Update on the California Home Owner Bill of Rights

T. Robert Finlay, Esq.

By T. Robert Finlay, Esq., Wright, Finlay & Zak, LLP
UTA President

As you may be aware, California’s AG introduced eleven total bills entitled the Home Owner Bill of Rights.  From a practical standpoint, these eleven bills only represent six new bills as five are duplicates, introduced in both the Senate and the Assembly.  Seven bills have already passed:  SB1472/AB 2314 – preventing blight; SB1473/AB2610 – State law matching the PTFA; SB 1474/AB 1763  - expands jurisdiction of the AG; and AB 1950 – extends the Statute of Limitations for mortgage fraud from one year to three years.  The most important four bills are still pending before the Sub-Committee assigned to recommend approval or denial to the Senate and Assembly (SB 1470/AB 1602 and SB 1471/AB 2425).

The remaining four bills have been constant flux, making it almost pointless to provide you with an update until now.  That said, the bills are still subject to change right now.  In fact, the Sub-Committee that will vote on the bills any day now, hasn’t even confirmed which version of the bill it intends to vote on.  This is a brief summary of the bills’ main points, as well as some potential problem areas.  Of course, this information is provided for informational purposes only and should not be relied on as legal advice.  Please consult with your in-house or outside counsel before making any decisions or policies based on the proposed new bills. 

A. SB 1471/AB 2425: Single Point of Contact and other protections for homeowners in foreclosure.

The current version of the SB 1471/AB 2425 have fortunately backed off on the Single Point of Contact (SPOC) concept.  Instead, the proposed language requires that the mortgage servicer provide the borrower with “one or more means of direct communication”.  What exactly that means will be subject to further debate and, unfortunately, litigation.  Nevertheless, it’s better than the original SPOC requirement.

In addition, the bills are fortunately limited to first liens only.  The specific additions and amendments proposed are:

1. Summary of addition of Civil Code section 2923.7:

“Upon request” for a foreclosure prevention alternative (FPA) from a BR on a “first lien”, the mortgage servicer (MS) shall promptly provide a point of contact and “one or more means of direct communication”.  The attachment provides the specific responsibilities of the “point of contact” (POC). 

Potential Issues:

• What constitutes a “request” for a FPA?
  
  
• What does “promptly” mean – 24, 48, 72 hours?
  
  
• The proposed statute does not cover the situation where the investor will, under no circumstances, offer the BR a FPA.
  
  
• In subsection (b)(3), the POC must have access to current information and personnel sufficient to timely, accurately, and adequately inform the BR of the current status of the loan mod or other FPA.  The highlighted terms are subject to many interpretations, likely to result abusive litigation aimed at delay.
  
  
• The POC must refer and transfer a BR to a supervisor upon request.
  
  
• Definition of BR is not adequately defined, leaving open the question of whether a non-signatory on the Note is eligible.
  
  
• Application of the new law to foreclosures that have already been initiated is unclear.

B. SB 1470/AB 1602:  Intended to implement the standards of the National Mortgage Settlement, including eliminating “dual tracking”:

These bills are even more comprehensive that the ones discussed above.  Specifically, these bills propose the following amendments and statutory additions:

1. Summary of Changes to 2923.6:

If a BR submits a complete application for a first lien FPA, the MS and its agents cannot records a NOD, NOS or go to sale while the FPA is pending.  The proposed language then provides a series of obligations on the MS’ part, depending on whether the BR qualifies for a loan mod or other FPA.  For example, subsection (d) gives the BR a 30 right to appeal a decision denying the FPA.  The proposed language also provides a timeframe for when the MS can proceed to the next foreclosure step.  Please see the attachment for the exact language.

Potential Issues:

• While the proposed bill provides a definition of a complete application, it is woefully inadequate.  We envision lots of BR lawsuits claiming that they submitted a “complete” loan mod application.  In addition, the definition provides that the loan mod application must be submitted within the reasonable timeframe requirements of the MS.  We can see BRs filing suit, claiming that the MS’ deadline was not “reasonable”.  At that point, the foreclosure is delayed.
  
  
• Compliance with the onerous requirements on the MS will be a definite challenge.  Mistakes will open the door for delay and liability.
  
  
• Subsection (c)(2) gives the BR 14 days to accept a FPA, but does not require that the acceptance be in writing.  We envision battles over whether the BR verbally accepted the FPA.
  
  
• Subsection (f) states that the MS does not have to reconsider a BR for a FPA that had been previously rejected unless “there has been a material change in the BR’s financial circumstances”.  We can all see the battle here – what constitutes a “material” change.
  
  
• Same definition problem with the term “borrower”.
  
  
• Application of the new law to foreclosures that have already been initiated is unclear.

2. Summary of the Addition of 2924.11

Limits the circumstances under which the MS can record the NOD or NOS.  For instance, subsection (a) provides that the NOD or NOS cannot be recorded when the BR is in compliance with the terms of a loan mod or a PFA has been approved by all parties.  Subsection (b) requires that the MS provide the BR with a fully executed PFA following receipt of the executed copy from the BR.  If the PFA was not made in writing, the MS must provide the BR with a written summary of the PFA’s terms as soon as possible following the approval of the PFA.   Subsection (c) requires that the MS record a rescission of the NOD and/or NOS upon the BR’s execution of a permanent loan mod or PFA.  In the case of a short sale, the NOD and/or NOS must be recorded when the sale has been approved by all parties and proof of funds received.  Subsection (e) bars charging late fees while a completed FPA is under review. 

Potential Issues:

• Vagueness of the term approved PFA is open to potential litigation.
  
  
• There currently is no document for rescinding a NOS, only a NOD.  There are serious questions as to whether the recorder’s offices will even accept a document entitled Rescission of the Notice of Sale.
  
  
• How quickly does the MS have to provide the executed PFA?  Subsection (b) merely says “following” receipt of the BR’s executed PFA.
  
  
• What constitutes “asap” in Subsection (b).
  
  
• In subsection (c), how quick is “upon” and what constitutes a “permanent” mod?
  
  
• Under subsection (d), the NOD and/or NOS must be rescinded if a short sale is approved.  What if it never closes?  Under this provision, the entire foreclosure would have to restart.
  
  
• Application of the new law to foreclosures that have already been initiated is unclear.

3. Summary of the Addition of 2924.10:

The proposed language in subsection (a) identifies a series of MS obligations when the borrower submits a complete loan mod application. For example, the MS must acknowledge its receipt in writing within 5 business days and describe the loan mod process, identify any deadlines, expiration dates for docs and any deficiencies in the application.  Meanwhile, subsection (b) requires that, upon denial of a loan mod, the MS must provide a written notice to the BR explaining in detail the reasons for denial (see attachment for specific information must be provided).

Potential Issues:

• Same defective definition of a “borrower” and inadequacy of the definition of a “completed” loan mod application.
  
  
• Setting up procedures to ensure compliance with the “receipt” and “denial” of a loan mod application will cause significant delay.  Once set up, compliance will be an issue and ripe for borrower attack.
   
  
• How does the denial notice need to be sent?  There is nothing preventing a BR from simply claiming that he or she didn’t receive the notice.
  
  
• Application of the new law to foreclosures that have already been initiated is unclear.
  
  
• The reasons for denial are likely to be challenged by the BR in the courts.

4. Summary of Amendments to 2923.5:

Section 2923.5 currently requires the MS to reach out to the BR prior to recording the NOD to generically discuss FPA.  It also requires a very generic compliance declaration along with the NOD.  The original language of the bill would have turned this requirement on its head.  Fortunately, most of the really onerous language has been removed from the current draft.  That said, the following problems still exist:

• Yet a different definition of the BR.  This one includes the signatory on the DOT, who may or may not be on the Note (or in the MS’ eyes, the BR). 
  
  
• The timing of the owner-occupied requirement is likewise unclear – at origination, at recording of the NOD?
  
  
• It also adds some requirements to the NOD and NOS (please see the specific language in the attachment).

5. Summary of the Addition of 2924.9:

Unless the BR has exhausted the loan mod process described in 2923.6, within five calendar days after recording the NOD, the MS shall send the BR a written notice with the following information: that the BR may be evaluated for FPA; whether an application is required; how the BR can obtain the application; that a BR service member or a dependent of a service member may be entitled to SCRA protection; and that the BR may request certain information on the loan (i.e., note, DOT, assignments recorded pursuant to 2932.5 and payment history).

Potential Issues:

• Potential disputes over what constitutes “exhausting the loan mod process”.
  
  
• The 5 calendar day requirement is a potential pitfall, especially if there is a weekend in between.
  
  
• Delay caused by the need to change current processes.
  
  
• Assignments under 2932.5.  As confirmed in several recent appellate rulings, 2932.5 only applies to mortgages and does not apply to DOTs.  Unfortunately, we anticipate another bill to change 2932.5 to include DOTs.  If that both bills pass, all assignments of the DOT would have to be recorded and the BR would have the right to request copies. 
  
  
• As always, application to pending foreclosures will be a point of discussion and contention.

6. Summary of Amendments to 2924:

2924 is the introduction to California’s foreclosure requirements:  A road map of the foreclosure process, elaborated on in subsections.  The Home Owner Bill of Rights proposes to bar anyone but the beneficiary or its agents from recording the NOD.  Agents can only record the NOD if its within the scope of authority designated by the holder of the beneficial interest.

Potential Issues:

• As written, even the trustee under the DOT couldn’t record the NOD. This would conflict with several other provisions in 2924 et. seq.
  
  
• As written, arguably a title company, attorney service or anyone else that physically brings the NOD to the recorder’s office, must qualify under the agency exception.
  
  
• Who does the agency authorization comes from?  According to the statute, it must come from the “holder of the beneficial interest”.  First off, that term is subject to differing interpretations and, as a result, litigation.  Second, how does the MS fit in.  A conservative reading of the proposed language would require that the actual beneficiary or investor provide the necessary agency authorization.  MS authorization is probably not sufficient.
  
  
• MS will have to take steps to document the agency relationship and scope of authorization.  More cost and delay.
  
  
• If the beneficiary itself does not physically bring every NOD to the recorder’s office, any BR wanting to delay the foreclosure can simply file suit questioning the agents authority.  As written, the BR would almost automatically receive a TRO.
  
  
• What about pending foreclosures?
  
  
• Of all the proposed additions and amendments, this one and 2924.17 below, will probably result in the most litigation.  These sections are automatic TROs for the BR.

7. Summary of the Addition of 2924.17:

The proposed language requires that every recorded NOD, SOT, NOS, Assignment, 2923.5 declaration, or declaration filed in any court relative to a foreclosure proceeding, be accurate, complete and supported by competent and reliable evidence.  The language adds that, before recording or filing one of these documents, the MS shall ensure that it has reviewed competent and reliable evidence to substantiate the BR’s default and the right to foreclosure.   Any MS that engages in multiple and repeated violations of this section shall be liable for a $10,000 penalty per document, in addition to other available remedies.

Potential Issues – where to begin:

• Requiring the MS to review each of these documents, many of which are prepared by the trustee, will be mind-numbing, costly and incredible cumbersome.  It will also cause significant delay while setting up the process.
  
  
• The terms “accurate”, “complete” and “supported by competent and reliable evidence” are begging for litigation.
  
  
• What constitutes “multiple and repeated” violations?
  
  
• $10K penalty per document. A mistake in the Assignment for instance, could result in a mistake in the NOD, SOT, NOS and 2923.5 Declaration, resulting in a $50k penalty.
  
  
• Other remedies are still available on top of the $10k.
  
  
• Sorry, but this language is ridiculous.

8. Summary of the Addition of 2924.12 (Private Right of Action):

Without a specific private right of action, an individual does not have the right to sue to enforce a statute.  In the 2010 case entitled Mabry v. Superior Court, the United Trustees Association, California Mortgage Association and others in the industry were successful in getting the Court of Appeals to limit the private right of action available under 2923.5 to a postponement of the foreclosure sale only.  The proposed language of 2924.12 will obliterate the gains made in the Mabry decision.   2924.12(a) proposes to give BRs a pre-NOS right to bring an action to enjoin the foreclosure sale for a material violation of 2923.5, 2923.6, 2923.7, 2924.9, 2924.10, 2924.11 or 2924.17.  If granted, the injunction will remain in effect until compliance has been reached.  Subsection (b) provides for similar post-NOS relief, adding an additional penalty if the violation of 2923.5, 2923.6, 2924.9, 2924.10 or 2924.11 (but not 2923.7 or 2924.17) is intentional, reckless or resulted from willful misconduct - the greater of treble (triple) actual damages or $50k.   2924.12 also awards attorneys fees and costs to a prevailing BR (but not a prevailing MS).

Potential Issues:

• Giving the BRs a private right of action for an injunction will undoubtedly increase the amount of litigation.
  
  
• As a condition of the injunction, a bond “may” be required whereas the current law technically mandates a bond.  The bond is also now limited to the amount of the BR’s monthly mortgage payment, far less than bonds we commonly get today. 
  
  
• Subsections (a)(3) and (b)(3) obliterates the Tender Rule – specifically stating that the BR is not required to tender as a condition of an action under one of the covered statutes.
  
  
• Not sure how you can comply with 2923.5 without rescinding the NOD, complying and then rerecording the NOD.  This technicality alone will be subject to ligation.
  
  
• The potential penalty under subsection (b) is very dangerous.  In addition, the right to attorneys fees will encourage more lawsuits.
  
  
• Note – signatories to the Consent Judgment are exempt from 2924.12.

C. Conclusion: