Banks May Kill Foreclosure-Prevention Bill in Sacramento (Updated)

The L.A. Times Money & Company blog is reporting that the last major mortgage foreclosure bill of the legislative session may be on the verge of being killed in Sacramento.

SB 1275 (Leno), which had already passed the State Senate in June, fell 14 votes short of passage in the Assembly on Thursday. The Legislature recesses on Tuesday night, meaning the authors have five days to resuscitate the bill.

The proposed new law would require mortgage servicers to provide additional information to borrowers who are in default, and would require the mortgage servicer to provide the borrower with information about loan modification options before the lender could begin the foreclosure process.

SB 1275 is authored by two of the biggest heavyweight legislators in Sacramento, Sen. Mark Leno (D-San Francisco) and Senate President Pro Tem Darrel Steinberg (D-Sacramento).  It’s no wonder the bill has received a fair amount of attention, with major editorial boards such as the L.A. Times and the San Jose Mercury-News editorializing in favor of its passage.

No doubt Leno and Steinberg are calling in every favor they can to try to get the measure passed, but they may have met their match.  Reporter Marc Lifsher acutely points out that there is a major reason why banks are fighting this bill:

Bankers dislike the proposal because it would give aggrieved homeowners the right to sue for monetary damages and to seek an injunction to delay or void a foreclosure.

Up to $10,000 In Penalties

Allowing borrowers to file a lawsuit is a major “stick” which makes the banks seriously uncomfortable.  If SB 1275 were to pass, borrowers would be able to file a lawsuit and collect (albeit limited) damages if they were not given certain disclosures.  In a worst case scenario, if their property was sold at a trustee sale without the mortgage lender providing the required disclosures, the former homeowners would be entitled to $10,000.

While that’s nothing to sneeze at, $10,000 doesn’t go a long way for someone who no longer has their home and it’s doubtful whether the outside chance that a few homeowners would be awarded $10,000 would force banks to seriously reform their practices.  The authors likely settled on $10,000 in damages as a means of getting the bill passed, with the hope they could increase the penalty to a more significant punitive level in the future.  Also, if the $10,000 is awarded and the borrower could recover their attorney’s fees, that would mean banks are more likely to sit up and pay attention, even if it doesn’t mean more money in the borrower’s pockets.

The Assembly’s vote on SB 1275 comes just a few days after the same body passed SB 1178, another significant piece of mortgage relief legislation which would extend non-recourse protections to homeowners who have refinanced their mortgage(s). Under current law, only homeowners who have not refinanced their mortgages are entitled to non-recourse protections, which means a lender cannot sue the borrower after a foreclosure or a short sale for the lender’s losses.  You can read about that bill in my previous blog post here.

Update 8/27/2010 at 11:00am: The Sacramento Bee and the San Jose Mercury News have both added editorials on SB 1275.  The Mercury News editorial was particularly strong, harshly criticizing the Assembly for failing to pass SB 127 and blaming a heavy lobbying effort by the banking industry.

The Bee editorial can be read here, and the Mercury News here.

(Photo: Flickr)