BILL ANALYSIS Ó
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Juan Vargas, Chair
SB 708 (Corbett) Hearing Date: January
9, 2012
As Amended: January 4, 2012
Fiscal: Yes
Urgency: No
SUMMARY Would extend the sunset date on SB 1137
(Perata/Corbett/Machado, Chapter 69, Statutes of 2008) from
January 1, 2013 to January 1, 2018.
DESCRIPTION
1. Would, until January 1, 2018, require the following, before a
notice of default (NOD) may be recorded on a mortgage or deed of
trust, which was recorded between January 1, 2003 and December
31, 2007, and was secured by single-family, owner-occupied
residential real property:
a. A mortgagee, beneficiary, or authorized agent (i.e., the
mortgage lender or its representative) would have to contact
the borrower in person or by telephone, in order to assess
the borrower's financial situation and explore options for
the borrower to avoid foreclosure. Contact (or attempted
contact, if a borrower is unreachable) would have to be made
telephonically and in writing, as specified. During the
initial contact, the mortgagee, beneficiary, or authorized
agent would have to advise the borrower that he or she has
the right to request a subsequent meeting, which, if
requested, would have to occur within 14 days of request.
The mortgagee, beneficiary, or authorized agent would also
have to provide the borrower with a toll-free telephone
number that could be used by the borrower to contact a U.S.
Department of Housing and Urban Development (HUD)-certified
housing counseling agency.
b. A mortgagee, beneficiary, or authorized agent would have
to wait at least 30 days after making initial contact with a
borrower, or satisfying specified due diligence requirements
to make contact, before it could record a NOD on a loan
covered by the provisions of the bill.
SB 708 (Corbett), Page 2
c. Each NOD that is recorded on a loan covered by the
provisions of the bill would have to include a statement that
the mortgagee, beneficiary, or authorized agent contacted the
borrower, tried with due diligence to contact the borrower,
or that no contact was required, because one of the
exemptions applied. Exemptions from the bill's contact
requirements are provided, 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 still before a court.
2. Would, until January 1, 2018, state the intention of the
Legislature that a lender offer a borrower a loan
modification or workout plan, if such a modification is
consistent with "its contractual or other authority."
3. Would, until January 1, 2018, require that a specified
notice be posted on a property on which a notice of sale has
been recorded, and mailed to the resident of that property.
The wording of the notice is specified in statute and
includes information about the rights of tenants whose
residence is sold at foreclosure.
4. Would, until January 1, 2018, provide a tenant or subtenant
in possession of a rental housing unit at the time the
property is sold in foreclosure, 60 days' written notice to
exit the property, before the tenant or subtenant may be
removed from the property. (Staff notes that this provision
has been superseded by federal law until January 1, 2015, as
described in more detail below).
5. Would, until January 1, 2018, require a legal property
owner to maintain vacant residential property purchased by
that owner at a foreclosure sale, or acquired by that owner
through foreclosure, and would provide for specified
penalties of up to $1,000 per day for failure to maintain
the property, which could be imposed by local government
entities, as specified.
EXISTING STATE LAW
1. Prescribes rules that govern the nonjudicial foreclosure
process in California (Civil Code Section 2924 et seq.). A
SB 708 (Corbett), Page 3
layman's description of the portions of the process that are
relevant to this bill follows immediately below. Modifications
that were made to this process by SB 1137 (Chapter 69, Statutes
of 2008) are described in Number 1, immediately above. SB 1137
will sunset on January 1, 2013, unless its provisions are
extended.
a. The nonjudicial foreclosure process begins with the
recordation of a NOD by a mortgagee, trustee, beneficiary, or
authorized agent. The NOD must be recorded in the county in
which the property securing the defaulted loan is located,
and must be mailed to specified persons with a financial
interest in the property, including the property owner.
Existing law does not prescribe the minimum amount of time
that must pass between a delinquency and the recordation of a
NOD, although NODs are commonly recorded only after a
borrower is at least 90 days delinquent on his or her
mortgage loan.
b. At least three months must pass after recordation of a
NOD, before the mortgagee, trustee, beneficiary, or
authorized agent may record a notice of sale. Notices of
sale must be recorded in the county in which the property
securing the defaulted loan is located, mailed to the
property owner and other specified persons with a financial
interest in the property, published in a newspaper of general
circulation, and posted on the property that is the subject
of the sale.
c. At least 20 days must pass after recordation of a notice
of sale, before a property may be sold. However, sale dates
may be, and often are, postponed. Under existing law, a sale
date may be postponed for any of the following reasons: 1)
upon the order of any court of competent jurisdiction; 2) if
stayed by operation of law; 3) by mutual agreement, whether
oral or in writing, of any trustor and any beneficiary or any
mortgagor and any mortgagee (i.e., by mutual agreement
between a borrower and his or her lender); and/or 4) at the
discretion of the trustee. A new notice of sale must be
recorded, if a postponement or postponements delay the sale
for more than 365 days following the first scheduled sale
date.
1. Provides for all of the provisions described in Numbers 1
through 5 above, but sunsets those provisions on January 1,
2013.
SB 708 (Corbett), Page 4
EXISTING FEDERAL LAW
1. Pursuant to the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (a portion of which extended an earlier
enacted federal law called the Protecting Tenants at
Foreclosure Act), renters whose landlords have lost their
properties to foreclosure have the right to stay in the home
for up to 90 days following the foreclosure, or through the
term of their lease, whichever is longer. This provision
sunsets at the federal level on January 1, 2015.
COMMENTS
1. Purpose: As the only joint author of SB 1137 who is still
serving in the California Legislature, Senator Corbett
wishes to ensure that the provisions of SB 1137 do not
sunset on January 1, 2013. According to background material
provided by the author's office to this committee, "The
purpose of the bill is to continue to reduce the number of
foreclosures in California by providing resources to
distressed Californian homeowners, to ensure that foreclosed
properties do not become a source of blight to the
communities in which they are located, and to continue to
protect vulnerable tenants living in properties that go into
foreclosure. It is crucial that we do not eliminate this
resource for distressed homeowners."
2. Background and Discussion:
a. Foreclosure Data for California: The table below
summarizes NODs, notices of sale, and trustee
(foreclosure) sales in California from 2007 through 2010.
It shows that both NODs and notices of sale rose
dramatically from 2007 through 2009, before falling in
2010. Foreclosures (i.e., the actual sale of a house on
the courthouse steps) spiked in 2008, and have been
falling since that time.
-----------------------------------------------------------
|Source: | | | | |
|Foreclosure | 2007 | 2008 | 2009 | 2010 |
|Radar | | | | |
|--------------+--------+-----------+-----------+-----------|
|NODs |280,112 | 442,629 | 504,550 | 341,151 |
SB 708 (Corbett), Page 5
|--------------+--------+-----------+-----------+-----------|
|Notices of |157,491 | 353,784 | 390,626 | 362,173 |
|Sale | | | | |
|--------------+--------+-----------+-----------+-----------|
|Trustee | | | | |
|(Foreclosure) | 96,881 | 251,546 | 202,261 |189,837 |
|Sales | | | | |
-----------------------------------------------------------
b. Has SB 1137 worked as intended? This committee held
a joint informational hearing with the Senate Judiciary
Committee in March 2010 to investigate the impact of SB
1137, and other pieces of legislation that had been
enacted by the California Legislature to mitigate some of
the negative impacts of the foreclosure crisis.
Testimony provided by witnesses during that hearing
identified several impacts.
According to Mr. Mark Skilling of Foreclosure Radar, SB
1137 had a short-term impact on NOD filings. In
September 2008, the month before the contact requirements
in SB 1137 went into effect, notices of default spiked
upwards. October 2008, the first month that the contact
requirements in SB 1137 went into effect, notices of
default plummeted, to far below the levels at which they
had been during earlier months of 2008. By December
2008, NOD filings had returned to their prior trend
lines. These statistics suggest that some servicers
rushed to file NODs before the contact requirements of SB
1137 became operative, then reduced their NOD filings for
a few months, while they modified their systems to comply
with SB 1137, then returned to business as usual, once
their systems had been modified - albeit business as
usual modified to reflect compliance with SB 1137.
Did SB 1137 reduce foreclosures? Most economists would
assert that myriad economic and other factors drive
foreclosure rates, and that it is impossible to quantify
the impact of a single factor, such as a single piece of
legislation, on the numbers summarized above.
Anecdotally, however, at least one witness who testified
during the March 2010 hearing believed that SB 1137 did
reduce foreclosures. Preston DuFauchard, Commissioner of
Corporations at the time of his testimony, stated "The
very early statistic that we heard going into all of
this, before 1137 was passed and all of this is that more
SB 708 (Corbett), Page 6
than half of the people who receive a Notice of Default
lose their home without ever making any contact with
their lender. So, what these bills have done - it's not
just the lenders having a change of heart. It really has
been driven by a better level of communication by the
borrower and by the lender in coming together to try to
talk about what deal can be done to structure a
modification to keep people in their homes. So, that's
been sort of the outcome that I think we can point to as
a positive outcome as a result not only the lengthening
of the time, but in the reducing the actual number of
people that get pulled through all the way to the
foreclosure process."
The impact of the tenants' rights provisions in SB 1137 was
also addressed during the March 2010 hearing, but needs
to be considered in the context of similar changes to
federal law. SB 1137 had been in effect for less than
one year before Congress enacted the Protecting Tenants
at Foreclosure Act of 2009. SB 1137 gave renters up to
60 days to remain in a home they had been renting,
following a foreclosure (up from 30 days in prior
California law). The federal act gave renters up to 90
days, or through the end of their lease. How many
tenants have been helped by these provisions? Mr. Dean
Preston, testifying on behalf of Tenants Together at the
March 2010 hearing, testified that "These were
significant advances in the protections for tenants, both
SB 1137 as well as the federal law, at least providing
more notice for tenants who are forced to move in this
situation. Unfortunately, while it has protected some
tenants, what we see is widespread violations of both of
these laws...I would say where it is complied with, it is
working. Tenants have a greater notice period, and there
are certainly some folks-when tenants learn about their
rights, if they call our hotline or they go to a local
legal services agency and they learn that they don't need
to vacate next week just because the agent came and told
them they have to, then for those tenants it works."
Finally, witnesses at the March 2010 hearing spoke to the
anti-blight provision in SB 1137. Bill Higgins,
testifying on behalf of the League of California Cities:
"a portion of that bill created an enforcement mechanism
where local agencies could impose a civil fine when
foreclosed properties were not kept up... I polled our
SB 708 (Corbett), Page 7
city code enforcement officers to get a feeling for how
this is being applied, and they say that this provision
is very successful in getting banks and others who own
the foreclosed properties to actually deal with the
issues, to have the inspections done. So, to the extent
that SB 1137 applies, it's positive. There's some
constraints to it, however, and the largest constraint
is, is that it applies only to foreclosed properties. A
lot of vacant units actually occur before the
foreclosure."
c. The Mabry Decision: Several aspects of SB 1137 have
been interpreted by the courts. Among the scores of
cases regarding SB 1137, which have been litigated since
that bill's enactment, the Mabry case has provided
interested parties with the greatest degree of clarity
regarding the courts' interpretation of the borrower
notification requirements of the bill (Terry Mabry et al.
v. the Superior Court of Orange County and Aurora Loan
Services, decided by the California Court of Appeal on
June 2, 2010, 2010 Cal. App. LEXIS 794).
Key answers provided by the Mabry court are reproduced
below, and are taken verbatim from the court's decision.
They augment the language of the statute, and provide
greater clarity regarding the way in which the California
courts believe that the borrower notification provisions
of the bill were intended to work.
i. May section 2923.5 be enforced by a
private right of action? Yes. Otherwise the
statute would be a dead letter. ÝStaff observes
that Section 2923.5 is the provision of SB 1137
which requires lenders to make an effort to notify
borrowers, to explore options for borrowers to avoid
foreclosure].
ii. Must a borrower tender the full amount
of the mortgage indebtedness due as a prerequisite
to bringing an action under section 2923.5? No. To
hold otherwise would defeat the purpose of the
statute.
iii. Is section 2923.5 preempted by federal
law? No-but we must emphasize, it is not preempted
because the remedy for noncompliance is a simple
SB 708 (Corbett), Page 8
postponement of the foreclosure sale, nothing more.
iv. What is the extent of a private right
of action under section 2923.5? To repeat: The
right of action is limited to obtaining a
postponement of an impending foreclosure to permit
the lender to comply with section 2923.5.
v. Must the declaration required of the
lender by section 2923.5, subdivision (b) be under
penalty of perjury? No. Such a requirement is not
only not in the statute, but would be at odds with
the way the statute is written.
vi. Does a declaration in a notice of
default that tracks the language of section 2923.5,
subdivision (b) comply with the statute, even though
such language does not on its face delineate
precisely which one of the three categories set
forth in the declaration applies to the particular
case at hand? Yes. There is no indication that the
Legislature wanted to saddle lenders with the need
to "custom draft" the statement required by the
statute in notices of default. ÝStaff notes that
2923.5(b) requires each NOD to include "a
declaration that the mortgagee, beneficiary, or
authorized agent has contacted the borrower, has
tried with due diligence to contact the borrower as
required by this section, or that no contact was
required pursuant to subdivision (h)." Subdivision
(h), in turn, states that subdivision (b) does not
apply if the borrower has surrendered his/her keys
to the property, is in the middle of an active
bankruptcy case, or has contracted with an
organization intended to help borrowers "game" the
foreclosure process.]
vii. If a lender did not comply with section
2923.5 and a foreclosure sale has already been held,
does that noncompliance affect the title to the
foreclosed property obtained by the families or
investors who may have bought the property at the
foreclosure sale? No. The Legislature did nothing
to affect the rule regarding foreclosure sales as
final.
SB 708 (Corbett), Page 9
d. State Regulator Enforcement Actions: To date,
SB 1137 has been enforced almost entirely through
litigation. Neither the Department of Financial
Institutions nor the Department of Real Estate have
taken any enforcement actions against any of their
licensees for violations of SB 1137. The Department
of Corporations has required approximately half a
dozen licensees to correct recordkeeping deficiencies
related to SB 1137 and establish that they have
adequate procedures in place to document their
compliance in the future.
3. Summary of Arguments in Support: The Center for Responsible
Lending (CRL) and Western Center on Law & Poverty believe
that, as the foreclosure crisis continues, it is critical
that California not retreat from ensuring that every effort
is made to keep homeowners in their homes. "The
borrower-contact provisions of SB 1137 have helped form the
framework for loan modification efforts, and given those
borrowers with an opportunity to stay in their homes, a
chance to find a solution."
Despite its support for the measure, CRL believes that "much
more can and should be done to protect California's
homeowners, such as passing legislation to prohibit
'dual-tracking' - the practice by banks and servicers of
initiating and moving forward with foreclosure proceedings
even while borrowers are attempting to secure a modification
of their mortgage to save their home."
4. Summary of Arguments in Opposition: None received.
5. Amendments: Because of the deadlines that apply to two-year
bills such as SB 708, there is insufficient time for the
Senate Banking and Financial Institutions Committee to amend
SB 708, before the bill must be reported out to the Senate
Judiciary Committee, and there may be insufficient time for
the Senate Judiciary Committee to amend SB 708, before the
bill must be reported out to the Senate Appropriations
Committee. However, there is an issue within the bill that
may warrant future amendments, as described below. Staff
suggests that, if this Committee wishes to amend the bill to
address the issue described immediately below, it request a
commitment from the author to take those amendments in the
first location in which timing constraints allow.
SB 708 (Corbett), Page 10
a. Two provisions of SB 1137, both relating to tenants'
rights, have been rendered out of date by subsequently
enacted federal law. For example, California Code of
Civil Procedure 1161b, which the author is proposing to
extend to January 1, 2018, refers to tenants having up to
60 days in which to remain in a property following a
foreclosure. Until January 1, 2015, federal law gives
tenants up to 90 days, or until their lease expires, in
which to remain in a property following a foreclosure.
Existing California Civil Code Section 2924.8 requires a
notice to be posted on a property and mailed to the
resident of the property, once a notice of sale has been
recorded for that property. This notice is intended to
inform renters of their rights. But, its wording is now
out of date, as it refers to a 60-day eviction notice,
rather than the longer period of time allowable under
federal law.
Staff was initially inclined to recommend that the author
of SB 708 update the language of Code of Civil Procedure
1161b and the wording of the notice required by Civil
Code Section 2924.8, to minimize the possibility that
renters would be confused about their rights. However,
this Committee subsequently received a letter from the
California Association of Realtors (CAR), indicating that
CAR would oppose such a change. "CAR would be opposed to
an incorporation within California law of a longer (90
vs. 60 day) restriction on evictions of tenants in
foreclosed properties, even if federal law currently
imposes the longer standard. We see no good reason to
conform California law to every successive change in
federal law, when no conflict in practice is created and
the area continues to be in flux at the federal level."
As a possible compromise intended to avoid CAR's
opposition, while more clearly informing renters of their
post-foreclosure rights, the author may wish to update
the wording of the notice required by Civil Code Section
2924.8, while leaving Code of Civil Procedure Section
1161b unchanged. A CAR representative indicated in an
e-mail to Committee staff that CAR would not oppose such
a clarifying change.
6. Prior and Related Legislation:
SB 708 (Corbett), Page 11
a. SB 926 (Perata), 2007-08 Legislative Session:
Substantially similar to SB 1137. Failed passage on the
Senate Floor in January 2008. SB 1137 passed the Senate
and the Assembly, and was signed by the Governor later in
2008.
b. SB 7 (Corbett), Chapter 4, 2009-2010 Second
Extraordinary Session, and AB 7 (Lieu), Chapter 5,
2009-2010 Second Extraordinary Session: Required
mortgage loan servicers that lacked comprehensive
mortgage loan modification programs, as defined, to wait
an additional 90 days before recording a notice of sale
on mortgages or deeds of trust, which were recorded from
January 1, 2003 to January 1, 2008, and were secured by
single-family, owner-occupied residential real property.
c. AB 1639 (Nava), 2009-2010 Legislative Session:
Would have established the Mediated Mortgage Workout
Program, a process by which certain borrowers seeking to
avoid foreclosure could obtain mediated workouts from
their servicers. Failed passage on the Assembly Floor.
d. SB 1275 (Leno), 2009-2010 Legislative Session:
Would have required servicers to complete additional
foreclosure avoidance actions, beyond those required by
SB 1137, and as specified, before recording a NOD; prove
they had standing to foreclose, as specified; and record
a new document, called a declaration of compliance, as an
attachment to every NOD. Would have established specific
administrative and civil penalties to be applied to
servicers who failed to comply with the provisions of the
bill. Passed the Senate. Failed passage on the Assembly
Floor.
e. SB 729 (Leno), 2011-12 Legislative Session: Similar
to SB 1275. Failed passage in the Senate Banking and
Financial Institutions Committee.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
Center for Responsible Lending
Western Center on Law & Poverty
SB 708 (Corbett), Page 12
Opposition
None received
Consultant: Eileen Newhall (916) 651-4102