BILL ANALYSIS Ó
AB 1321
Page 1
Date of Hearing: May 3, 2011
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
AB 1321 (Wieckowski) - As Introduced: February 18, 2011
As Proposed to be Amended
SUBJECT : Mortgages and Deeds of Trust: Recordation
KEY ISSUES :
1)Should all assignments of a mortgage or deed of trust be
recorded within 30 days of execution of the assignment?
2)Should a mortgagee, trustee, or beneficiary be prohibited from
filing a notice of default until 45 days after it has recorded
a mortgage, deed of trust, or assignment?
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
SYNOPSIS
This bill seeks to achieve greater transparency in the recording
of home mortgages and to provide homeowners confronting the
prospect of foreclosure with critical information about who owns
their loan, who they must negotiate with to achieve a loan
modification, and who has the right to foreclosure on their
homes should they default. The author contends that
Californians need these protections more than ever in light of
the on-going foreclosure crisis and a mortgage market
characterized by the frequent transfers of beneficial interests
under a mortgage or deed of trust. These practices, according
to the author, have gaps in the recording system that make it
impossible for borrowers to acquire needed information. As
such, this bill creates two key requirements: (1) that no
mortgagee, trustee, or beneficiary shall record a notice of
default (the first step in initiating a foreclosure) unless it
has recorded its interests with the appropriate county recorder
at least 45 days prior to filing the notice of default; (2) that
all subsequent assignments of a mortgage or a beneficial
interest in a deed of trust shall be recorded with the
appropriate county recorder's office within 30 days of execution
of the assignment. The bill is supported by a broad coalition
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of groups who contend that it will protect distressed borrowers
by allowing them to discover critical information that might
allow them to stay in their homes. The bill is opposed by a
broad coalition of banking, mortgage, escrow, and finance
industry associations who allege that the bill is unnecessary
and will only delay the foreclosure process. The bill will be
referred to the Assembly Banking & Finance Committee should it
pass out of this Committee. The following bill summary and
analysis reflect the amendments that the author wishes to take
in this Committee.
SUMMARY : Requires that assignments of a mortgage or deed of
trust must be recorded within 30 days of execution and provides
that a notice of default shall not be filed until 45 days after
the relevant mortgage, deed, or assignment has been recorded.
Specifically, this bill :
1)Prohibits a mortgagee, trustee, or beneficiary from filing a
notice of default (NOD) until 45 days after it has duly
recorded the mortgage or deed of trust and any subsequent
assignments with the appropriate county recorder, as
specified.
2)Provides that nothing in the above provision shall be
construed to require the county recorder to certify that a
mortgage, deed of trust, or assignments of the mortgage or
beneficial interest under the deed of trust have been properly
recorded prior to recording a notice of default.
3)Provides that any assignment of a mortgage or beneficial
interest under a deed of trust shall be recorded within 30
days of execution of the assignment with the appropriate
county recorder, as specified.
EXISTING LAW :
1)Provides, until January 1, 2013, that a mortgagee, trustee,
beneficiary, or authorized agent may not file a notice of
default (NOD) until 30 days after having contacted the
borrower in person or by telephone in order to assess the
borrower's financial situation and to explore options to avoid
foreclosure. However, a mortgagee, beneficiary, or authorized
agent may file an NOD if it failed to contact the borrower
after using due diligence, as described, to contact the
borrower. (Civil Code Section 2923.5.)
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2)Sets forth the process for bringing a non-judicial foreclosure
in California, from the filing of an NOD through the trustee's
sale and distribution of proceeds and the allocation of costs
and expenses. (Civil Code Sections 2924 through 2924k.)
3)Provides that where a mortgage or deed of trust confers a
power of sale upon a mortgagee, trustee, or any other person,
to be exercised after a breach of the obligation for which the
mortgage is security, the power of sale shall not be exercised
until all of the following apply:
a) The trustee, mortgagee, or beneficiary, or any of their
authorized agents, shall first file for record, in the
office of the recorder in each county where the mortgaged
or trust property or some part or parcel thereof is
situated, an NOD which contains specified information,
including a statement identifying the mortgage or deed of
trust and a statement that a breach of the obligation for
which the mortgage or deed of trust is security has
occurred.
b) Not less than three months has elapsed since the filing
of the NOD.
c) After the lapse of three months above, the mortgagee,
trustee, or other person authorized to make the sale shall
give notice of sale, stating the time and place thereof, in
the manner prescribed. (Civil Code Section 2924 (a).)
4)Requires that, within 10 days of filing an NOD, a copy of the
NOD must be mailed to the borrower, in the manner specified,
along with a prescribed statement notifying the borrower that
his or her property is in foreclosure and setting forth the
borrowers rights and obligations during the period of
foreclosure, including the borrower's right to stop the
foreclosure by curing the default up to five days prior to the
sale. (Civil Code Sections 2924b and 2924c.)
5)Provides that a power of sale may be conferred by a mortgage
upon the mortgagee or any other person, to be executed after a
breach of the obligation for which the mortgage is secured.
(Civil Code Section 2932.)
6)Provides that before a power of sale in a mortgage or deed of
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trust may be exercised, notice of the sale must be given by
posting of a written notice identifying the time and place of
the sale and describing the property at least 20 days prior to
the date of the sale. Provides that notice of sale must also
be published in a local newspaper of general circulation at
least once a week for three consecutive calendar weeks
preceding the sale. Sets forth the procedure for conducting
the sale, resolving conflicting claims, and distributing
proceeds of the sale. (Civil Code Sections 2924f through
2924k.)
7)Provides that where a power to sell real property is given to
a mortgagee in an instrument intended to secure the payment of
money, the power is part of the security and vests in any
person who by assignment becomes entitled to payment of the
money secured by the instrument. The power of sale may be
exercised by the assignee if the assignment is duly
acknowledged and recorded. (Civil Code Section 2932.5.)
8)Provides that an assignment of a mortgage and any assignment
of the beneficial interest under a deed of trust may be
recorded, and from that the recorded assignment operates as
constructive notice of the contents thereof to all persons.
(Civil Code Section 2934.)
9)Requires, under federal law, that not later than 30 days after
the date on which a mortgage loan is sold or otherwise
transferred or assigned to a third party, the creditor that is
the new owner or assignee of the debt shall notify the
borrower in writing of such transfer, including the following:
the identity, address, and phone number of the new owner; the
date of the transfer; how to reach an agent or party having
authority to act on behalf of the new creditor; the location
or the place where the transfer of ownership of the debt is
recorded; and any other relevant information regarding the new
creditor. Requires a loan servicer, upon written request of a
borrower, to provide the borrower with the name, address, and
telephone number of the owner of the obligation, to the best
of the loan servicer's knowledge. (15 USC Section 1641
(f)-(g).)
COMMENTS : This bill is sponsored by the San Francisco Office of
the Assessor-Recorder. According to the author, this bill "is
intended to address the flawed electronic mortgage recording
system that is widely used throughout the United States and
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fails to adequately track clear chain of title for mortgages."
The sponsor contends that as a result of this flawed system land
records do not always contain the names of the actual
beneficiary. Thus homeowners are unable to discover who owns
their mortgage, and tax collectors are unable to discover the
beneficiary who owes taxes. Especially at a time when
California has one of the highest rates of foreclosure in the
country, the author argues, homeowners should know who owns
their debt and who has the right to initiate a foreclosure.
The past year witnessed a proliferation of reports across the
county about foreclosures proceedings involving so-called
"robo-signers" (who failed to read critical documents) and legal
challenges to the right organizations like the Mortgage
Electronic Registry System, or MERS, to bring foreclosure
actions. If the foreclosure of the past few years has done
anything, it has exposed an increasingly complex mortgage
industry, where lending institutions routinely sell loans (often
without borrower's knowledge, at least prior to recently enacted
federal legislation) and where Wall Street traders invest money
in "bundled" packages of "securitized" loans. Only recently,
the New York Times reported the MERS, by its own estimation,
holds title to roughly half of all home mortgages in America.
Yet no one quite understands exactly what MERS does or how it
acquires the right to bring foreclosure actions when it has
never made any loans and, often, is not the party that benefits
when a loan is repaid or suffers when a borrower defaults. (New
York Times, March 5, 2011.)
At one level, MERS is simply a registration system that allows
persons or entities that hold an interest or assignment in a
mortgage or deed to register that interest with MERS, as opposed
to recording that interest in a county recorder's office.
(Although it is apparently the case that parties often register
with MERS and record interests in county recorder's offices.)
At another level MERS is much more than just a registration
system. Indeed, MERS apparently can be the owner of loan, the
holder of a beneficial interest in a deed of trust, or a nominee
or trustee who holds the power of sale and thus the ability to
initiate a foreclosure. MERS and its supporters, on the other
hand, counter that MERS creates a more efficient and
stream-lined system apropos of the age of the Internet. For
example, a former CEO of MERS claimed that borrowers whose loans
are registered in the MERS system can log onto its website to
identify their loan servicer, who in turn is required by recent
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federal legislation to identify the owner of the mortgage note.
(See e.g. 15 USC Section 1641 (f)(2).) Others contend that the
process is not so easy, and allege that MERS has lost or
accidentally destroyed "thousands" of loan documents. (New York
Times, March 5, 2011.)
This analysis cannot possibly, and need not, settle the debate
over the merits and demerits of the MERS system. This bill is
not directly aimed at MERS, though MERS is arguably the
poster-child of the "flawed electronic mortgage recording
system" that the author and sponsor seek to remedy.
What this Bill Does : This bill seeks to facilitate the
recording of mortgages and deeds of trust, and especially the
recording of subsequent assignments of beneficial interests
under those instruments. The author and sponsor believe that
this will improve title transparency and give borrowers critical
information about who owns their home loan, who has the power to
modify that loan, and who has the power to foreclose upon their
home. The bill seeks to do this in two ways. First, this bill
would prohibit a mortgagee, trustee, or beneficiary from filing
a notice of default (NOD) until 45 days after it has duly
recorded, in the appropriate county recorder's office, the
mortgage, the deed of trust, or any subsequent assignments of
the mortgage or beneficial interest under the deed of trust. In
sum, consistent with California' traditional race-notice system
of recordation, a person may elect not to record a mortgage or a
deed of trust. However, in order to file an NOD and initiate
the non-judicial foreclosure process, that person (or that
person's agent) must have recorded the interest at least 45 days
earlier. This will permit a distressed borrower to discover who
owns the loan and who has the right to foreclose before
receiving the NOD. Second, this bill would provide that all
assignments of a mortgage or a beneficial interest under a deed
of trust shall be recorded in the appropriate county recorder's
office within 30 days of execution of that assignment. This
provision reflects the fact that banks typically no longer hold
onto mortgages and beneficial interests under the original deed
of trust may be subsequently assigned, often multiple times.
Recent Amendments Address Some But Not All Opposition Concerns .
As introduced, this bill contained provisions that would have
required all mortgages and deeds of trust (not just assignments)
to be recorded within thirty days of execution of the mortgage
or deed of trust. Additionally, as introduced, this bill would
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have required that, at the time of recording, the attachment of
a copy of the promissory note or a certificate proving the
existence of a note. Opponents representing the banking,
mortgage, and escrow industries, pointed to a number of
potential problems this approach, including the fact California
is a race-notice state that has always authorized, rather than
required, recording of mortgages and deeds of trust. Opponents
noted too that 30 days is not always sufficient time to record a
mortgage given potential transaction details or delays.
Finally, opponents claimed that people elect, for privacy or
familial reasons, not to immediately (or ever) record a mortgage
or deed of trust.
As to requiring the attachment of a promissory note, the same
opponents argued that California has never required production
of a promissory note to initiate a non-judicial foreclosure.
(See e.g. Chilton v. Federal National Mortgage Association 2010
U.S. Dist. LEXIS 62232) (citing several cases to show that "it
is well-established that non-judicial foreclosure can be
commenced without producing the original promissory note.")
Opponents also argued that promissory notes, which are contracts
rather than interests in real property, are not recordable items
and, at any rate, their terms can be renegotiated without any
necessary relationship to, or change in, the assignment of the
beneficial interest under the deed of trust.
In order to assuage these concerns, the author agreed to delete
the provisions requiring recording of all instruments within 30
days and the requirement of attaching a promissory note or
certificate to the recording. The bill retains, however, the
provisions that will require (1) recording at least 45 days
prior to filing an NOD and (2) recording subsequent assignments
within 30 days of execution. These provisions reflect the
author's primary purpose in ensuring that owners have knowledge
of subsequent assignments of their loan and will know who owns
their loan in the event of an actual or probable foreclosure.
ARGUMENTS IN SUPPORT : According to the sponsor, the Office of
Assessor-Recorder of San Francisco City and County, AB 1321 will
provide "transparency through public clarification of the actual
chain of title, protect consumers, and arm them with access to
information." This in turn will "aid in a fair and transparent
loan modification process, foreclosure process, and mortgage
reassignment process."
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The California Labor Federation (CLF) claims that one of the
most serious and systematic "failures of the foreclosure crisis
has been the lack of accurate, public documents to establish
title." CLF argues that the required recordings under this
measure will "help consumers discover who owns their debt,
potentially modify their loans with access to documentation,
clean up the recording mess, and help prevent future
robo-signing and servicing issues." CLF concludes that this is
"a modest, but important measure to help end loan servicing
abuses and promote transparency in the mortgage market."
A broad coalition of religious, community, civil rights, and
labor organizations support this bill because it will address
problems created by questionable practices of securitizing,
packaging, selling, and re-selling mortgages. This system,
these supporters contend, creates a system that allowed banks,
lenders, and investors to evade requirements to record mortgage
ownership documents and pay fees for doing so. This practice,
the supporters argue, "often Ýmakes it] impossible to determine
who actually owns the mortgage note and has the authority to
foreclose."
The California Reinvestment Coalition claims that existing
financial institutions circumvent the local recording process by
registering changes of ownership and beneficial interests with
institutions like the MERS.
Arguments in Opposition : This bill is opposed by a broad
coalition of banking, mortgage, and financial industry
associations, the California Escrow Association, and MERS. Many
of the letters of opposition address the two provisions that
have been deleted from this bill: (1) the requirement that all
mortgages and deeds of trust be recorded within 30 days of
execution; and (2) the requirement that a copy of the promissory
note, or a certificate verifying its existence, be attached to a
recorded mortgage, deed, or assignment.
However, opposition to the remaining provisions is still
significant. For example, a letter from about a dozen banking
and lending industry associations claims that this bill will
deter investments in California real estate and delay the
commencing of a foreclosure action, thereby artificially
intruding into the mortgage marketplace without any
corresponding benefit to consumers. These opponents claim that
"the average time to foreclosure in California is more than 300
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days" and "an additional 45 days, as this measure provides, is
counterproductive." Ý Note : It is not clear that the 45 days
would be in "addition" to the 300 days, depending on how the
300-day figure was arrived at, and, at any rate, there would be
no additional time if the mortgage, deed, or assignment is
recorded after execution - unless, of course, an assignment is
made with the express intention that the assignee will
immediately seek foreclosure.]
All of the opponents of this bill argue that this bill is
unnecessary in light of recent federal legislation. For
example, opponents note that the Federal Helping Families Save
Their Homes Act of 2009 amended the Truth in Lending Act (TILA)
to require anyone who acquires ownership of an existing mortgage
loan to provide the borrower with a notice that the acquirer is
the new owner of the loan. If the person or entity that newly
acquires the loan uses a loan servicer, then it must provide the
borrower with the name of that servicer. MERS adds in its
letter of opposition that the Dodd-Frank legislation of 2010
requires a loan servicer to disclose to the owner, upon request,
the name of the current loan owner. MERS concludes that if the
recording provisions of AB 1321 are intended to provide
borrowers with information about who owns a loan and who has a
right to foreclose, then existing federal law already adequately
addresses that issue.
AUTHOR'S amendments: The following author amendments - which
are discussed above - will be taken in this Committee:
Amendment 1
On page 2 delete lines 1 through 16.
Amendment 2
On page 2 line 21 after "trust" insert: in the office of the
recorder of each county where the mortgaged or trust property or
some part or parcel thereof is situated .
Amendment 3
On page 2 line 21 delete "Pursuant" and delete lines 22 through
24.
Amendment 4
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On page 3 delete lines 4 through 5 and insert: recorded in the
office of the recorder of each county where the mortgaged or
trust property or some part or parcel thereof is situated within
30
Amendment 5
On page 3 delete lines 14 through 38.
REGISTERED SUPPORT / OPPOSITION :
Support
Office of the Assessor-Recorder, City and County of San
Francisco (sponsor)
California Council of Churches
California Federation of Labor
California Nurses Association
California Partnership
California Reinvestment Coalition
California Teamsters Public Affairs Council
Center for Responsible Lending
Congregations Building Community
Contra-Costa Interfaith Supporting Community Organization
Council of Mexican Federations
Dolores Huerta Foundation
Greenlining Institute
National Asian American Coalition
National Council of La Raza, California
Oakland Chapter, NAACP
Peninsula Interfaith Action
PICO California
Service Employees International Union, Local 1021
Service Employees International Union- UHW
Opposition
California Bankers Association
California Chamber of Commerce
California Escrow Association
California Financial Services Association
California Independent Bankers
California Land Title Association
California Mortgage Association
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California Mortgage Bankers Association
Civil Justice Association of California
Mortgage Electronic Registration System, Inc. (MERS)
Securities Industry and Financial Markets Association
United Trustees Association
Analysis Prepared by : Thomas Clark / JUD. / (916) 319-2334