Part 1: A Preliminary Guide to the California Homeowner Bill of Rights

Written By: Eric D. Dean Published in Winter 2012 Issue of CMBA Legal News      

 

In July 2012, California Governor Jerry Brown signed SB 900/AB 278: the Foreclosure Reduction Act the core segment of a series of foreclosure reforms known as the California Homeowner Bill of Rights.[1]  The Act, which itself is commonly referred to as the Homeowner Bill of Rights, amends several sections of California’s non-judicial statutory scheme and is expected to impact over 700,000 homeowners who are in the foreclosure pipeline.  The stated purpose of the Act is to ensure that borrowers “are considered for and have a meaningful opportunity to obtain loss mitigation options.”  (Civ. Code § 2923.4(a).)  As a result, mortgage servicers will be responsible for complying with several additional rules before commencing and completing a non-judicial foreclosure.

The New Normal

The new rules are probably best thought of as a codification of the February 2012 National Mortgage Servicing Settlement between the states attorneys’ general and the five largest mortgage servicers, making California the first state to enact protections like these at the state level.  The Act—which, in many instances, specifically places the burden of compliance on the “mortgage servicer”—will become effective on January 1, 2013 and includes sunset provisions as of January 1, 2018.  However, many of the obligations will continue beyond that date.  Significant changes in the foreclosure process or procedures include:

1. New Notices to Borrowers: The Act adds Civil Code section 2923.55, which expands the existing pre-foreclosure notice requirements and prohibits a servicer from recording a notice of default until it has informed the borrower of his right to request copies of documents proving the mortgage servicer’s right to foreclose and that the borrower may be entitled to protections under the Servicemembers’ Civil Relief Act (“SCRA”).  It also requires a written notice to the borrower after the postponement of a foreclosure sale for more than 10 business days (though failure to do so is not grounds to invalidate an otherwise valid sale).  (Civil Code § 2924(a)(5).)
2. Dual Tract Foreclosure Ban: Foreclosures must now be held in abeyance and not proceed while a “complete” first lien loan modification application is pending, on appeal, or while the borrower is in compliance with an approved loan modification agreement.  A loan modification application is “complete” when the borrower has submitted all required documents “within the reasonable timeframes” set by the servicer.  (See Civil Code §§ 2923.6, 2924.11, 2924.18.)
3. Single Point of Contact: Servicers that conduct more than 175 foreclosures per year in California must assign a single individual or team of individuals with knowledge of the loan and status of the possible loan modification and must be available to the borrower as to such things as the loan status, foreclosure prevention options available and the coordination of documentation. A decision maker must also be available to a borrower.  (Civil Code § 2923.7.)
4. Verification of Right to Foreclose:  Homeowners can require loan servicers to document their right to foreclose.  The Act also makes explicit that an entity cannot record a notice of default or otherwise initiate the foreclosure process unless it the holder of the beneficial interest under the deed of trust, the original or substituted trustee, or the designated agent of the holder of the beneficial interest.  (Civil Code 2924(a)(6).)
5. Robo-signing Banned: Representatives of a financial institution or servicer may not process foreclosure documents without verifying them for accuracy.  (See Civil Code § 2925.17.)
6. Required Loss Mitigation Procedures: Unless a borrower has previously exhausted the first lien loan modification process, within five business days of recording a notice of default, servicers that conduct more than 175 foreclosures per year in California must send a written notice advising the borrower regarding foreclosure prevention alternatives.  (Civil Code § 2924.9)  Receipt of an application for loan modification (or any other documents) must be acknowledged within five business days.  (Civil Code§ 2924.10)  If a loan modification is denied, the servicer must provide information regarding time to appeal the denial and reason(s) for the denial. (Civil Code §§ 2923.6.)

Significant Increased Risk to Servicers and Others in the Foreclosure Industry

The result of the Act is an altered legal terrain and a fundamental shift in the obligations of the mortgage servicer.  Mortgage servicers and their agents will need to become intimately familiar with the new rules and implement compliant practices and procedures to avoid some of the law’s large penalties and payment of attorneys’ fees.

The new “verification of documents” requirement, intended to address so-called “robo-signing” requires that mortgage related notices be “accurate and complete and supported by competent and reliable evidence.”  (Civil Code § 2925.17.)  That requirement itself goes beyond the National Mortgage Settlement establishing that recording and filing of multiple unverified documents will subject a mortgage servicer to a civil penalty of up to $7,500 per loan in an action brought by the State Attorney General, a district attorney, or specified regulators.

Further, in what is easily the most important feature, the Act provides for a private right of action for violation of the non-judicial foreclosure laws and provides new remedies allowing homeowners to sue for injunctive relief and damages for “material violation of sections 2923.55, 2923.6, 2923.7, 2924.9, 2924.10, 2024.11 or 2924.17.”  (Civil Code § 2924.12)  The law authorizes a borrower to seek an injunction and attorneys’ fees for up until a foreclosure sale is completed.  An injunction may be dissolved upon a showing that the material violation has been corrected and remedied.  (Civil Code §§ 2924.12(a), 2924.19(a).)  Even after a foreclosure sale, borrowers can sue for actual damages suffered because of a material violation that was not remedied prior to the sale, again plus attorneys’ fees.  This provision essentially overturns Mabry v. Superior Court (2010) 185  Cal.App.4th 208, which held that after the foreclosure sale has been held, section 2923.5 provides the borrower no relief.

The Act goes even further and provides that a borrower can be awarded the greater of a $50,000 civil money penalty or treble damages if the court finds that a violation was intentional or reckless or resulted from willful misconduct.  (Civil Code §§ 2924.12(b), 2924.19(b).)   A mortgage servicer can, however, avoid liability for any violation that it has corrected and remedied directly or through a third party contractor prior to recordation of a trustee’s deed upon sale.  (Civil Code §§ 2924.12(c), 2924.19(c).)  Obviously, the private right of action provides a powerful enforcement mechanism for the Homeowner Bill of Rights notice and diligence requirements and presents enormous incentives for litigation by borrowers seeking to stave off foreclosure.

 The Limitations of the Act:

Given the plethora of new rules, it is natural to look for safe harbor and there are a few exceptions under the Act to keep in mind:

1. Covered Properties: The Act applies only to first lien mortgage or deeds of trust secured by owner-occupied residential real property containing no more than four dwelling units.  “Owner-occupied” means that the property is the principal residence of the borrower.  (Civ. Code § 2924.15.)
2. Limited Definition of “Borrower”: Under the Act, “borrower” is defined as a natural person potentially eligible for foreclosure prevention; excluded from the definition of a “borrower” are debtors in an active bankruptcy or who have surrendered their property or contracted with foreclosure delay business.  (Civil Code §§ 2920.5(A)-(C).)
3. Smaller Mortgage Servicers: In many cases, the Act applies only to those who conduct more than 175 foreclosures in California in a year.  (See e.g., Civil Code §§ 2923.55)
4. Sunset Provisions: Portions of the Act will expire in 2018.  (See e.g., Civil Code § 2923.6(k), 2924(a)(5), 2924.9(d).)
5. Compliance with National Mortgage Settlement: The Act does not supersede the National Mortgage Settlement as to its signatories.  (Civil Code §§ 2923.4(b), 2924.12(g).)
6. No Guarantee of Loan Modification: The Act does not impose any duty on a servicer to reach a particular result as to a loan modification application or other foreclosure prevention alternative.  (Civil Code § 2923.4(a).)

Intended and Unintended Consequences

It appears to the authors that there will be a number of unintended consequences resulting from the Act including increased costs to consumers, further substantial delays in the foreclosure process and enhanced litigation as the borrower’s bar is already extremely aggressive and will seize the Act to in many cases assert “boilerplate” complaints.  Moreover, courts are already clogged and understaffed.  The Act will make Court congestion far worse thereby delaying the rights of those seeking redress. 

There are also likely to be Court challenges as to whether the Act applies to certain categories of lenders and servicers, whether it applies to foreclosures and modifications currently in progress and whether the Act is preempted in whole or in part by federal law.  Until such challenges are resolved, mortgage servicers will need to carefully prepare to comply with the myriad of new rules and regulations.  Indeed, some mortgage servicers might consider whether they can eliminate loss mitigation programs entirely to avoid the flood of litigation that the new rules seem to promise.  The costs associated with this new scrutiny will likely be extensive, both in time and personnel.  The challenge will be to find a cost-efficient and timely process to meet the new requirements.