All eyes in the nation now turn to California as Governor Jerry Brown signed into law today the Homeowner Bill of Rights to help struggling Californians keep their homes. This law aims to avoid foreclosure where possible to help stabilize California’s housing market and prevent the other negative effects of foreclosures on families, communities, and the economy. The new law will generally prohibit lenders from engaging in dual tracking, require a single point of contact for borrowers seeking foreclosure prevention alternatives, provide borrowers with certain safeguards during the foreclosure process, and provide borrowers with the right to sue lenders for material violations of this law.
The following is a summary of the key provisions of the Homeowner Bill of Rights that may affect California’s REALTORS® and their clients. The full text of this law, also known as Assembly Bill 278 and Senate Bill 900, is available at www.leginfo.ca.gov.
Applicability of the Law: This law will generally come into effect on January 1, 2013. It only pertains to first trust deeds secured by owner-occupied properties with one-to-four residential units, unless otherwise indicated below. “Owner-occupied” means the property is the principal residence of the borrower and secured by a loan made for personal, family, or household purposes (CC 2924.15). A “borrower” under this law must generally be a natural person and potentially eligible for a foreclosure prevention alternative program offered by the mortgage servicer, but not someone who has filed bankruptcy, surrendered the secured property, or contracted with an organization primarily engaged in the business of advising people how to extend the foreclosure process and avoid their contractual obligations (CC 2920.5(c)). A “foreclosure prevention alternative” is defined as a first lien loan modification or another available loss mitigation option, including short sales (CC 2920.5(b)). Some of the requirements of this law do not apply to “smaller banks” that, during the preceding annual reporting period, foreclosed on 175 or fewer properties with one-to-four residential units (CC 2924.18(b)).
No Dual Tracking During Short Sale: A mortgage servicer or lender cannot record a notice of default or notice of sale, or conduct a trustee’s sale, if a foreclosure prevention alternative has been approved in writing by all parties (e.g., first lien investor, junior lienholder, and mortgage insurer as applicable), and proof of funds or financing has been provided to the servicer. This requirement expires on January 1, 2018. Effective January 1, 2018, a lender or mortgage servicer cannot record a notice of sale or conduct a trustee’s sale if the borrower’s complete application for a foreclosure prevention alternative is pending, and until the borrower has been given a written determination by the mortgage servicer. Smaller banks are only covered by the requirements taking effect in 2018. CC 2924.11.
Cancelling a Pending Trustee’s Sale: A mortgage servicer must rescind or cancel any pending trustee’s sale if a short sale has been approved by all parties (e.g., first lien investor, junior lienholder, and mortgage insurer as applicable), and proof of funds or financing has been provided to the lender or authorized agent. For other types of foreclosure prevention alternatives, a lender must record a rescission of a notice of default or cancel a pending trustee’s sale if a borrower executes a permanent foreclosure prevention alternative. These requirements do not apply to smaller banks, and will sunset on January 1, 2018. CC 2924.11.
Providing a Single Point of Contact: For a borrower requesting a foreclosure prevention alternative, the mortgage servicer must, upon the borrower’s request, promptly establish and provide a direct means of communication with a single point of contact. The single point of contact must remain assigned to the borrower’s account until all loss mitigation options offered by the mortgage servicer are exhausted or the borrower’s account becomes current. The single point of contact must be an individual or team responsible for, among other things, coordinating the application for the foreclosure prevention alternative, giving timely and accurate status reports, having access to those with the ability and authority to stop foreclosure proceedings, and referring the borrower to a supervisor if any upon the borrower’s request. Each team member must be knowledgeable about a borrower’s situation and current status in the foreclosure alternatives process. These requirements do not apply to smaller banks as defined. CC 2923.7.
No Dual Tracking During Loan Modification: A mortgage servicer generally cannot record a notice of default, notice of sale, or conduct a trustee’s sale for a nonjudicial foreclosure if the borrower’s complete application for a first lien loan modification is pending as specified, or if a borrower is in compliance with the terms of a written trial or permanent loan modification, forbearance, or repayment plan. The borrower will have 30 days to appeal the denial of a loan modification, and the mortgage service cannot proceed with the above foreclosure steps until 31 days after giving the borrower a written denial of a loan modification, or longer if the borrower appeals the denial. To prevent abuse of this provision, however, a mortgage servicer is not obligated to evaluate a first lien loan modification application from a borrower who has previously been evaluated before 2013, or given a fair opportunity to be evaluated, unless the borrower submits a documented material change in the borrower’s financial circumstances. These specific requirements expire on January 1, 2018 at which time, as stated above, a lender or mortgage servicer will be prohibited from recording a notice of sale or conducting a trustee’s sale if the borrower’s complete application for a foreclosure prevention alternative is pending, and until the borrower has been given a written determination by the mortgage servicer. Smaller banks are only covered under the requirements commencing in 2018. CC 2923.6 and 2924.11.
No Late Fees or Application Fees: A mortgage servicer cannot collect any late fees while a complete first lien loan modification application is under consideration, a denial is being appealed, the borrower is making timely modification payments, or a foreclosure prevention alternative is being evaluated or exercised. A mortgage servicer is also prohibited from charging for any application, processing, or other fee for a first lien loan modification or other foreclosure prevention alternative. These requirements do not apply to smaller banks as defined. These requirements will sunset on January 1, 2018. CC 2924.11.
Additional Loan Modification Safeguards: Until January 1, 2018, a mortgage servicer must provide written acknowledgment of receipt within five business days of a borrower’s submission of a complete first lien modification application or any document in connection with a first lien modification application. The acknowledgement of receipt must provide a description of the loan modification process, including an estimated timeframe for the mortgage servicer to decide, other timeframes, and any deficiencies in the borrower’s application. CC 2924.10. Furthermore, effective January 1, 2013 with no expiration date, if a first lien loan modification is denied, a mortgage service must send a written notice to the borrower with the reasons for denial and additional information as specified. On January 1, 2018, the required content of the denial letter will change to comport with other changes that will take effect. Smaller banks need not comply with these requirements until January 1, 2018. CC 2923.6 and 2924.11.
Binding if Loan is Transferred: Any written approval for a foreclosure prevention alternative shall be honored by a subsequent mortgage servicer in the event the borrower’s loan is transferred or sold. This requirement does not apply to smaller banks. This requirement will expire on January 1, 2018. CC 2924.11.
Lender Required to Review Foreclosure Documents: No entity can record a notice of default or otherwise initiate the foreclosure process, except for the holder of the beneficial interest under the deed of trust, an authorized designated agent of the holder of the beneficial interest, or the original or substituted trustee under the deed of trust. Furthermore, a mortgage servicer must ensure that certain foreclosure documents are accurate and complete, and supported by competent and reliable evidence. Those foreclosure documents are the initial contact declaration, notice of default, notice of sale, assignment of deed of trust, substitution of trustee, and declarations and affidavits filed in a judicial foreclosure proceeding. A mortgage servicer must, before recording or filing these documents, review competent and reliable evidence substantiating a borrower’s default and the right to foreclose. The above provisions have no expiration date. However, until January 1, 2018, any mortgage servicer who engages in multiple and repeated uncorrected violations of its obligation to review foreclosure documents shall be liable for a civil penalty up to $7,500 per deed of trust in an action brought by the Attorney General, district attorney, or city attorney, or in an administrative proceeding brought by the DRE, DOC, or DFI against a respective licensee (see below for a borrower’s legal remedies). These provisions apply to all trust deeds, regardless of occupancy or number of units. CC 2924(a)(6) and 2924.17.
Extending Initial Contact Requirement: Existing law requiring a lender to contact a borrower 30 days before initiating foreclosure has been modified as well as extended with no expiration date. Originally set to expire on January 1, 2013, this provision generally prohibits a mortgage servicer or lender from recording a notice of default until 30 days after the lender or mortgage servicer contacts the borrower in person or by telephone to assess the borrower’s financial situation and explore options for avoiding foreclosure. During the initial contact, the mortgage servicer must advise the borrower of the right to request a subsequent meeting within 14 days, and provide a toll-free number to find a HUD-certified housing counseling agency. Any meeting may occur telephonically. Instead of directly contacting the borrower, a mortgage servicer can satisfy due diligence requirements in the manner specified. A notice of default must include a declaration that the mortgage servicer has complied with or is exempt from this initial contact requirement. An existing requirement for a declaration in the notice of sale will be eliminated. Until January 1, 2013, this law generally applies to loans made from 2003 to 2007 secured by owner-occupied residential properties with one-to-four units, whereas starting January 1, 2013, this law will generally apply to first trust deeds secured by owner-occupied residential properties with one-to-four units. CC 2923.5 and 2923.55.
Notifying Borrower Before NOD: A mortgage servicer cannot record a notice of default for a nonjudicial foreclosure until the mortgage servicer informs the borrower of the borrower’s right to: (1) request copies of the promissory note, deed of trust, payment history, and assignment of loan if any to demonstrate the mortgage servicer’s right to foreclose; and (2) certain protections under the Servicemembers Civil Relief Act if the borrower is a service member or dependent. This requirement does not pertain to smaller banks as defined. This requirement expires on January 1, 2018. CC 2923.55.
Notifying Borrower After NOD: Within 5 business days after recording a notice of default, a mortgage servicer must generally send a written notice to the borrower on how to apply for the mortgage servicer’s foreclosure prevention alternatives if any. This notice is not required if the borrower has previously exhausted the first lien loan modification process offered by the mortgage servicer as specified. This requirement does not apply to smaller banks as defined. This requirement shall sunset on January 1, 2018. CC 2924.9.
Postponing a Trustee’s Sale: Whenever a trustee’s sale is postponed for at least 10 business days, the lender or authorized agent must provide written notice of the new sale date and time to the borrower within five business days after the postponement. However, any failure to comply with this requirement will not invalidate any trustee’s sale that would otherwise be valid. This requirement applies to all trust deeds, regardless of occupancy or number of units. This requirement shall sunset on January 1, 2018. CC 2924(a)(5).
Legal Remedies for Borrowers: A borrower may generally bring a private right of action to enjoin or stop a trustee’s sale until the mortgage servicer has corrected certain material violations of this law. If a trustee’s deed has already been recorded, the borrower may recover actual monetary damages for certain material violations. For intentional and reckless violations by the mortgage servicer, the borrower may recover treble actual damages or $50,000, whichever is greater. A prevailing borrower who is awarded relief under this provision can also recover reasonable attorneys’ fees and costs. Certain violations by a person licensed by the DRE, DOC, or DFI are deemed violations of that person’s licensing laws. These provisions do not apply to smaller banks until 2018. CC 2924.12. C.A.R. opposed this provision because of our concern for bad faith claims, but the Legislature was not convinced.
Lender’s Standard of Care to Investors: The Legislature intends for a mortgage servicer to offer the borrower a loan modification or workout plan in accordance with the mortgage servicer’s contractual or other authority. Any duty a mortgage servicer has to maximize net present value under a pooling and servicing agreement is owed to all investors, not any particular investor. A mortgage servicer will be deemed as acting in the best interest of all investor if it implements a loan modification or workout plan in accordance with certain specified parameters. CC 2923.6.