make a good-faith effort to notify defaulting borrowers about the availability of any loan modification programs.

The editorial calls for the State Assembly to join the Senate in passing the bill, which would prevent banks from foreclosing on homeowners who are in the midst of trying to modify their loan.

The L.A. Times writes:

Nothing in the bill would compel lenders to give troubled homeowners a break if it wasn’t in the lenders’ financial interest to do so. It simply tries to stop overwhelmed banks from forcing borrowers out of their homes before making sure they’re not qualified for one of the loan modification programs.

If SB 1275 is signed into law, it would mean if a borrower applied for a modification but didn’t qualify, the lender would have to send a letter explaining the decision and giving an opportunity to appeal before filing a notice that the mortgage was in default.

Even if the bill passes the Assembly, it is unclear that Gov. Schwarzenegger would sign it. His administration recently sent a letter to the author arguing that SB 1275 was unnecessary because of a federal program already in existence.  This is only partly true, as the federal program has no penalties for lenders that don’t comply with its requirements. SB 1275 would allow for limited penalties (a very small “stick”) for lenders that don’t comply.

While far from perfect, SB 1275 could end the dysfunctional problem of lenders foreclosing on borrowers while another division of the bank is processing a mortgage loan modification. Banks are so overwhelmed with the number of borrowers in foreclosure and simultaneously attempting to hang on to their home that the left hand doesn’t know what the right hand is doing.

An additional benefit to SB 1275 is it would, for the first time, give borrowers a weapon – they could file suit against lenders to force compliance with the law, even if the remedies are limited.  It would also make sure borrowers are more informed about their options – which is always a good thing.

But that’s just my opinion.  What do you think? Free free to leave your opinion in the comments below.

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