State Issues Emergency Foreclosure Moratorium Regulation
June 1, 2009
The Office of Administrative Law of the State of California (“OAL”) released an emergency regulation (“Regulation”)  that implements ABX2 7, the California Foreclosure Prevention Act, enacted in February this year and set to take effect on June 15, 2009 (the “Act”).
See CBA’s Regulatory Compliance Bulletin dated February 23, 2009 for a summary of the Act. The Regulation will be followed by the release of a proposed final regulation that will be subject to the usual notice and comment process.
CBA worked with the agencies that developed this Regulation for OAL approval, and we will submit further comments on the proposed final regulation as well. Members who wish to comment are invited to contact CBA. This Bulletin only addresses provisions of the Regulation not already covered in the Act. Click here for the text of the Regulation.
Summary of Act
The Act adds an additional 90-day waiting period after a lender or servicer (hereafter, “Lender”) files a notice of default before it is allowed to file the notice of sale on a residential mortgage loan. It allows Lenders to bypass the waiting period if they have implemented a comprehensive loan modification program that is approved by the Department of Financial Institutions, Department of Corporations, or Department of Real Estate.
The Act applies to loans that are secured by deeds of trust which were recorded between January 1, 2003 to January 1, 2008 and that constitute a first priority mortgage or deed of trust on property that the borrower occupied as his or her principal residence at the time the loan became delinquent.
- Whereas the Act recognizes compliance with a federal modification program as a factor in complying with the Act, the Regulation goes much further. If a Lender elects to comply with the federal Home Affordable Mortgage Program (“HAMP”), this constitutes adoption of a comprehensive loan modification program sufficient to avoid the 90-day waiting period. A Lender that is a depository financial institution would be subject to a streamlined application process. HAMP requirements and standards differ from the standards set forth in the Act, but the Regulation effectively ensures that Lenders will not be subject to conflicting requirements if they choose to comply with HAMP .
- The Act applies to residential mortgage loans primarily for personal, family, or household use. It would not apply, for example, where a residence is pledged to guarantee a business loan. The definition of “borrower” also clarifies this point.
- The Act does not apply if the property is subject to a subordinate lien and the subordinate lienholder does not agree to subordinate to the modified first lien. Similarly, if the loan is investor-owned and the pooling and servicing agreement or other contract prohibits the Lender from modifying the loan terms as required by the Act, then the modification program does not have to be made available. However, the Lender has a duty to use reasonable efforts to remove any prohibitions and obtain waivers or approvals from junior lienholders, investors, and other necessary parties.
- To be eligible, the borrower must be able to document assets, income or likelihood of future earnings to establish the ability to repay the modified loan as determined using “customary underwriting criteria and analysis or current industry standards.”
- A residential mortgage loan refinanced under the HOPE for Homeowners Program  or the Home Affordable Refinance Program  is conclusively presumed to meet the minimum requirements for a loan modification .
- A Lender that applies for an exemption from the 90-day waiting period is required to make the modification program available to any borrower meeting the Act’s eligibility requirements who “calls, writes, or otherwise communicates with” the Lender to notify the Lender of a financial hardship or to explore modification options. Lenders are also required to notify a borrower of their modification program when meeting the pre- Notice of Default contact requirement pursuant to Civil Code Section 2923.5 (enacted last year as AB 1137 ).
- The Act requires a loan modification to be offered to a borrower if the Lender’s net present value of the anticipated recovery from a modification exceeds the net present value of the anticipated recovery from foreclosure. The calculation is based on “reasonable assumptions regarding discount rates, property values, costs of foreclosure, costs of modification, and ability of borrowers to pay,” supported by “internal or external evidence.” Use of the Net Present Value Model Parameters applicable in HAMP conclusively meets these requirements . If a different NPV model is used, the Lender must explain the difference and offer a justification.
- A Lender is required to develop criteria that define when a borrower qualifies for the modifications in its program.
- A modification need not be offered if the borrower cannot document the ability to repay a modified loan as determined through customary underwriting criteria and analysis or current industry standards.
- The Lender’s modification program must target a 38% housing-related debt to gross income ratio  on an aggregate basis; it is not required that each modified loan achieve this ratio. If the modification program seeks to establish a higher ratio, the application must explain the reason.
A comprehensive loan modification program must include at least two of the following features (it is not required that each individual modification include two features):
- An interest rate reduction, as needed, for a term of at least 5 years.
- An extension of amortization period to no more than 40 years from the original date of the loan.
- Deferral of principal until maturity.
- Reduction of principal.
- Compliance with a federally mandated loan modification program.
- Any other factor that the applicable agency may identify in the approval process, such as back-end debt-to-income ratios, elimination of late fees, modifications for borrowers who are not yet (but imminently) delinquent, and other factors that would reduce monthly payments.
A program may also include other foreclosure alternatives for borrowers who do not qualify for a modification or who wish to vacate the property, such as short sales or deeds-in-lieu of foreclosure.
The Act requires that Lenders seek to achieve “long term sustainability” for the borrower. The Regulation states that a modification is presumed to be sustainable if it includes at least one of the following characteristics:
- The monthly payment is reduced for at least 5 years;
- The borrower’s housing-related debt to gross income ratio is 38% or less;
- The borrower’s back-end debt-to-income ratio as defined under HAMP is no higher than 55%;
- The borrower is current under the terms of the modified loan at the end of a 3-month trial period; or
- The modification conforms to HAMP, HOPE for Homeowners Program, or another federal program intended to reduce the rate of foreclosures.
A modification may consist solely of a repayment plan, defined as a plan or arrangement where loan amounts past due—including principal, interest, late fees or other penalties—are added to the principal amount due on a loan and re-aged so that the loan is no longer delinquent, and no other loan concession described in the Act is provided. In such a case, the borrower’s housing-related debt to gross income ratio must be no higher than 38% and the Lender has reasonable grounds to support the ability of the borrower to repay the loan.
The following timing requirements must be followed:
- The Lender is required to act on a request to modify a loan within a reasonable time as long as the request is received within three months after recording a Notice of Default (but later requests may be accepted).
- The Lender’s procedures must ensure that delays not caused by a borrower do not adversely affect the borrower. Compliance with the time periods recommended in the HOPE NOW Mortgage Servicing Guidelines is deemed to be reasonable.
- The Lender is required to provide an acknowledgement of the receipt of a modification request.
- The Lender is not required to pursue a modification if the borrower does not provide documentation within a reasonable time (two weeks of a request is presumed to be reasonable) or otherwise abandons the request.
- The Lender must notify a borrower in writing of the time period to respond to a request for information and of the potential consequence of failing to do so before it may decline a modification request.
A loan is not required to be modified more than once, regardless of when modified, as long as the modification reduced the borrower’s monthly payments.
Depository financial institutions that have elected to be in “substantial conformance” with HAMP are subject to a streamlined application process. State chartered banks, industrial banks, and those national banks and federal savings institutions that are “headquartered” in California apply to the Department of Financial Institutions. National banks and federal savings institutions not headquartered in California apply to the Department of Corporations. The application is included in the Regulation. The application must include a form of the Notice of Sale that includes the declaration described in the Act and codified at Civil Code Section 2923.54.
Exempt Lenders are required, upon request of the applicable agency, to report loan modification data on a quarterly basis, with the first report due no later than 90 days after approval of the exemption. CBA will work with the agencies on an acceptable format.
A hardship exception is available for Lenders whose eligible loan volume is negligible, whose “infrastructure” prevents them from collecting the requested data, or where the necessary changes to their systems are cost prohibitive. An agency may require an alternative form of data collecting and reporting, and has the discretion to accept a report in a format required or requested pursuant to a federal loan modification program.
As discussed above, CBA will be working with the agencies on the final regulation and welcomes any comments from CBA members. If you have any questions, contact Kevin Gould at 916-438-4410 or Leland Chan at 916-438-4404.
- The Regulation will be codified as Subchapter 14 to Chapter 3, Title 10 of the California Code of Regulations.
- The Regulation does not specifically state that a Lender is required to enter into a formal agreement with Treasury (through its agent Fannie Mae), only that modification of loans is in “conformance” with HAMP. The application uses the term, “substantial conformance.” However, if no agreement is entered, the monetary incentives of the program would not be available. Information about HAMP may be obtained from the website: http://www.hmpadmin.com/. The details of HAMP are beyond the scope of this Bulletin. The Treasury Department has developed a web-based training program available at http://hmp.launchcontent.com/3648420879.
- This is the HUD program that allows certain distressed borrowers to refinance into a HUD-insured loan. See http://www.hud.gov/news/release.cfm?content=pr08-150.cfm.
- This is available only for refinances of existing Fannie Mae loans and is targeted to high LTV loans that are difficult to refinance. See https://www.efanniemae.com/sf/mha/mharefi/https://www.efanniemae.com/sf/mha/mharefi/
- These programs differ from HAMP in that they are options that a Lender may apply to individual loans and do not require the Lender’s commitment to apply the programs to all eligible borrowers.
- See CBA Regulatory Compliance Bulletin dated July 21, 2008.
- The standard is available here.
- The Act defines this term as debt that includes loan principal, interest, property taxes, hazard insurance, flood insurance, mortgage insurance, and homeowner association fees. The Regulation states that junior liens are not included in the calculation.
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.
© This CBA Regulatory Compliance Bulletin is copyrighted by the California Institutioners Association, and may not be reproduced or distributed without the prior written consent of CBA.