BILL ANALYSIS ------------------------------------------------------------ |SENATE RULES COMMITTEE | SB 1275| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ THIRD READING Bill No: SB 1275 Author: Leno (D), et al Amended: 5/27/10 Vote: 21 SENATE BANKING, FINANCE, AND INS. COMMITTEE : 7-2, 4/7/10 AYES: Calderon, Florez, Kehoe, Liu, Lowenthal, Padilla, Price NOES: Cogdill, Runner NO VOTE RECORDED: Correa, Cox, Vacancy SENATE JUDICIARY COMMITTEE : 3-1, 4/20/10 AYES: Corbett, Hancock, Leno NOES: Harman NO VOTE RECORDED: Walters SENATE APPROPRIATIONS COMMITTEE : 6-4, 5/24/10 AYES: Kehoe, Alquist, Corbett, Leno, Wolk, Yee NOES: Cox, Denham, Walters, Wyland NO VOTE RECORDED: Price SUBJECT : Mortgage foreclosure relief SOURCE : Author DIGEST : This bill requires a mortgagee, trustee, beneficiary, or authorized agent, before recording a Notice of Default on a loan covered by the bill, to comply with the bills provisions, as specified, which require (1) written communication and statutory notice, (2) contact and CONTINUED SB 1275 Page 2 borrower outreach, (3) a declaration of compliance, and (4) a denial explanation letter. This bill sunsets on January 1, 2013. Senate Floor Amendments of 5/27/10 describe procedures that must be followed by mortgage loan servicers before proceeding to foreclosure. ANALYSIS : Existing law regulates the nonjudicial foreclosure of properties pursuant to the power of sale contained within a mortgage contract. To commence the process, existing law requires the trustee, mortgagee, or beneficiary to record a Notice of Default (NOD) and allow three months to lapse before setting a date for sale of the property. Existing law requires a notice of nonjudicial foreclosure sale to be officially noticed in a newspaper of general circulation, posted on the property, and recorded at least 20 days before the sale date. Existing law, pursuant to SB 1137 (Perata, Corbett, Machado), Chapter 69, Statutes of 2008, provides the following: 1. A mortgagee, trustee, beneficiary, or authorized agent may not file a NOD until 30 days after the mortgagee, beneficiary, or authorized agent contacts the borrower in person or by telephone to assess the borrower's financial situation and explore options for the borrower to avoid foreclosure or 30 days after the mortgagee, beneficiary, or authorized agent has tried with due diligence, as defined, to contact the borrower. 2. A NOD must include a declaration that the mortgagee, beneficiary, or authorized agent has contacted the borrower, has tried with due diligence to contact the borrower, or that no contact was required because the borrower has filed for bankruptcy, surrendered the property, or contracted with an entity to extend the foreclosure process. 3. "Due diligence" is defined to require that the mortgagee, beneficiary, or authorized agent send a first-class letter to the borrower and then call the borrower at least three times at different hours and on SB 1275 Page 3 different days. If the borrower does not respond within two weeks after the phone calls have been made, the mortgagee, beneficiary, or authorized agent must send a certified letter, return receipt requested. 4. The above-described provisions sunset on January 1, 2013, and apply only to loans originated between January 1, 2003 and December 31, 2007, which are secured by owner-occupied residential real property containing no more than four dwelling units. This bill, until January 1, 2013, extends the requirements of SB 1137 for owner-occupied residential real property containing no more than four dwelling units to mortgages or deeds of trust recorded prior to January 1, 2009, if the loans are required to be reviewed under federal Home Affordable Modification Program (HAMP) guidelines, or between January 1, 2003, and January 1, 2009, if the loans are not required to be reviewed under HAMP guidelines. This bill: 1. Applies different sets of provisions to different types of mortgage loan servicers, as follows: A. Mortgage loan servicers who are required to review loans pursuant to HAMP ("HAMP servicers" for purposes of this analysis) would be subject to one set of requirements, with respect to mortgages and deeds of trust recorded prior to January 1, 2009, which are secured by single-family, owner-occupied, residential real property. B. Mortgage loan servicers who are not required to review loans pursuant to HAMP ("non-HAMP servicers" for purposes of this analysis) would be subject to a different set of requirements, with respect to mortgages and deeds of trust recorded from January 1, 2003 through December 31, 2008. 2. Requires HAMP servicers to do the following four things, in addition to what they are required to do pursuant to HAMP guidelines and directives: SB 1275 Page 4 A. Before recording a NOD on a loan covered by the bill, provide a specified notice to borrowers, describing the nonjudicial foreclosure process, informing them of their foreclosure-related rights, and explaining potential foreclosure avoidance options. This notice would have to be made available by an unnamed state government entity, in English and each of the five foreign languages listed in Section 1632 of the Civil Code (Spanish, Tagalog, Korean, Vietnamese, and Chinese). B. Within 10 business days following a decision to deny a borrower's application for a mortgage loan modification, mail a denial explanation letter to the borrower. Although HAMP guidelines and directives require servicers to mail a denial explanation letter to borrowers who have not been approved for a HAMP mortgage loan modification, this bill's requirements related to the denial explanation letter go beyond HAMP in three ways: (1) Several of the inputs used by the servicer to calculate the net present value of modification versus foreclosure must be automatically provided to the borrower in the denial explanation letter, rather than provided only upon request by the borrower. (2) Three additional items must be provided to the borrower in the letter of denial: the name and contact information for the holder of the mortgage note, the date a completed application was received from the borrower, and the date the borrower's application for a loan modification was denied. (3) If the servicer's communications with the borrower have been primarily in one of the five foreign languages specified in Section 1632 of the Civil Code, the denial explanation letter must be translated into that foreign language. C. Concurrent with recording a NOD on any type of SB 1275 Page 5 loan (whether single-family residential, multi-family residential, or commercial), record a Declaration of Compliance. The Declaration of Compliance is a "check the box" document, which asks the servicer or its agent to identify which of several specific provisions of law apply to the loan, which of several specific provisions of law were followed in connection with the loan, and which of several specific options the borrower elected, with respect to requesting a loan modification. The Declaration of Compliance must be signed by an individual having personal knowledge of the information it contains, or by an individual with authority to bind the mortgage servicer, who certifies that the declaration is based on records made in the regular course of the servicer's business. D. For purposes of completing the declaration of compliance, compile a record of the dates and times of, and addresses and telephone numbers used for attempts to contact the borrower. Servicers are required to make this record available to a borrower within ten business days, if requested by the borrower in writing after a NOD has been recorded. 3. Requires Non-HAMP servicers to do each of the things described in #2A, 2B, 2C, and 2D above, and additionally requires compliance with a series of requirements related to borrower outreach, contact, and communication. These requirements reflect a combination of enhancements to the contact requirements contained in SB 1137, plus some actions required under HAMP, plus some changes to HAMP requirements, which the bill's key proponents believe to be improvements over HAMP rules and procedures. The timing of some of the requirements on non-HAMP servicers is different than the timing required of HAMP servicers. 4. Provides the following remedies to borrowers whose servicer fails to record a completed Declaration of Compliance, submits a false Declaration of Compliance, or fails to send a denial explanation letter that materially complies with specified provisions of the bill. The remedies would only become available after SB 1275 Page 6 the borrower's property has been foreclosed upon nonjudicially: A. If the property is sold to a bona fide purchaser at the trustee sale (i.e., sold to a third party that is not the foreclosing financial institution), the borrower may recover the greater of treble actual damages or statutory damages of $10,000. B. If the property is taken back by the foreclosing financial institution at the trustee sale but is later sold by that institution to a bona fide purchaser, the borrower may recover the greater of treble actual damages or statutory damages of $10,000. However, if the borrower establishes that the servicer had notice of the borrower's claim under the provisions of the bill before selling the property to that bona fide purchaser, the borrower is additionally entitled to recover statutory damages of $15,000. C. If the property is taken back by the foreclosing financial institution at the trustee sale and not subsequently sold to a bona fide purchaser, the borrower may bring an action to void the foreclosure sale. D. In addition to the remedies available under #4A, 4B, or 4C above, the borrower would be entitled to recover between $1,500 and $10,000 in statutory damages, if the servicer failed to mail the translated notice informing borrowers of their foreclosure-related rights or failed to materially comply with the loan modification review process requirements of the bill. E. Not authorize a cause of action for any failure or error that is technical or de minimis in nature. 5. Provides an express exemption from its requirements, in cases where a borrower has already surrendered the property, contracted with an organization or other entity that advises borrowers on how to "game" the foreclosure process, or filed for a bankruptcy that is SB 1275 Page 7 still before a court. 6. Sunsets on January 1, 2013. FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes Local: No According to the Senate Appropriations Committee: Fiscal Impact (in thousands) Major Provisions 2010-11 2011-12 2012-13 Fund DFI auditing/reviews $62 $121 $62Special* DOC ----------------unknown-------------- Special** DRE ------------------minor---------------- Special*** * Department of Financial Institutions Fund ** Department of Corporations Fund ***Department of Real Estate Fund SUPPORT : (Verified 5/25/10) Affordable Housing Services Alliance of Californians for Community Empowerment California Alliance for Retired Americans California Capital Financial Development Corporation California Coalition for Rural Housing California Conference Board of the Amalgamated Transit Union California Conference of Machinists California Human Development Corporation California Labor Federation California Reinvestment Coalition Causa Justa: Just Cause Center for Responsible Lending City of Lakewood Coalition for Quality Credit Counseling Community Financial Resources Community Housing Works, San Diego SB 1275 Page 8 Consumer Federation of California Consumer Legal Services in East Palo Alto Consumers Union Contra Costa Interfaith Supporting Community Organization Council on Aging Silicon Valley East LA Community Corporation East Palo Alto Council of Tenants Education Fund Engineers and Scientists of California, IFPTE Local 20 Housing and Economics Rights Advocates Inland Fair Housing and Mediation Board International Longshore and Warehouse Union JOLT, Coalition for Responsible Investing Law Foundation of Silicon Valley National Council of La Raza Neighborhood Housing Services of Orange County Novadebt Oakland Community Organizations Opportunity Fund Orange County Fair Housing Council, Inc. Professional and Technical Engineers, IFPTE Local 21 Public Counsel Rural Community Assistance Corporation Sacramento Gray Panthers Sacramento Housing Alliance Sacramento Mutual Housing Association Southern California Housing Rights Center The Mission Economic Development Agency United Food & Commercial Workers Western States Council UNITE-HERE Vallejo Neighborhood Housing Services, Inc. Vermont Slauson Economic Development Corp. Yolo Mutual Housing Association OPPOSITION : (Verified 5/25/10) American Council of Engineering Companies of California California Bankers Association California Building Industry Association California Chamber of Commerce California Credit Union League California Financial Services Association California Independent Bankers California Land Title Association California Mortgage Association SB 1275 Page 9 California Mortgage Bankers Association Civil Justice Association of California Securities Industry and Financial Markets Association United Trustees Association ARGUMENTS IN SUPPORT : The author writes: "? delinquencies and foreclosures in California continue to increase - and appear likely to increase into the foreseeable future. Meanwhile, data shows that the rate of permanent loan modifications offered to borrowers has lagged in comparison. The California non-governmental agencies providing housing counseling services have seen many cases in which foreclosures are initiated and/or homes sold in foreclosure while a borrower is still under review for a loan modification - or even while a borrower is making payments on a trial modification plan. ? "Borrowers and housing counselors throughout the State report that they regularly face seemingly insurmountable obstacles when they contact loan servicers for assistance. These include delays of many months to over a year in processing applications; financial and other documentation lost by the servicer; repeated requests from the servicer for the borrower to send in additional documentation or to send in the same documentation over and over again; miscalculations or misreading of borrower income leading to mistaken denials; misapplication and misrepresentation of investor guidelines and restrictions leading to mistaken denials; inconsistent, inaccurate and contradictory information provided to borrowers about their rights and obligations; foreclosures conducted while a modification application is pending (or while a trial plan is in effect) because the servicer failed to instruct the foreclosure trustee to postpone the sale; and unnecessary foreclosures conducted after an erroneous denial. "In the vast majority of cases, borrowers and their advocates are confronted with an overwhelming lack of information and communication from the servicer - about the status of their applications, the documentation they need to provide, and, in the event a borrower is notified that an application has been denied, about the reasons SB 1275 Page 10 for the denial. This lack of transparency makes it nearly impossible for borrowers to figure out where they are in the review process or to assess whether a denial is erroneous and to seek reconsideration of a qualifying application. Because borrowers often arrive at their foreclosure sale date without receiving a decision on a pending modification application, this lack of transparency also denies borrowers the opportunity to explore alternatives to foreclosure if they do not in fact qualify for a modification." ARGUMENTS IN OPPOSITION : Opponents of SB 1137 state: "While we believe that SB 1137 was a sound product, certain provisions have resulted in class action litigation. Some of those provisions that are subject to lawsuit are being amended by SB 1275, which we believe would inappropriately intervene in pending litigation. While we endeavor to understand the intricacies of this measure and its impact, we argue that that the bill exemplifies an overly complicated formula that will be layered on to recently enacted borrower outreach efforts to further frustrate and prolong existing foreclosure and loss mitigation efforts. We believe the measure will result in adding to the complexity of navigating these processes for loan servicers to create a series of procedural traps that will lead to ever increasing litigation. How this measure interacts mechanically and chronologically with recent state and federal regulatory and statutory changes is unclear. This will result in compliance hurdles and a detrimental distraction from our efforts to assist our customers. "Changes at the federal level are frequent and swift and make this measure unnecessary. To further illustrate this point, President Obama's and the United States Treasury Department's Home Affordable Modification Program (HAMP) has continued to evolve. In November 2009, Treasury released Supplemental Directive 09-08 requiring participating servicers to provide borrowers with a non-approval notice if they are denied for a trial period plan or official HAMP modification (effective on January 1, 2010). This disclosure provides detailed information as to why the borrower was not eligible for a SB 1275 Page 11 HAMP modification. "On March 24, 2010, Treasury released Supplemental Directive 10-02. This directive precludes a servicer from foreclosing on a borrower until the borrower has been evaluated and eligibility has been determined under HAMP. The directive also includes a foreclosure process explanation letter to be sent to borrowers detailing the HAMP eligibility consideration process and advising borrowers to pay attention to foreclosure notices. This directive is effective June 1, 2010. We understand that additional changes to HAMP are forthcoming. Given recent changes to HAMP, we believe that this measure is unnecessary and may conflict with federal programs. At a minimum, SB 1275 continues a trend of delaying or stretching out the foreclosure process. This will delay economic recovery, further frustrate local governments struggling with properties in disrepair while continuing the trend of reduced property tax revenue for local governments, and will artificially sustain depressed property values." JJA:mw 6/2/10 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END ****