October 11, 2016
by Caren Jacobs Castle
The Wolf Firm – USFN Member (California)
The California Legislature has passed a bill (signed by the governor on September 29, 2016), which creates additional requirements as well as potential liability for servicers when dealing with “successors in interest” to a deceased borrower. The purpose of SB1150 is to allow successors in interest to step into the shoes of the deceased borrower with respect to home retention and loss mitigation opportunities. The bill will be effective January 1, 2017. Highlights of the new legislation are discussed below.
SB1150 applies to first lien mortgages or deeds of trust that are secured by owner-occupied residential property containing no more than four dwelling units. “Owner-occupied” is defined as the principal residence of the borrower at the time of the borrower’s death. The definition of successor in interest has been greatly limited through the legislative process. “Successor in interest” is defined in the bill as a natural person, who notifies the servicer of the death of the mortgagor, and can provide documentation that the person is the spouse, domestic partner, parent, grandparent, adult child, adult grandchild, adult sibling, or joint tenant of the deceased borrower. Additionally the successor in interest must have occupied the subject property as his/her principal residence at the time of the borrower’s death and continuously for the six months prior to the borrower’s death.
Successor in Interest Determination: Timing & Process
There are several time frames built into the SB1150 process. Upon notification to the servicer (from a person claiming to be a successor in interest) that the borrower has died, the servicer may not proceed with the recordation of a notice of default. The bill specifically requires that the foreclosure not commence and/or proceed in any fashion until the successor in interest process is completed. The cumulative review/delay time frame stated within the legislation is a minimum period of 120 days.
Upon notification of death, the servicer shall request in writing that the party provide evidence of the death of the borrower. The bill allows 30 days to provide this documentation. The evidence may be a death certificate or “other written evidence.” Once the evidence of death is validated, the servicer must request in writing that the party provide written proof that he/she is a successor in interest as defined above. SB1150 deems 90 days as a reasonable time frame for the party to provide “reasonable documentation.”
Once the documentation is received, the servicer must evaluate whether the party qualifies as a successor in interest; in other words, determine that the original borrower is deceased, the party has an ownership interest in the property, and that the party has occupied the home for six continuous months prior to the borrower’s death as his/her principal residence. While SB1150 recognizes that there may be multiple successors in interest, it only provides a statement that the servicer shall apply the provisions of the loan documents as well as federal and state law when there are multiple parties.
Successor in Interest Entitlements
Within 10 days of determining that there is a successor in interest, the servicer shall provide to the party, at a minimum, the following loan information: loan balance, interest rate and any reset dates/amounts, balloon payments, pre-payment penalties, default information, delinquency status, monthly payment amount, and payoff amount.
The servicer shall further allow the successor in interest to apply to assume the loan and may evaluate the creditworthiness of the successor subject to applicable investor guidelines. If the loan is assumable, and the successor requests a foreclosure prevention alternative simultaneously with the assumption process, the party shall be allowed to apply for an alternative that would have been available to the deceased borrower. If the successor qualifies for an alternative, the servicer shall also allow the party to assume the loan.
Successors in interest will have the same rights and remedies as the borrower under the California Homeowner’s Bill of Rights (HBOR), which allows a private right of action. This includes the right to seek an injunction preventing the foreclosure sale from going forward — as well as the right to seek economic damages, and potentially punitive damages for intentional or reckless violations equal to the greater of $50,000 or treble damages, if a sale occurred in violation of SB1150. The successor in interest is also entitled to attorney’s fees if it is the prevailing party. Unfortunately, there is no attorney fee provision should the servicer be the prevailing party. The servicer will not be liable under SB1150 if violations are remediated prior to the recordation of the trustee’s deed upon sale.
SB1150 provides that compliance with the Consumer Financial Protection Bureau (CFPB) regulations regarding successors in interest will be deemed compliance with California law, albeit we now know that the new CFPB rules regarding successors in interest will not take effect for over 18 months. The California bill will sunset January 1, 2020, unless extended.
There are several issues that remain problematic with SB1150:
1. Delays in foreclosure. Upon notification of a borrower’s death by a potential successor in interest, there is built into the process a minimum of a 120-day delay (30 days for evidence of death, and 90 days for reasonable documentation to prove successor in interest).
2. Determination of a successor in interest. The bill puts the servicer in the position of having to make a legal conclusion that a party is in fact a successor in interest. This may include having to review last wills and testaments, trusts, deeds, etc. It also may require that the servicer file a court action to determine if the party is in fact a successor in interest.
3. Conflicting successors in interest. Although the bill acknowledges that there may be more than one successor in interest, it does not deal with the issue of adverse successors. Again, this may require that the servicer file a court action to resolve any and all conflicts. Note, however, that the requirements under SB1150 will not apply if the potential successor is involved in a legal dispute over the rights to the subject property.
4. Privacy/Fair Debt Collection Practices Act (FDCPA) issues. SB1150 requires that the servicer, upon determination that a party is a successor in interest, provide specified loan information without written authorization of the borrower or court order, which may violate federal privacy laws and FDCPA. The California legislature has thus far been unwilling to address these conflict of statutes/preemption issues.
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