February 6, 2013
by Kathy Shakibi
Northwest Trustee Services, Inc.
USFN Member (California, Oregon)
Homeowner Bill of Rights — In 2008 the passage of SB 1137 constituted a major change in California’s foreclosure laws. SB 1137 enacted a loss mitigation statute as well as tenant protection and vacant property maintenance statutes. There had been no significant change in foreclosure laws until the passage of California’s Homeowner Bill of Rights (HOBR) in 2012. Similar to SB 1137, HOBR enacted a few code sections further targeting loss mitigation efforts, tenant protection, and vacant property maintenance, among others. Like SB 1137, HOBR had significant support in both the Assembly and the Senate, and was further sponsored by California’s attorney general. Unlike SB 1137, HOBR was introduced shortly following the signing of the National Mortgage Settlement (NMS), and sought to incorporate the concepts of NMS into the state’s nonjudicial statutory scheme. Thus, making California one of the first trustee states to codify the NMS concepts, and extend their application beyond the five major servicers.
The package known as HOBR consists of six bills that can be briefly summarized as follows:
AB1950 — Effective on January 1, 2013, this bill amended Business & Professions Code §§ 10085.6, 10130 and amends Civil Code § 2944.7 and Penal Code § 802. The bill extends indefinitely the sunset deadlines on existing prohibitions on persons arranging loan modifications from demanding upfront fees, requiring security as collateral, or taking a power of attorney from a borrower. This bill also extends the statute of limitations for prosecution of practicing law without a license, acting as a real estate broker, salesperson, or mortgage loan originator without a license, or in the case of arranging for a loan modification, collecting upfront fees, requiring security as collateral or a power of attorney from a borrower, from one year of the commission of the offense to three years from discovery of the offense or three years after completion of the offense, whichever is later.
AB2314 — Effective January 1, 2013, this bill amended Civil Code § 2929.3, and Health & Safety Code §§ 17980, 17980.7. The bill extends the sunset provision of Civil Code § 2929.3 indefinitely. The bill requires any entity that releases a lien securing a deed of trust or mortgage for which a notice of pendency of action is recorded against the property (by a government enforcement agency attempting to enforce state housing laws) to notify in writing the enforcement agency that issued the notice within 30 days of releasing the lien. The bill also authorizes a court to require the owner of a property to pay all unrecovered costs associated with receivership, in addition to any other remedy authorized by law.
AB2610 — This bill became effective on January, 1, 2013; however, changes to the notice to tenant are effective on March 1, 2013, or 60 days following the posting of a dated notice incorporating the amendments on the Department of Consumer Affairs’ website, whichever is later. This bill amends Civil Code § 2924.8 and Code of Civil Procedure §§ 415.46 and 1161b. Existing law requires a resident of property upon which a notice of sale has been posted to be provided a certain tenant notice. Existing law requires a state government entity to make translation of the tenant notice available in five specified languages. This bill revises certain portions of the tenant notice, including changing the notice period from 60 to 90 days. The bill requires the tenant notice to include certain verbiage. The bill also requires the Department of Consumer Affairs to make translation of the tenant notice available in five specified languages. The bill additionally mandates that in an unlawful detainer action resulting from a foreclosure sale of a rental housing unit, the provisions regarding objection to the enforcement of a judgment not limit the right of a tenant or subtenant to file a prejudgment claim of right of possession or to object to enforcement of a judgment or possession, regardless of whether the tenant/subtenant was served with a prejudgment claim of right to possession. Further, the bill changes the notice-to-quit period from 60 to 90 days, and extends the operation of provision to December, 31, 2019.
SB1474 — Effective on January, 1, 2013, this bill amended Penal Code §§ 781, 923. The bill authorizes the attorney general to convene a special statewide grand jury for cases involving fraud or theft that occur in more than one county, and were conducted by a single defendant or multiple defendants acting in concert.
SB900/AB 278 — Effective January 1, 2013, these two identical bills directly impact the nonjudicial foreclosure process. These bills enact 13 new code sections and amend an existing three sections. This article focuses on summarizing the new requirements and the changes in the foreclosure process. For ease of reference going forward, SB900/AB278 will be referred to as SB 900.
SB 900 (the successor to SB 1137) incorporates the concepts of the NMS. SB 900 was introduced in March 2012, shortly after the National Mortgage Settlement was reached among the five major mortgage servicers and the attorneys general of 49 states. The bill incorporates the concepts of the national servicing standards (NSS) into California’s nonjudicial foreclosure statutes. The stated purpose of SB 900 (See Civil Code § 2923.4) is to ensure that borrowers are considered for and have a meaningful opportunity to obtain available loss mitigation options. California has had a loss mitigation statute since the passage of SB 1137 in 2008; however, SB 900 places greater focus on loss mitigation efforts, and provides for new penalties and remedies in case of noncompliance.
Application of SB 900 — SB 900 applies to first liens for properties that are owner-occupied and secured with residential property (1-4 units) (see Civil Code § 2924.15). The bill contains new definitions for mortgage servicer, foreclosure prevention alternative, borrower, and first lien (see Civil Code § 2920.5). The bill contains two categories of code. The majority of sections apply to entities that conduct more than 175 foreclosures per year. A smaller group of sections govern entities conducting 175 foreclosures or less per year. SB 900 further breaks down into sections that took effect on January 1, 2013, and those that will take effect on January 1, 2018. In reading the bill, care needs to be taken that the correct governing code (more than 175 foreclosures per year or less), and the correct time frame (effective date of January 1, 2013 or January 1, 2018) is utilized.
Standing Requirement before Starting Foreclosure — The amended Civil Code § 2924 requires that only the holder of the beneficial interest, or its authorized agent acting within the scope of authority or original or substituted trustee may record a notice of default or start the foreclosure process.
New Pre-foreclosure Notices Required For Over 175 FCs — For those entitles conducting more than 175 foreclosures per year, loss mitigation efforts are no longer governed by Civil Code § 2923.5. The new section governing loss mitigation efforts is Civil Code § 2923.55, which requires that two new pre-foreclosure notices be sent to the borrower as follows: (1) Servicer shall send a written Servicemembers Civil Relief Act notice to the borrower; and (2) Servicer shall send a written statement to the borrower that the borrower is entitled to receive a copy of the promissory note, copy of the deed of trust, copy of any assignment, if applicable, and a copy of the borrower’s payment history. A notice of default (first legal action) cannot be recorded until the new pre-foreclosure notices are sent.
Loan Modification Processing For Over 175 FCs — Prohibition on Dual Tracking — Newly enacted Civil Code § 2924.10 requires that when a borrower submits a “Complete First Lien Loan Modification Application” (a defined term), the servicer shall acknowledge receipt in writing within five business days. The initial acknowledgment of receipt also needs to set forth a detailed description of the loan mediation or foreclosure prevention alternative process, including any deadlines and documents required. After the initial acknowledgment of receipt, any time a borrower submits additional documents, the servicer must acknowledge receipt in writing within five business days. Further, the amended Civil Code § 2923.6 mandates that when a borrower submits a “Complete Loan Modification Application,” a notice of default cannot be recorded while the application is pending review or on appeal. This provision is part of the prohibition on dual tracking. Dual tracking refers to the practice of discussing loss mitigation options with the borrower while foreclosure proceeds concurrently.
After an application review, if the borrower is offered a loan modification, the notice of default cannot be recorded until 14 days after the borrower does not accept the offer, or until the borrower breaches any agreement. If the borrower is denied a loan modification, there is a 30-day appeal period, and the notice of default cannot be recorded until 31 days after the borrower is notified in writing of the denial. If a borrower is denied a loan modification, the servicer has to send a denial letter to the borrower, stating the specific reason for the denial.
Following the denial letter, the borrower has 30 days to appeal a denial, and a notice of default cannot be recorded during the appeal period. The notice of default cannot be recorded until 14 days after the borrower does not accept an offer or, if the borrower accepts the offer, until the borrower breaches any agreement.
As an additional prohibition on dual tracking, the newly enacted Civil Code § 2924.11 provides that if a foreclosure prevention alternative is approved in writing prior to recording a notice of default, a notice of default shall not be recorded while the borrower is complying with the terms or, in the case of a short sale, while a foreclosure prevention alternative is approved by all parties in writing, and proof of funds or financing has been provided to the servicer. If a foreclosure prevention alternative is approved in writing after the notice of default is recorded, then a notice of sale cannot be recorded under the two circumstances just stated. Moreover, any recorded notice of default shall be rescinded and any sale set needs to be cancelled. When a borrower signs a permanent foreclosure prevention alternative, the servicer shall provide a fully signed copy to the borrower.
Civil Code § 2924.11 also prohibits charging an application or processing fee for a foreclosure prevention alternative, and prohibits charging late fees while a foreclosure prevention alternative is under review, on appeal, or the foreclosure prevention alternative is being exercised. If the loan servicing transfers, the subsequent servicer is bound by an agreement entered into with the prior servicer.
Multiple Applications Throughout the Foreclosure Process — SB 900 permits a borrower to submit a complete loan modification application at any time before or during the foreclosure process; and every time a complete application is submitted, the foreclosure process must go on hold. A borrower may submit multiple applications for the purpose of delay. Civil Code § 2923.6 does provide that a servicer is not obligated to evaluate a repeat application from a borrower who has previously been reviewed or afforded a fair opportunity to be reviewed, unless there has been a material change in the borrower’s financial circumstances. “Material change” is not a defined term. The statute is ambiguous as to how many times and under what circumstances repeat applications need to be reviewed.
Single Point of Contact Requirement for Over 175 FCs — Newly enacted Civil Code § 2923.7 requires that upon a borrower requesting a foreclosure prevention alternative, a servicer shall establish a single point of contact (SPOC).The SPOC can be a team of people that have certain enumerated responsibilities, and need to remain assigned to the borrower until all loss mitigation options (loan modification, deed-in-lieu, short sale) have been exhausted or the borrower’s account becomes current.
Document Review Requirement Applies to All — Newly enacted Civil Code § 2924.17 is the document review provision, and it requires that any notice of default, notice of sale, assignment of a deed of trust, substitution of trustee, or declaration or affidavit recorded or filed with the court shall be accurate and complete, as well as supported by competent and reliable evidence. Before recording or filing any of these listed documents, a servicer shall ensure that it has reviewed competent and reliable evidence to substantiate the borrower’s default and the right to foreclose.
New Notice is Required after Recording the NOD for Over 175 FCs — Newly enacted Civil Code § 2924.9 requires that unless a borrower has previously exhausted the first lien loan modification process, within five business days after recording the notice of default the servicer shall send a written communication to the borrower stating that the borrower may be evaluated for a foreclosure prevention alternative, and explaining the process for application. Furthermore, amended Civil Code § 2924 requires that whenever a sale is postponed by at least 10 business days, written notice needs to be mailed to the borrower within five business days following the postponement. The sale postponement notice provision applies to all; it is not limited to entities that conduct over 175 foreclosures per year.
Government Action upon Non-Compliance — If a servicer engages in repeated violations of the document review provision, a government entity may bring action for a civil penalty up to $7,500 per deed of trust or mortgage. Additionally, the Department of Corporations, the Department of Financial Institutions, and the Department of Real Estate may adopt regulations necessary to carry out the purpose of the act.
Borrower’s Private Right of Action — A borrower has a private right of action to bring a lawsuit for a material violation of SB 900. Before a trustee’s deed upon sale is recorded, a borrower may sue for an injunction, as well as reasonable attorneys’ fees if successful in obtaining injunctive relief. The servicer has an opportunity to remedy the violation and if the violation is remedied, there is no liability (other than the borrower’s attorneys’ fees). After a trustee’s deed upon sale is recorded, a borrower may sue for actual damages and reasonable attorneys’ fees. At this point, the servicer no longer has an opportunity to remedy the violation.
If a court finds that the violation was intentional, reckless, or willful, the court can award punitive damages in the amount of three times the borrower’s actual damages, or $50,000, whichever is greater. A violation by a person licensed by the Department of Corporations, the Department of Financial Institutions, or the Department of Real Estate shall be deemed to be a violation of that person’s licensing law. After a trustee’s deed upon sale is recorded, the servicer, mortgagee, trustee, beneficiary, or authorized agent faces joint and several liability for the borrower’s damages.
Entities Conducting 175 Foreclosures Or Less a Year — SB 900 is less burdensome for entities that conduct 175 or less foreclosures annually. Civil Code § 2923.5 continues to govern the loss mitigation activities for those entities. In addition, the prohibition on dual tracking listed in Civil Code § 2924.18 and the borrower’s private right of action listed in Civil Code § 2924.19 govern. The definitions set forth in Civil Code §§ 2920.5 and 2924.15 apply to all entities. Furthermore, the standing and postponement notice requirements of Civil Code § 2924, the document review provision of Civil Code § 2924.17, and the penalties of Civil Code § 2924.20 apply to all entities.
Conclusion — SB 900 significantly changes the nonjudicial foreclosure process in California, imposes additional responsibilities on servicers, affords borrowers multiple opportunities for a foreclosure prevention alternative, and dictates the protocol for conducting the loss mitigation efforts. While 2012 has been a year of considerable regulatory changes, California is one of the first nonjudicial states to incorporate the concepts of national serving standards into its nonjudicial statutory scheme.
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Winter 2013 USFN Report