10 Dec California Legislative Update
The California legislature recently amended its laws governing mortgages and deeds of trust, foreclosure prevention alternatives, and first lien mortgage modifications. The legislation is referred to as the Homeowner’s Bill of Rights (the “Bill”). This Memorandum addresses the provisions of the Bill that are effective from January 1, 2013 until January 1, 2018.
CALIFORNIA SENATE BILL 900/ASSEMBLY BILL 278
Certain provisions of the Bill apply to depository institutions chartered under California or federal law, a person licensed in accordance with California’s Finance Lenders Law or the Residential Mortgage Lending Act, or a person licensed under the California Real Estate laws, that, during its immediately preceding annual reporting period, as established with its primary regulator, foreclosed on 175 or fewer residential real properties, containing no more than four dwelling units located in California (collectively referred to in this Memorandum as “smaller residential mortgage lenders”). Other provisions of the Bill apply to lenders who have foreclosed on more than 175 residential real properties (collectively referred to in this Memorandum as “larger residential mortgage lenders”). Finally, certain provisions of the Bill apply to both smaller residential mortgage lenders and larger residential mortgage lenders.
Unless otherwise indicated, the provisions of the Bill apply only to first lien mortgages or deeds of trust that are secured by owner-occupied residential real property containing no more than four dwelling units. “Owner-occupied” means that the property is the principal residence of the borrower and is security for a loan made for personal, family, or household purposes.
All Residential Mortgage Lenders
An application is “complete” when a borrower has supplied the mortgage servicer with all documents required by the mortgage servicer within the reasonable timeframes specified by the mortgage servicer.
“Mortgage servicer” means a person or entity who directly services a loan, or who is responsible for interacting with the borrower, managing the loan account on a daily basis, including collecting and crediting periodic loan payments, managing any escrow account, or enforcing the note and security instrument, either as the current owner of the promissory note or as the current owner’s authorized agent. “Mortgage servicer” includes a subservicing agent to a master servicer by contract. “Mortgage servicer” does not include a trustee, or a trustee’s authorized agent, acting under a power of sale according to a deed of trust.
“Foreclosure prevention alternative” means a first lien loan modification or another available loss mitigation option.
“Borrower” means any natural person who is a borrower or trustor and who is potentially eligible for any federal, state, or proprietary foreclosure prevention alternative program offered by, or through, his or her mortgage servicer. “Borrower” does not include an individual who has:
- Surrendered the secured property as evidenced by either a letter confirming the surrender or delivery of the keys to the property to the lender, trustee, beneficiary, or authorized agent;
- Contracted with an organization, person, or entity whose primary business is advising people who have decided to leave their homes on how to extend the foreclosure process and avoid their contractual obligations to lenders or beneficiaries; or
- A bankruptcy case and the bankruptcy court has not entered an order closing or dismissing the bankruptcy case, or granting relief from a stay of foreclosure.
If a trustee’s deed upon sale has not been recorded, a borrower may bring an action for injunctive relief to enjoin a material violation of the applicable California laws. Any injunction will remain in place and any trustee’s sale will be enjoined until the court determines that the mortgage servicer, lender, trustee, beneficiary, or authorized agent has corrected and remedied the violation or violations giving rise to the action for injunctive relief. An enjoined entity may move to dissolve an injunction based on a showing that the material violation has been corrected and remedied.
After a trustee’s deed upon sale has been recorded, a mortgage servicer, lender, trustee, beneficiary, or authorized agent will be liable to a borrower for actual economic damages, resulting from a material violation of the applicable California laws by that mortgage servicer, lender, trustee, beneficiary, or authorized agent where the violation was not corrected and remedied prior to the recordation of the trustee’s deed upon sale. If the court finds that the material violation was intentional or reckless, or resulted from willful misconduct by a mortgage servicer, lender, trustee, beneficiary, or authorized agent, the court may award the borrower the greater of treble actual damages or statutory damages of $50,000.
A mortgage servicer, lender, trustee, beneficiary, or authorized agent will not be liable for any violation that it has been corrected and remedied prior to the recordation of a trustee’s deed upon sale, or that has been corrected and remedied by third parties working on its behalf prior to the recordation of a trustee’s deed upon sale. A violation of the applicable California laws by a person licensed by the Department of Corporations, Department of Financial Institutions, or Department of Real Estate (collectively “the Departments”) will be considered to be a violation of that person’s licensing law. A violation will not affect the validity of a sale in favor of a bona fide purchaser and any of its encumbrancers for value without notice.
A third-party encumbrancer will not be relieved of liability resulting from violations of the applicable California laws committed by that third-party encumbrancer that occurred prior to the sale of the subject property to the bona fide purchaser.
A lender which agreed to the consent judgment entered in the case entitled United States of America et al. v. Bank of America Corporation et al., filed in the United States District Court for the District of Columbia, that is in compliance with the relevant terms of the Settlement Term Sheet of that consent judgment with respect to the borrower who brought an action while the consent judgment is in effect will have no liability for a violation of the applicable California laws. Any rights, remedies, and procedures stemming from the judgment are in addition to and independent of any other rights, remedies, or procedures under any other law, and may not be construed to alter, limit, or negate any other rights, remedies, or procedures provided by law. A court may award a prevailing borrower reasonable attorney’s fees and costs. A borrower will be considered to have prevailed if the borrower obtained injunctive relief or was awarded damages.
A declaration recorded in accordance with the requirements that the lender, beneficiary, or authorized agent has contacted the borrower, has tried with due diligence, or that a contact was not required, a notice of default, notice of sale, assignment of a deed of trust, or substitution of trustee recorded by or on behalf of a mortgage servicer in connection with a foreclosure, or a declaration or affidavit filed in any court relative to a foreclosure proceeding must be accurate and complete and supported by competent and reliable evidence.
Before recording or filing any of the documents described above, a mortgage servicer must ensure that it has reviewed competent and reliable evidence to substantiate the borrower’s default and the right to foreclose, including the borrower’s loan status and loan information.
Any mortgage servicer that engages in multiple and repeated uncorrected violations in recording documents or filing documents in any court relative to a foreclosure proceeding will be liable for a civil penalty of up to $7,500 per mortgage or deed of trust in an action brought by:
- The California Attorney General;
- A district attorney;
- A county counsel authorized by agreement with the district attorney in actions involving violation of a county ordinance;
- A city attorney of a city having a population in excess of 750,000;
- A city attorney in a city and county;
- With the consent of the district attorney, a city prosecutor in a city having a full-time city prosecutor in the name of the people of California upon their own complaint or upon the complaint of a board, officer, person, corporation, or association; or
- By a person who has suffered an injury and has lost money or property as a result of the unfair competition, in an administrative proceeding brought by any of the Departments against a respective licensee, in addition to any other remedies available to these entities.
Consistent with their general regulatory authority, the Departments may adopt regulations applicable to any entity or person under their respective jurisdictions that are necessary to carry out the purposes of the Bill. A violation of the regulations is only enforceable by the respective regulatory agency.
The following provisions apply to both first and second lien mortgages and deeds of trust:
Whenever a sale of property under the power of sale is postponed for a period of at least 10 business days, a lender, beneficiary, or authorized agent must provide written notice to a borrower regarding the new sale date and time, within five business days following the postponement. Information provided will not constitute the required public declaration of postponement. Failure to comply will not invalidate any sale that would otherwise be valid.
An entity must not record or cause a notice of default to be recorded or otherwise initiate the foreclosure process unless it is the holder of the beneficial interest under the mortgage or deed of trust, the original trustee or the substituted trustee under the deed of trust, or the designated agent of the holder of the beneficial interest. An agent of the holder of the beneficial interest under the mortgage or deed of trust, original trustee, or substituted trustee under the deed of trust may not record a notice of default or otherwise commence the foreclosure process except when acting within the scope of authority designated by the holder of the beneficial interest.
A mortgage servicer must send the following information in writing to the borrower:
- A statement that if the borrower is a servicemember or a dependent of a servicemember, he or she may be entitled to certain protections under the federal Servicemembers Civil Relief Act regarding the servicemember’s interest rate and the risk of foreclosure, and counseling for covered servicemembers that is available at agencies such as Military OneSource and Armed Forces Legal Assistance; and
- A statement that the borrower may request the following:
o A copy of the borrower’s promissory note or other evidence of indebtedness;
o A copy of the borrower’s deed of trust or mortgage;
o A copy of any assignment, if applicable, of the borrower’s mortgage or deed of trust required to demonstrate the right of the mortgage servicer to foreclose; and
o A copy of the borrower’s payment history since the last time the borrower was less than 60 days past due on his or her payment.
If a borrower submits a complete application for a first lien loan modification offered by, or through, the borrower’s mortgage servicer, a mortgage servicer, lender, trustee, beneficiary, or authorized agent must not record a notice of default or notice of sale, or conduct a trustee’s sale, while the complete first lien loan modification application is pending. A mortgage servicer, lender, trustee, beneficiary, or authorized agent must not record a notice of default or notice of sale or conduct a trustee’s sale until any of the following occurs:
- The mortgage servicer makes a written determination that the borrower is not eligible for a first lien loan modification, and any appeal period has expired;
- The borrower does not accept an offered first lien loan modification within 14 days of the offer; or
- The borrower accepts a written first lien loan modification, but defaults on, or otherwise breaches the borrower’s obligations under, the first lien loan modification.
If the borrower’s application for a first lien loan modification is denied, the borrower will have at least 30 days from the date of the written denial to appeal the denial and to provide evidence that the mortgage servicer’s determination was in error. If the borrower’s application for a first lien loan modification is denied, the mortgage servicer, lender, trustee, beneficiary, or authorized agent may not record a notice of default or, if a notice of default has already been recorded, record a notice of sale or conduct a trustee’s sale until the later of:
- 31 days after the borrower is notified in writing of the denial; or
- If the borrower appeals the denial, the later of 15 days after the denial of the appeal or 14 days after a first lien loan modification is offered after appeal but declined by the borrower, or, if a first lien loan modification is offered and accepted after appeal, the date on which the borrower fails to timely submit the first payment or otherwise breaches the terms of the offer.
Following the denial of a first lien loan modification application, the mortgage servicer must send a written notice to the borrower identifying the reasons for denial, including the following:
- The amount of time from the date of the denial letter in which the borrower may request an appeal of the denial of the first lien loan modification and instructions regarding how to appeal the denial;
- If the denial was based on investor disallowance, the specific reasons for the investor disallowance;
- If the denial is the result of a net present value calculation, the monthly gross income and property value used to calculate the net present value and a statement that the borrower may obtain all of the inputs used in the net present value calculation upon written request to the mortgage servicer;
- If applicable, a finding that the borrower was previously offered a first lien loan modification and failed to successfully make payments under the terms of the modified loan; and
- If applicable, a description of other foreclosure prevention alternatives for which the borrower may be eligible, and a list of the steps the borrower must take in order to be considered for those options. If the mortgage servicer has already approved the borrower for another foreclosure prevention alternative, information necessary to complete the foreclosure prevention alternative.
In order to minimize the risk of borrowers submitting multiple applications for first lien loan modifications for the purpose of delay, the mortgage servicer will not be obligated to evaluate applications from borrowers who have already been evaluated or afforded a fair opportunity to be evaluated for a first lien loan modification prior to January 1, 2013, or who have been evaluated or afforded a fair opportunity to be evaluated consistent with the above requirements, unless there has been a material change in the borrower’s financial circumstances since the date of the borrower’s previous application and that change is documented by the borrower and submitted to the mortgage servicer.
Upon request from a borrower who requests a foreclosure prevention alternative, the mortgage servicer must promptly establish a single point of contact and provide to the borrower one or more direct means of communication with the single point of contact.
The single point of contact will be responsible for doing all of the following:
- Communicating the process by which a borrower may apply for an available foreclosure prevention alternative and the deadline for any required submissions to be considered for these options;
- Coordinating receipt of all documents associated with available foreclosure prevention alternatives and notifying the borrower of any missing documents necessary to complete the application;
- Having access to current information and personnel sufficient to timely, accurately, and adequately inform the borrower of the current status of the foreclosure prevention alternative;
- Ensuring that a borrower is considered for all foreclosure prevention alternatives offered by, or through, the mortgage servicer, if any; and
- Having access to individuals with the ability and authority to stop foreclosure proceedings when necessary.
The single point of contact will remain assigned to the borrower’s account until the mortgage servicer determines that all loss mitigation options offered by, or through, the mortgage servicer have been exhausted or the borrower’s account becomes current. The mortgage servicer must ensure that a single point of contact refers and transfers a borrower to an appropriate supervisor upon request of the borrower, if the single point of contact has a supervisor. For purposes of this paragraph, “single point of contact” means an individual or team of personnel each of whom has the ability and authority to perform the responsibilities described above. The mortgage servicer must ensure that each member of the team is knowledgeable about the borrower’s situation and current status in the alternatives to foreclosure process.
Within three months after the close of a calendar year or annual reporting period, a lender that foreclosed on more than 175 residential real properties in California must notify its primary regulator and any delinquent borrower that the lender has exceeded 175 foreclosures for the year. On July 1 or the annual reporting period, the lender must also notify any delinquent borrower that the lender has exceeded 175 foreclosures for the year.
Unless a borrower has previously exhausted the first lien loan modification process offered by, or through, his or her mortgage servicer, within five business days after recording a notice of default, a mortgage servicer that offers one or more foreclosure prevention alternatives must send a written communication to the borrower that includes all of the following information:
- That the borrower may be evaluated for a foreclosure prevention alternative or, if applicable, foreclosure prevention alternatives;
- Whether an application is required to be submitted by the borrower in order to be considered for a foreclosure prevention alternative; and
- The means and process by which a borrower may obtain an application for a foreclosure prevention alternative.
When a borrower submits a complete first lien modification application or any document in connection with a first lien modification application, the mortgage servicer must provide written acknowledgment of the receipt of the documentation within five business days of receipt. In its initial acknowledgment of receipt of the loan modification application, the mortgage servicer must include the following information:
- A description of the loan modification process, including an estimate of when a decision on the loan modification will be made after a complete application has been submitted by the borrower and the length of time the borrower will have to consider an offer of a loan modification or other foreclosure prevention alternative;
- Any deadlines, including deadlines to submit missing documentation, that would affect the processing of a first lien loan modification application;
- Any expiration dates for submitted documents; and
- Any deficiency in the borrower’s first lien loan modification application.
If a foreclosure prevention alternative is approved in writing after the recordation of a notice of default, a mortgage servicer, lender, trustee, beneficiary, or authorized agent must not record a notice of sale or conduct a trustee’s sale under either of the following circumstances:
- The borrower is in compliance with the terms of a written trial or permanent loan modification, forbearance, or repayment plan; or
- A foreclosure prevention alternative has been approved in writing by all parties, including, for example, the first lien investor, junior lienholder, and mortgage insurer, as applicable, and proof of funds or financing has been provided to the servicer.
When a borrower accepts an offered first lien loan modification or other foreclosure prevention alternative, the mortgage servicer must provide the borrower with a copy of the fully executed loan modification agreement or agreement evidencing the foreclosure prevention alternative following receipt of the executed copy from the borrower.
A lender, beneficiary, or authorized agent must record a rescission of a notice of default or cancel a pending trustee’s sale, if applicable, upon the borrower executing a permanent foreclosure prevention alternative. In the case of a short sale, the rescission or cancellation of the pending trustee’s sale must only occur when the short sale has been approved by all parties and proof of funds or financing has been provided to the lender, beneficiary, or authorized agent.
The mortgage servicer must not charge any application, processing, or other fee for a first lien loan modification or other foreclosure prevention alternative. The mortgage servicer must not collect any late fees for periods during which a complete first lien loan modification application is under consideration or a denial is being appealed, the borrower is making timely modification payments, or a foreclosure prevention alternative is being evaluated or exercised.
If a borrower has been approved in writing for a first lien loan modification or other foreclosure prevention alternative, and the servicing of that borrower’s loan is transferred or sold to another mortgage servicer, the subsequent mortgage servicer must continue to honor any previously approved first lien loan modification or other foreclosure prevention alternative.