California Enacts Attorney General’s “Homeowner’s Bill of Rights”
July 16, 2012
This Bulletin was prepared for CBA by Neil J. Rubenstein, a shareholder with the law firm of BuchalterNemer and member of the CBA Legal Affairs Committee. Mr. Rubenstein worked with CBA on this legislation.
The California Legislature passed mortgage foreclosure legislation proposed by Attorney General Kamala D. Harris, although with some significant changes from the bill originally proposed by the Attorney General. The Governor signed the legislation on July 11, 2012. It becomes effective January 1, 2013.
The law (designated as AB 278 and SB 900) establishes procedures that must be followed by lenders before foreclosing on certain residential mortgages – most of which relate to giving the borrower an opportunity to seek a loan modification. The law contains numerous flaws, but the efforts of the California Bankers Association and other members of the lending community resulted in the elimination of some of the significant problems.
The law, in numerous places, contains alternative sections – one version that is in effect from January 1, 2013 until January 1, 2018, and another version that is in effect on and after January 1, 2018. This bulletin only considers those sections in effect from January 1, 2013 until January 1, 2018. Furthermore, this bulletin does not describe all provisions of the law. The terms of the law are complicated and lenders should examine it closely to determine the law’s specific requirements. The provisions of the law are contained in 16 separate sections in the Civil Code, with the same subject sometimes addressed in multiple sections. In order to assist readers in their examination of the new law, this bulletin cites specific section numbers in addressing different subjects.
This bulletin discusses the following subjects covered by the law: (1) the scope of the law; (2) the distinction between regulated/licensed lenders with 175 or fewer residential foreclosures per year and other lenders; (3) the process for review of loan modification applications by smaller residential mortgage lenders; (4) the process for review of loan modification applications by larger residential mortgage lenders; (5) the prohibition on “robosigning”; (6) the private right of action available to borrowers; (7) the required notice of postponement of foreclosure sales; and (8) the restriction on persons who may initiate foreclosure proceedings.
1. Scope of Law
Except for Sections 2924(a)(6) and 2924.17, discussed below, the law applies 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” is defined as meaning that the property is the principal residence of the borrower (who must be a natural person and the mortgagor or trustor) and is security for a loan made for personal, family, or household purposes (Section 2924.15).
Accordingly, aside from Sections 2924(a)(6) and 2924.17, the law does not apply to deeds of trust or mortgages that secure commercial loans, nor does it apply to deeds of trust or mortgages that are not in a first priority position.
The term “mortgage servicer” is used in many places in the law, and is defined as the person or entity who directly services the loan or is responsible for interacting with the borrower, either as the current owner of the promissory note or as the owner’s agent (Section 2920.5). The terminology used in the law is inconsistent; sometimes the law refers to “mortgage servicer,” sometimes it refers to “mortgagee, trustee, beneficiary, or authorized agent,” and other times it uses other combinations of those terms. For simplicity, this bulletin refers to the creditor or the person acting at the request of the creditor (including the trustee who conducts the foreclosure sale) as the “mortgage servicer.”
In some places, the law refers to “first lien loan modifications” and in other places, the law refers to “foreclosure prevention alternatives” (which is defined in Section 2920.5(b) as a “first lien loan modification or another available loss mitigation option”). It is unclear whether the Legislature intended the two terms to have different meanings.
2. Distinction between Regulated/Licensed Lenders with 175 or Fewer Residential Foreclosures per Year and Other Lenders
In several areas, the law imposes alternative sets of requirements. The set with less stringent requirements applies to depository institutions chartered under state or federal law, persons licensed pursuant to the California Finance Lenders Law, persons licensed under the California Residential Mortgage Lending Act, and persons licensed under the California Real Estate Law, if such institution or person, during its immediately preceding annual reporting period as established by its primary regulator, foreclosed on 175 or fewer residential real properties containing no more than four dwelling units that are located in California (referred to in this bulletin as “Smaller Residential Mortgage Lenders”). See, e.g., Sections 2924.18(b) and (c). Lenders who do not fall in that category are referred to in this bulletin as “Larger Residential Mortgage Lenders.”
3. Process for Review of Loan Modification Applications – Smaller Residential Mortgage Lenders
Section 2923.5, as it currently exists and which remains in effect until January 1, 2013, states that a creditor covered by the statute may not record a notice of default and election to sell until 30 days after it has contacted the borrower to assess the borrower’s financial situation and explore options for the borrower to avoid foreclosure, or 30 days after making specified efforts to contact the borrower. The new Section 2923.5 applies only to Smaller Residential Mortgage Lenders. It is similar to the existing statute, except it states that the mortgage servicer must also comply with Section 2924.18(a)(1).
Section 2924.18 says that, for Smaller Residential Mortgage Lenders, if a borrower submits a complete application for a first lien loan modification offered by, or through, the borrower’s mortgage servicer, the mortgage servicer shall not record a notice of default, record a notice of sale, or conduct a trustee’s sale while the complete application is pending, and until the borrower has been provided with a written determination by the mortgage servicer regarding that borrower’s eligibility for the requested loan modification. It says that an application is “complete” when the borrower has supplied the mortgage servicer with all documents required by the mortgage servicer within the reasonable timeframes specified by the mortgage servicer.
It says that, if a foreclosure prevention alternative has been approved in writing, the mortgage servicer shall not record a notice of default, record a notice of sale or conduct a trustee’s sale while the borrower is in compliance with it.
The law states that nothing in it shall be interpreted to require a particular result of this process (Section 2923.4(a)).
4. Process for Review of Loan Modification Applications – Larger Residential Mortgage Lenders
Sections 2923.55, 2923.6, 2923.7, 2924.9, 2924.10 and 2924.11 describe the process that must be followed by Larger Residential Mortgage Lenders in connection with review of loan modification applications. The sections overlap in many respects and are, in some places, internally inconsistent.
Section 2923.55 contains the same requirements as Section 2923.5 regarding steps the mortgage servicer must take before recording a notice of default, but also sets forth a more involved process for the mortgage servicer to follow in handling requests by the borrower for a first lien loan modification (including establishment of an appeal process if the borrower’s application is denied). Section 2923.55 also requires the mortgage servicer to send a statement to the borrower stating that the borrower may have rights under the federal Servicemembers Civil Relief Act, and a statement that the borrower may request a copy of the borrower’s promissory note, deed of trust or mortgage, “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 a copy of the borrower’s payment history since the borrower was last less than 60 days past due.
Section 2924.9 states that, unless a borrower has previously exhausted the first lien loan modification process offered by or through his or her mortgage servicer described in Section 2923.6, 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 saying that the borrower may be evaluated for a foreclosure prevention alternative and describing the process by which the borrower may apply for it.
Section 2923.7 states that, 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” must be either an individual or team of personnel each of whom is knowledgeable about the borrower’s situation and has the ability and authority to carry out specified types of activities relating to the borrower’s situation such as ensuring that the borrower is considered for foreclosure prevention alternatives offered by or through the mortgage servicer and informing the borrower about the status of his or her application.
Section 2924.10 states that, 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, within five business days, provide written acknowledgment of receipt and, in its initial acknowledgment, describe the loan modification process, state any deadlines that apply, and identify any deficiencies in the documents submitted by the borrower.
Section 2923.6 states that, if a borrower submits a complete application for a first lien loan modification, the mortgage servicer may not record a notice of default or notice of sale or conduct a trustee’s sale while the application is pending, or until any of the following occurs: (1) the mortgage servicer makes a written determination that the borrower is not eligible for the modification, and the applicable appeal period has expired; (2) the borrower does not accept an offered modification within 14 days of the offer; or (3) the borrower accepts an offered modification but breaches his or her obligations under the modification. It says that an application will be deemed “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.
Section 2923.6 states that the mortgage servicer must send written notice to the borrower of a denial of the loan modification application, containing the following information: (1) the reasons for the denial; (2) the borrower’s appeal rights; and (3) “[i]f 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.” The section also says: “In order to minimize the risk of borrowers submitting multiple applications for first lien loan modifications for the purpose of delay, the mortgage servicer shall not be obligated to evaluate applications from borrowers who have already been evaluated or offered 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 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.” The foregoing provisions will sometimes lead to uncertainty about how many times a borrower is entitled to have the lender consider an application for a foreclosure prevention alternative.
Section 2924.11 says that “[a] mortgagee, beneficiary, or authorized agent shall 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 shall occur when the short sale has been approved by all parties and proof of funds or financing has been provided to the mortgagee, beneficiary, or authorized agent.”
Section 2924.11 also says that the mortgage servicer shall not charge any application, processing, or other fee for a first lien loan modification or other foreclosure prevention alternative.
The law says that nothing in the law shall be interpreted to require a particular result of the process established for consideration of loss mitigation options (Section 2923.4(b)).
5. Prohibition on “Robosigning” – Applicable to Everyone
Section 2924.17 says that declarations recorded pursuant to Sections 2923.5 or 2923.55, notices of default, notices of sale, assignments of deeds of trust, and substitutions of trustee recorded in connection with a nonjudicial foreclosure, and declarations filed in court with respect to any foreclosure proceeding must be accurate and complete and supported by competent and reliable evidence. Before recording any of those documents, the mortgage servicer must review competent and reliable evidence to substantiate the borrower’s default and the right to foreclose, including the borrower’s loan status and loan information. A mortgage servicer that engages in multiple and repeated uncorrected violations shall be liable for a civil penalty of up to $7,500 per mortgage or deed of trust in an action brought by an applicable government agency.
Section 2924.17 is not limited to residential mortgage loans, but applies to all foreclosure proceedings.
6. Private Right of Action – Applicable to Smaller and Larger Residential Mortgage Lenders
Section 2924.19 provides a private right of action against Smaller Residential Mortgage Lenders for material violations of Sections 2923.5, 2924.17 or 2924.18, and Section 2924.12 provides a private right of action against Larger Residential Mortgage Lenders for material violations of Sections 2923.55, 2923.6, 2923.7, 2924.9, 2924.10, 2924.11, or 2924.17. Both state that, prior to foreclosure, a borrower may obtain an injunction to enjoin a material violation of the applicable section. If the violation is corrected, the injunction may be dissolved. After foreclosure, a borrower may recover actual economic damages resulting from a material violation of any of those sections, where the violation was not corrected prior to the foreclosure. If the material violation was intentional or reckless or resulted from willful misconduct by the mortgage servicer, the court may award the borrower the greater of treble actual damages or statutory damages of $50,000. A prevailing borrower under either Section 2924.19 or 2424.12 may be awarded attorney’s fees and costs.
The foregoing is in addition to any other rights, remedies, or procedures available under any other law. A violation of the sections shall also be deemed a violation of the lender’s license, and subject it to appropriate action by its licensing agency.
Section 2924.12 says that a signatory to the consent judgment issued pursuant to the national mortgage lender settlement lawsuit that is in compliance with the relevant terms of the settlement term sheet for that consent judgment with respect to a specific borrower, shall have no liability to that borrower for violation of Sections 2923.55, 2923.6, 2923.7, 2924.10, 2924.11 or 2924.17.
Section 2924.19 and 2924.12 both say that no violation of the article shall affect the validity of a sale in favor of a bona fide purchaser and any of its encumbrancers for value without notice. A mortgage servicer who violated the statute prior to the sale, however, is not relieved from liability it might otherwise have simply because the property was sold.
7. Required Notice of Postponement of Foreclosure Sale
Section 2924(a)(5) was added stating that, whenever a foreclosure sale is postponed for a period of at least 10 business days, the mortgagee, beneficiary or authorized agent must provide written notice to the borrower regarding the new sale date and time, within five business days following the postponement.
8. Restriction on Persons Who May Initiate Foreclosure Proceedings
Section 2924(a)(6) was added stating that no entity shall 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 trustee under the deed of trust, or the designated agent of the holder of the beneficial interest acting within the scope of its authority. This provision is not limited to residential property, but applies to all non-judicial foreclosures.
The information contained in this CBA Regulatory Compliance Bulletin is not intended to constitute, and should not be received as, legal advice. Please consult with your counsel for more detailed information applicable to your institution.
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