California Homeowner Bill of
Rights Becomes Law

All eyes in the nation now turn to California as Governor
Jerry Brown signed into law today the Homeowner Bill of Rights to help
struggling Californians keep their homes. This law aims to avoid
foreclosure where possible to help stabilize California’s housing
market and prevent the other negative effects of foreclosures on
families, communities, and the economy. The new law will generally
prohibit lenders from engaging in dual tracking, require a single point
of contact for borrowers seeking foreclosure prevention alternatives,
provide borrowers with certain safeguards during the foreclosure
process, and provide borrowers with the right to sue lenders for
material violations of this law.

 

The following
is a summary of the key provisions of the Homeowner Bill of Rights that
may affect California’s REALTORS® and their clients. The full text of
this law, also known as Assembly Bill 278 and Senate Bill 900, is
available at www.leginfo.ca.gov.

 

Applicability of the Law: This law will generally
come into effect on January 1, 2013. It only pertains to first trust
deeds secured by owner-occupied properties with one-to-four residential
units, unless otherwise indicated below. “Owner-occupied”
means the property is the principal residence of the borrower and
secured by a loan made for personal, family, or household purposes (CC
2924.15). A “borrower” under this law must generally be a
natural person and potentially eligible for a foreclosure prevention
alternative program offered by the mortgage servicer, but not someone
who has filed bankruptcy, surrendered the secured property, or
contracted with an organization primarily engaged in the business of
advising people how to extend the foreclosure process and avoid their
contractual obligations (CC 2920.5(c)). A “foreclosure prevention
alternative” is defined as a first lien loan modification or
another available loss mitigation option, including short
sales (CC 2920.5(b)). Some of the requirements of this law do not
apply to “smaller banks” that, during the preceding annual
reporting period, foreclosed on 175 or fewer properties with
one-to-four residential units (CC 2924.18(b)).

No Dual Tracking During Short Sale: A mortgage
servicer or lender cannot record a notice of default or notice of sale,
or conduct a trustee’s sale, if a foreclosure prevention alternative
has been approved in writing by all parties (e.g., first lien investor,
junior lienholder, and mortgage insurer as applicable), and proof of
funds or financing has been provided to the servicer. This requirement
expires on January 1, 2018. Effective January 1, 2018, a lender or
mortgage servicer cannot record a notice of sale or conduct a trustee’s
sale if the borrower’s complete application for a foreclosure
prevention alternative is pending, and until the borrower has been
given a written determination by the mortgage servicer. Smaller
banks are only covered by the requirements taking effect in 2018.
CC 2924.11.

Cancelling a Pending Trustee’s Sale: A mortgage
servicer must rescind or cancel any pending trustee’s sale if a short
sale has been approved by all parties  (e.g., first lien investor,
junior lienholder, and mortgage insurer as applicable), and proof of
funds or financing has been provided to the lender or authorized agent.
For other types of foreclosure prevention alternatives, a lender must
record a rescission of a notice of default or cancel a pending
trustee’s sale if a borrower executes a permanent foreclosure prevention
alternative. These requirements do not apply to smaller banks, and will
sunset on January 1, 2018. CC 2924.11.

Providing a Single Point of Contact: For a
borrower requesting a foreclosure prevention alternative, the mortgage
servicer must, upon the borrower’s request, promptly establish and
provide a direct means of communication with a single point of contact.
The single point of contact must remain assigned to the borrower’s
account until all loss mitigation options offered by the mortgage servicer
are exhausted or the borrower’s account becomes current. The single
point of contact must be an individual or team responsible for, among
other things, coordinating the application for the foreclosure
prevention alternative, giving timely and accurate status reports,
having access to those with the ability and authority to stop
foreclosure proceedings, and referring the borrower to a supervisor if
any upon the borrower’s request. Each team member must be knowledgeable
about a borrower’s situation and current status in the foreclosure
alternatives process. These requirements do not apply to smaller banks
as defined. CC 2923.7.

No Dual Tracking During Loan Modification: A
mortgage servicer generally cannot record a notice of default, notice
of sale, or conduct a trustee’s sale for a nonjudicial foreclosure if
the borrower’s complete application for a first lien loan modification
is pending as specified, or if a borrower is in compliance with the
terms of a written trial or permanent loan modification, forbearance,
or repayment plan. The borrower will have 30 days to appeal the denial
of a loan modification, and the mortgage service cannot proceed with
the above foreclosure steps until 31 days after giving the borrower a
written denial of a loan modification, or longer if the borrower
appeals the denial. To prevent abuse of this provision, however, a
mortgage servicer is not obligated to evaluate a first lien loan
modification application from a borrower who has previously been
evaluated before 2013, or given a fair opportunity to be evaluated,
unless the borrower submits a documented material change in the
borrower’s financial circumstances. These specific requirements expire
on January 1, 2018 at which time, as stated above, a lender or mortgage
servicer will be prohibited from recording a notice of sale or
conducting a trustee’s sale if the borrower’s complete application for
a foreclosure prevention alternative is pending, and until the borrower
has been given a written determination by the mortgage servicer. Smaller
banks are only covered under the requirements commencing in 2018. CC
2923.6 and 2924.11.

No Late Fees or Application Fees: A mortgage
servicer cannot collect any late fees while a complete first lien loan
modification application is under consideration, a denial is being
appealed, the borrower is making timely modification payments, or a
foreclosure prevention alternative is being evaluated or
exercised. A mortgage servicer is also prohibited from charging
for any application, processing, or other fee for a first lien loan
modification or other foreclosure prevention alternative. These
requirements do not apply to smaller banks as defined. These
requirements will sunset on January 1, 2018. CC 2924.11.

Additional Loan Modification Safeguards: Until
January 1, 2018, a mortgage servicer must provide written
acknowledgment of receipt within five business days of a borrower’s
submission of a complete first lien modification application or any
document in connection with a first lien modification application. The
acknowledgement of receipt must provide a description of the loan
modification process, including an estimated timeframe for the mortgage
servicer to decide, other timeframes, and any deficiencies in the
borrower’s application. CC 2924.10. Furthermore, effective January 1,
2013 with no expiration date, if a first lien loan modification is
denied, a mortgage service must send a written notice to the borrower
with the reasons for denial and additional information as specified. On
January 1, 2018, the required content of the denial letter will change
to comport with other changes that will take effect. Smaller banks need
not comply with these requirements until January 1, 2018. CC 2923.6 and
2924.11.

Binding if Loan is Transferred: Any written approval
for a foreclosure prevention alternative shall be honored by a
subsequent mortgage servicer in the event the borrower’s loan is
transferred or sold. This requirement does not apply to smaller banks.
This requirement will expire on January 1, 2018. CC 2924.11.

Lender Required to Review Foreclosure Documents:
No entity can record a notice of default or otherwise initiate the
foreclosure process, except for the holder of the beneficial interest
under the deed of trust, an authorized designated agent of the holder
of the beneficial interest, or the original or substituted trustee
under the deed of trust. Furthermore, a mortgage servicer must ensure
that certain foreclosure documents are accurate and complete, and
supported by competent and reliable evidence. Those foreclosure
documents are the initial contact declaration, notice of default,
notice of sale, assignment of deed of trust, substitution of trustee,
and declarations and affidavits filed in a judicial foreclosure
proceeding. A mortgage servicer must, before recording or filing these
documents, review competent and reliable evidence substantiating a
borrower’s default and the right to foreclose. The above provisions
have no expiration date. However, until January 1, 2018, any mortgage
servicer who engages in multiple and repeated uncorrected violations of
its obligation to review foreclosure documents shall be liable for a
civil penalty up to $7,500 per deed of trust in an action brought by
the Attorney General, district attorney, or city attorney, or in an
administrative proceeding brought by the DRE, DOC, or DFI against a
respective licensee (see below for a borrower’s legal remedies). These
provisions apply to all trust deeds, regardless of occupancy or number
of units. CC 2924(a)(6) and 2924.17.

Extending Initial Contact Requirement: Existing
law requiring a lender to contact a borrower 30 days before initiating
foreclosure has been modified as well as extended with no expiration
date. Originally set to expire on January 1, 2013, this provision generally
prohibits a mortgage servicer or lender from recording a notice of
default until 30 days after the lender or mortgage servicer contacts
the borrower in person or by telephone to assess the borrower’s
financial situation and explore options for avoiding foreclosure.
During the initial contact, the mortgage servicer must advise the
borrower of the right to request a subsequent meeting within 14 days,
and provide a toll-free number to find a HUD-certified housing
counseling agency. Any meeting may occur telephonically. Instead of
directly contacting the borrower, a mortgage servicer can satisfy due
diligence requirements in the manner specified. A notice of default
must include a declaration that the mortgage servicer has complied with
or is exempt from this initial contact requirement. An existing
requirement for a declaration in the notice of sale will be eliminated.
Until January 1, 2013, this law generally applies to loans made from
2003 to 2007 secured by owner-occupied residential properties with one-to-four
units, whereas starting January 1, 2013, this law will generally apply
to first trust deeds secured by owner-occupied residential properties
with one-to-four units. CC 2923.5 and 2923.55.

Notifying Borrower Before NOD: A mortgage
servicer cannot record a notice of default for a nonjudicial
foreclosure until the mortgage servicer informs the borrower of the
borrower’s right to: (1) request copies of the promissory note, deed of
trust, payment history, and assignment of loan if any to demonstrate
the mortgage servicer’s right to foreclose; and (2) certain protections
under the Servicemembers Civil Relief Act if the borrower is a service
member or dependent. This requirement does not pertain to smaller banks
as defined. This requirement expires on January 1, 2018. CC 2923.55.

Notifying Borrower After NOD: Within 5 business
days after recording a notice of default, a mortgage servicer must
generally send a written notice to the borrower on how to apply for the
mortgage servicer’s foreclosure prevention alternatives if any. This
notice is not required if the borrower has previously exhausted the
first lien loan modification process offered by the mortgage servicer
as specified. This requirement does not apply to smaller banks as
defined. This requirement shall sunset on January 1, 2018. CC 2924.9.

Postponing a Trustee’s Sale: Whenever a
trustee’s sale is postponed for at least 10 business days, the lender
or authorized agent must provide written notice of the new sale date
and time to the borrower within five business days after the
postponement. However, any failure to comply with this requirement will
not invalidate any trustee’s sale that would otherwise be valid. This
requirement applies to all trust deeds, regardless of occupancy or
number of units. This requirement shall sunset on January 1, 2018. CC
2924(a)(5).

Legal Remedies for Borrowers: A borrower may
generally bring a private right of action to enjoin or stop a trustee’s
sale until the mortgage servicer has corrected certain material violations
of this law. If a trustee’s deed has already been recorded, the
borrower may recover actual monetary damages for certain material
violations. For intentional and reckless violations by the mortgage
servicer, the borrower may recover treble actual damages or $50,000,
whichever is greater. A prevailing borrower who is awarded relief under
this provision can also recover reasonable attorneys’ fees and costs.
Certain violations by a person licensed by the DRE, DOC, or DFI are
deemed violations of that person’s licensing laws. These provisions do
not apply to smaller banks until 2018. CC 2924.12. C.A.R. opposed this
provision because of our concern for bad faith claims, but the
Legislature was not convinced.

Lender’s Standard of Care to Investors: The
Legislature intends for a mortgage servicer to offer the borrower a
loan modification or workout plan in accordance with the mortgage
servicer’s contractual or other authority. Any duty a mortgage servicer
has to maximize net present value under a pooling and servicing
agreement is owed to all investors, not any particular investor. A
mortgage servicer will be deemed as acting in the best interest of all
investor if it implements a loan modification or workout plan in
accordance with certain specified parameters. CC 2923.6.

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