California Imposes New Stringent Obligations on Mortgage Servicers

On July 2, 2012, the California legislature approved legislation that sets new requirements and potential liabilities on mortgage servicers. California Governor Jerry Brown is expected to sign the legislation. California Attorney General Kamala Harris has been promoting the legislation as a part of a larger legislative package dubbed the “Homeowner Bill of Rights.” The legislation codifies and extends the recent national mortgage settlement reached between 49 state attorneys general, the federal government and the country’s five largest loan servicers earlier this year (the National Mortgage Settlement). (See the attached chart comparing topics in the legislation with key terms of the National Mortgage Settlement). While heralded by consumer groups, the legislation has the potential to cause delays in the foreclosure process without any measurable long-term benefits, to delay a meaningful recovery of the housing market in California, and to spur frivolous litigation.

The legislation, which is the first of its kind in the nation, imposes strict rules on mortgage servicers pursuing nonjudicial foreclosures and subjects mortgage servicers to substantial new potential liabilities. The legislation, among other things, contains four central provisions that:

• Prohibit “dual-tracked foreclosures.” Mortgage servicers are required to render a decision on a loan modification before proceeding with a foreclosure.
• Require a single point of contact for homeowners. Requires that an individual or team at the mortgage servicer have knowledge of the “borrower’s situation and current status in the alternatives to foreclosure process.” This single point of contact must also have access to decision makers and is responsible for coordinating the flow of documentation for any loan modification.
• Grant borrowers and state agencies authority to enforce the law. Borrowers may only sue for actual damages, but, if it is proven that the violation was "reckless or intentional," the court is authorized to award a borrower the greater of treble damages or $50,000. The legislation, however, provides that no lawsuit for damages may proceed if the bank or servicer corrects the alleged violation prior to foreclosure. Borrowers are permitted to “bring an action for injunctive relief to enjoin a material violation of [the legislation]."
• Ban “robo-signing”—the filing of foreclosure documents without verifying their accuracy. Requires the recording and filing of certain documents, and, “[b]efore recording or filing [these documents], a mortgage servicer shall ensure that it has reviewed competent and reliable evidence to substantiate the borrower’s default and the right to foreclose, including the borrower’s loan status and loan information.” Any servicer that “engages in multiple and repeated uncorrected violations [] in recording documents or filing documents in any court relative to a foreclosure proceeding shall be liable for a civil penalty of up to seven thousand five hundred dollars ($7,500) per mortgage or deed of trust in an action brought by a government entity.”

The legislation also imposes new notice, recording, and filing requirements on mortgage servicers, including:

• Notice of Default: Requires the “trustee, mortgagee, or beneficiary, or any of their authorized agents shall first file for record, in the office of the recorder of each county wherein the mortgaged or trust property or some part or parcel thereof is situated, a notice of default. That notice of default shall include all of the following: (1) A statement identifying the mortgage or deed of trust by stating the name or names of the trustor or trustors and giving the book and page, or instrument number, if applicable, where the mortgage or deed of trust is recorded or a description of the mortgaged or trust property; (2) A statement that a breach of the obligation for which the mortgage or transfer in trust is security has occurred; (3) A statement setting forth the nature of each breach actually known to the beneficiary and of his or her election to sell or cause to be sold the property to satisfy that obligation and any other obligation secured by the deed of trust or mortgage that is in default; (4) If the default is curable [], the statement specified in [the legislation]."
• Declaration from Mortgage Servicer: Requires that a declaration be attached to the recorded notice of default stating that “the mortgage servicer has contacted the borrower, has tried with due diligence to contact the borrower as required by this [legislation], or that no contact was required because the individual did not meet the definition of ‘borrower.’”
• Notice to Borrower of Foreclosure Prevention Alternatives: Requires the mortgage servicer, “within five business days after recording a notice of default [], a mortgage servicer that offers one or more foreclosure prevention alternatives shall send a written communication to the borrower that includes all of the following information: (1) That the borrower may be evaluated for a foreclosure prevention alternative or, if applicable, foreclosure prevention alternatives; (2) Whether an application is required to be submitted by the borrower in order to be considered for a foreclosure prevention alternative; (3) The means and process by which a borrower may obtain an application for a foreclosure prevention alternative.
• Written Acknowledgment of Loan Modification Application: After a borrower submits her/his complete first loan modification application or any document in connection with a first loan modification application, the mortgage servicer is required to provide “written acknowledgment of the receipt of the documentation within five business days of receipt. In its initial acknowledgment of receipt of the loan modification application, the mortgage servicer shall include the following information: (1) A description of the loan modification process, including an estimate of when a decision on the loan modification will be made after a complete application has been submitted by the borrower and the length of time the borrower will have to consider an offer of a loan modification or other foreclosure prevention alternative; (2) Any deadlines, including deadlines to submit missing documentation, that would affect the processing of a first lien loan modification application; (3) Any expiration dates for submitted documents; (4) Any deficiency in the borrower's first lien loan modification application.”
• Written Explanation for Denial of Loan Modification: Ifa first loan modification application is denied, “the mortgage servicer shall send a written notice to the borrower identifying with specificity the reasons for the denial and shall include a statement that the borrower may obtain additional documentation supporting the denial decision upon written request to the mortgage servicer.”

When the legislation passed the legislature, Brown claimed that the “Homeowner Bill of Rights will prevent banks from throwing Californians out of their homes while they are trying, in good faith, to renegotiate their mortgages. This bill establishes important consumer protections that are long overdue.” The self-declared purpose of the legislation is to “ensure that . . . borrowers are considered for, and have a meaningful opportunity to obtain, available loss mitigation options, if any, offered by or through the borrower’s mortgage servicer, such as loan modifications or other alternatives to foreclosure." The result of this extended and risky process, however, may ultimately do more harm than good.

Borrowers may receive temporary relief from foreclosure under the new law. A recent study by Beacon Economics finds California’s Homeowner Bill of Rights “is the exact opposite approach to what is truly needed to address the state’s housing woes, and these bills will have much broader consequences that will extend to the state’s mortgage market and overall economic recovery.” The study contends that the legislation has the potential to needlessly delay foreclosures and negatively affect the real estate market. Beacon Economics believes that legislation will drive up costs make lending more difficult and expensive for borrowers. The company’s report also claims that the legislation could reduce home values in the Golden State. Dustin Hobbs, a spokesman for the California Mortgage Bankers Association, explained that "[n]umerous studies have shown that when you lengthen litigation and lengthen the foreclosure process there's no tangible benefit to borrowers." Hobbs added that, to the contrary, "[i]t significantly delays the recovery of the real estate market."

If Brown signs the legislation, California will become first state to codify and extend provisions of a National Mortgage Settlement to all borrowers, and the second state, after Nevada, recently to encourage borrowers to enforce foreclosure requirements through litigation. Additionally, unlike the National Mortgage Settlement, which expires in three years, the requirements and liabilities under the legislation are permanent, except for certain provisions that expire in 2018. The laws will take effect on January 1, 2013. 

Other provisions of the legislation that comprises the “Homeowner Bill of Rights” include:

• A bill (AB 1950) that extends the statute of limitations for prosecuting mortgage related crimes from one year to three years;
• Two bills (AB 2610 and SB 1473) that extend additional protections to tenants who rent homes that are foreclosed upon;
• Two bills (AB 2314 or SB 1472) that will require purchasers of foreclosed homes to give tenants at least 90 days before starting eviction proceedings or, if the tenant has a fixed-term lease, to honor the lease and provide local governments and receivers additional tools to deter blight caused by vacant homes in neighborhoods.

This legislation has passed out of the respective legislative committees, but has not yet been passed by the full legislature.

Should you have any questions about this new legislation, or need additional information, please contact one of the authors of this alert, Fredrick Levin at 213-457-1837, Don Lampe at 704-335-2736, Jeffrey Jamison at 312-627-2101, a member of our Financial Services Regulatory and Compliance team, or your Dykema relationship attorney. 

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