SB 94's Potential To Crush The Homeowners It Seeks To Protect

On October 11, 2009, an important piece of legislation was signed into law and filed with the California Secretary of State. Senate Bill 94 ("SB 94") is aimed at crushing loan modification scam artists, people who roguishly cheated money from desperate homeowners under the false promise of obtaining loan modification. But SB 94 has the potential to achieve the opposite effect, and in practice, crush the very homeowners it seeks to protect. If you're having trouble falling asleep, you can read the full text of SB 94 here.

SB 94 attempts to stop scam artists from perpetrating a fraud by, among other things, preventing a loan modification provider (including law firms) from collecting an advance payment for services to be provided in the future. This helps to prevent scams--which is definitely a good thing--but it fails to consider the traditional model of any business, including that of a legitimate loan modification provider.

It's no secret that banks are overwhelmed with homeowners seeking relief and modifications for their homes. In the past, banks were able to provide modifications at a relatively speedy pace, one to three months. Today, banks have unequivocally stated that the time period required to process a modification can be up to six months. SB 94 requires, in essence, a loan modification provider to operate the business for months at a time with no income stream whatsoever.

This begs the question, who has the ability to operate a business with a operating expenses going out on a monthly basis and no positive cash flow until the six month mark? Yes, non-profit organizations exist, but there are not nearly enough to assist the volume of struggling homeowners in California.

The legislature must find a way to allow legitimate loan modification providers and law firms to balance the cash flow in their businesses while complying with the terms of SB 94. If nothing is done, homeowners are in serious danger of being alienated by any business that would previously been willing to provide solid loan modification services. If nothing is done, the mortgage crisis will only worsen.