BILL ANALYSIS Ó
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Juan Vargas, Chair
SB 729 (Leno and Steinberg) Hearing Date: April 27, 2011
As Amended: April 14, 2011
Fiscal: Yes
Urgency: No
SUMMARY Would require servicers to complete additional
foreclosure avoidance actions, as specified, before recording a
notice of default (NOD), prove they have standing to foreclose,
as specified; and record a new document, called a declaration of
compliance, as an attachment to every NOD. Would establish
specific penalties to be applied to servicers who fail to comply
with the provisions of the bill.
DESCRIPTION
1. Would require every NOD to include a certification that the
foreclosing party owns the mortgage or deed of trust note .
The foreclosing party could comply in either of the
following two ways:
a. The mortgagee, trustee, beneficiary, or authorized
agent would have to include a copy of the mortgage or deed
of trust note, and evidence of all assignments and
endorsements of the note and the mortgage or deed of
trust, along with a declaration attesting to the existence
and possession of the note and all assignments and
endorsements, and certifying ownership of the mortgage or
deed of trust and right to foreclose.
b. If the note cannot be located, the mortgagee, trustee,
beneficiary, or authorized agent can attach a declaration
signed either by an individual having personal knowledge
of the facts stated within, or by an individual with
authority to bind the mortgagee, trustee, beneficiary, or
authorized agent, which includes facts sufficient to show
that the mortgagee, trustee, beneficiary, or authorized
agent has the right to enforce the note; a statement that
the person cannot reasonably obtain possession of the
note, and a description of the reasonable efforts made to
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729 (Leno and Steinberg), Page 2
obtain the note; a description of the terms of the note
and any riders to the note, including, at a minimum: the
date of execution, the parties, the principal amount, the
amortization period, the initial interest rate and, if
applicable, the initial date and frequency of any
adjustments to the interest rate, the index and margin
used to calculate the interest rate at the time of any
scheduled adjustment; and the expiration date of any
interest-only period, if applicable.
2. Would prohibit a mortgagee, trustee, beneficiary, or
authorized agent from recording a NOD unless it makes a
reasonable and good faith effort to evaluate the borrower
for all available loss mitigation options to avoid
foreclosure .
a. Would, effective January 1, 2013, prohibit a
mortgagee, trustee, beneficiary, or authorized agent from
recording a NOD on any mortgage or deed of trust secured
by owner-occupied residential real property containing up
to four dwelling units, until the later of 46 days after
contacting the borrower in writing to inform the borrower
about options that may be available for avoiding
foreclosure, or the date on which it sends the borrower a
loan modification denial explanation letter, as specified.
Would require every NOD to include a declaration of
compliance (described in a subsequent section).
b. Prior to January 1, 2013, the bill would require
servicers to comply with both SB 1137 (described below
under Existing law number 2) and to send borrowers a loan
modification denial explanation letter, as specified,
before recording a NOD. Would require every NOD to
include a declaration of compliance.
3. Would require servicers to adhere to the following
timelines when evaluating borrowers for loss mitigation
options:
a. If an eligible borrower requests a loan modification,
either orally or in writing, on or before the 90th day of
delinquency on the mortgage loan at issue, or the 45th day
following contact by the mortgagee, trustee, beneficiary,
or authorized agent, whichever is later, the mortgagee,
trustee, or beneficiary may not record a NOD until it has,
in good faith, reviewed the loan modification application
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729 (Leno and Steinberg), Page 3
submitted by the borrower, rendered a decision on the
application, and sent the borrower a denial explanation
letter, as specified.
b. If a borrower requests a loan modification, either
orally or in writing, by the deadline immediately above,
but does not submit all of the information necessary to be
considered for a modification, the mortgagee, beneficiary,
or authorized agent must provide the borrower with a
written notice, listing any supplemental information
required, and include a deadline to submit that
information. The deadline cannot be shorter than 30 days
from receipt of the written notice by the borrower.
c. If a borrower requests a loan modification, either
orally or in writing, within 15 days after receiving a
copy of the NOD in the mail, and submits a complete loan
modification application by the later of 15 days after
receiving application instructions from the mortgage
servicer or any application deadline communicated in
writing by the mortgage servicer, the mortgagee, trustee,
beneficiary, or authorized agent may not record a notice
of sale until at least 10 business days after it has, in
good faith, reviewed the application, rendered a decision
on the application, and sent the borrower a denial
explanation letter, as specified.
d. If a mortgage servicer has signed a Making Home
Affordable Servicer Participation Agreement or is
otherwise required to review the borrower's loan under
federal Making Home Affordable Modification Program (HAMP)
guidelines, the servicer may satisfy the timeline
requirements of the bill by complying with applicable HAMP
deadlines and timeframes. HAMP servicers must follow the
timelines specified in the bill, once HAMP is no longer in
effect.
4. Would require the following, with respect to the denial
explanation letter that must be sent by servicers to
borrowers that do not qualify for a loan modification:
a. If a borrower who requests a loan modification is
denied either a permanent loan modification or a HAMP
trial modification, the mortgagee, beneficiary, or
authorized agent must send the borrower a denial
explanation letter by certified mail, no later than ten
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729 (Leno and Steinberg), Page 4
business days following the denial decision, either in
English, or in Spanish, Korean, Chinese, Tagalog, or
Vietnamese, if communications with the borrower were
primarily in one of those foreign languages.
b. If the loan modification is denied because of a
borrower's failure to provide all required verification
documents, the denial explanation letter must list the
date by which the borrower was directed to provide the
documents, list the documents or information that were not
provided, and state that the borrower's request for a loan
modification was denied for that reason.
c. If the borrower submitted all required written
application materials, and the borrower's application was
denied, the denial explanation letter must include all of
the following information: date the application materials
were received by the servicer; date the loan modification
was denied; the reason or reasons the borrower did not
qualify for a loan modification, including, as applicable,
copies of relevant sections of pooling and servicing
agreements, income and expense figures, net present value
inputs, assumptions, and calculations, inability of the
borrower to successfully complete a previously offered
loan modification; the name and contact information of the
holder of the note for the borrower's loan; a description
of other foreclosure alternatives for which the borrower
may be eligible and a list of the steps the borrower must
take in order to be considered for those options;
instructions regarding how to contact the mortgagee,
beneficiary, or authorized agent about the reasons for
denial of the loan modification; and other information
required pursuant to HAMP, as specified.
d. As long as a denial explanation letter complying with
the provisions of the bill is sent to a borrower, the
mortgagee, beneficiary, trustee, or authorized agent may
record an NOD. The decision of a borrower to dispute a
loan modification denial does not prevent the mortgagee,
beneficiary, trustee, or authorized agent from recording a
NOD.
5. Would require the following, with respect to the
declaration of compliance , which must be included as part
of, or attached to, every NOD filed on a mortgage or deed of
trust secured by owner-occupied residential real property
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729 (Leno and Steinberg), Page 5
containing up to four dwelling units:
a. The declaration of compliance is a form intended for
use by servicers to document their efforts relating to
borrower contact, review of foreclosure avoidance
alternatives, and proof of note ownership.
b. Before filing a declaration of compliance, each
servicer would have to compile a record of attempts to
contact the borrower, including the dates and times of,
and addresses and telephone numbers used for contacts and
attempted contacts, as well as a record of the good faith
efforts undertaken to evaluate the borrower for a loan
modification and provide the borrower with a denial
explanation letter. Servicers would be required to make
these records available to borrowers within ten business
days of a request in writing.
c. Servicers would have to ensure that the declaration of
compliance was signed either by an individual having
personal knowledge of the facts stated within, or by an
individual with authority to bind the servicer, who
certifies that the declaration is based upon records made
in the regular course of the servicer's business at or
near the time of the events recorded.
6. Would provide all of the following remedies through a
private right of action by a borrower who believed his or
her servicer had failed to comply with the bill:
a. Enjoinment of a pending trustee sale: If the
mortgagee, trustee, beneficiary, or authorized agent
records a notice of sale without properly evaluating a
borrower for a loan modification and sending the borrower
a denial explanation letter that materially complies with
the bill's requirements, the borrower may seek an order in
any court to enjoin the trustee sale, until the mortgagee,
trustee, beneficiary, or authorized agent complies with
the provisions of the bill.
b. Post-trustee sale remedies: If the mortgagee,
trustee, beneficiary, or authorized agent records a NOD
without properly evaluating a borrower for a loan
modification and sending the borrower a denial explanation
letter that materially complies with the bill's
requirements, and if the property at issue is sold at a
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729 (Leno and Steinberg), Page 6
trustee's sale, the borrower may pursue one of the
following options against the beneficiary or mortgage
servicer, within one year following the trustee's sale:
i. Recover the greater of treble actual damages or
statutory damages of $15,000, plus reasonable
attorney's fees and costs, if the property is sold
to a bona fide purchaser at the trustee's sale.
ii. Recover the greater of treble actual damages or
statutory damages of $15,000, plus reasonable
attorney's fees and costs, if the property is sold
to a bona fide purchaser by the foreclosing party
subsequent to a trustee sale, prior to any action
being pursued by the borrower. If the foreclosing
party has notice of a borrower's claim before it
sells the property to a bona fide third party, the
borrower is entitled to recover an additional
$20,000 in statutory damages, over and above the
other recoveries described in this paragraph.
iii.Bring an action to void the trustee sale, and
enjoin the recording of any further notice of sale
until 30 days after the beneficiary or servicer
complies with the provisions of the bill, if title
to the property is transferred to the foreclosing
party, and there is no subsequent sale to a bona
fide purchaser.
A beneficiary or mortgage servicer can avoid civil
liability under the bill, if, prior to the initiation of a
legal action by a borrower, and no later than 180 days
following the trustee sale, the mortgagee, trustee,
beneficiary, or authorized agent does either of the
following:
i. Voluntarily rescinds the trustee sale
before filing an unlawful detainer action; within
three days of the rescission, sends the borrower a
written communication listing the steps the
beneficiary or mortgage servicer will take before
recording another notice of sale; and materially
complies with all of the requirements of the bill
which were not previously complied with, at least 30
days before recording any further notice of sale.
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729 (Leno and Steinberg), Page 7
ii. Sends the borrower a written communication
stating that the beneficiary or mortgage servicer
will not file an unlawful detainer action against
the borrower until at least 30 days after materially
complying with all of the requirements of the bill,
complying with those requirements; and, if
applicable, rescinding the sale and offering the
borrower a loan modification.
a. Remedies Relating to Unfiled or False Declarations of
Compliance (additive to the remedies above):
i. If the mortgage servicer fails to record a
completed declaration of compliance, a borrower may
recover statutory damages of between $1,500 and
$10,000, plus attorney's fees and costs, from the
mortgage servicer.
ii. If the mortgage servicer records a materially
false declaration of compliance, including a
declaration of lost note, a borrower may recover
statutory damages between $10,000 and $25,000, plus
attorney's fees and costs, from the mortgage
servicer.
1. Would provide all of the following remedies through a suit
by the state Attorney General or enforcement by a state
licensing agency :
a. Any person, including a partner or officer of the
mortgagee, trustee, beneficiary, or authorized agent, who
violates any provision of the act, is subject to a civil
penalty of up to $10,000 per violation.
b. Notwithstanding the paragraph above, any trustee,
beneficiary, or authorized agent that records or has
recorded a false or fraudulent declaration of lost note
is additionally subject to a civil penalty of $25,000 per
violation.
c. The Attorney General may also bring a civil action
for injunctive relief, and may include in that action a
claim for restitution, disgorgement, or damages on behalf
of affected consumers. The Attorney General may include
in any action a claim for costs, including reasonable
attorney's fees and expenses.
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729 (Leno and Steinberg), Page 8
d. A violation of the bill's provisions by a person
licensed by the State of California is deemed to be a
violation of that person's licensing law, and subjects
that person to enforcement action by his or her
regulator.
EXISTING LAW
2. Prescribes rules that govern the nonjudicial foreclosure
process in California (Civil Code Section 2924 et seq.). A
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 Existing Law Number 2, below.
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
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729 (Leno and Steinberg), Page 9
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.
3. Pursuant to SB 1137 (Perata), Chapter 69, Statutes of 2008,
until January 1, 2013, requires the following, before a NOD may
be recorded on a mortgage or deed of trust that was recorded
from January 1, 2003 through December 31, 2007, and that is
secured by single-family, owner-occupied residential real
property:
a. A mortgagee, beneficiary, or authorized agent must
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) must be made
telephonically and in writing, as specified. During the
initial contact, the mortgagee, beneficiary, or authorized
agent must advise the borrower that he or she has the right
to request a subsequent meeting, which, if requested, must
occur within 14 days of request. The mortgagee, beneficiary,
or authorized agent must also provide the borrower with a
toll-free telephone number that can be used by the borrower
to contact a HUD-certified housing counseling agency.
b. A mortgagee, beneficiary, or authorized agent must wait
at least 30 days after making initial contact with a
borrower, or satisfying specified due diligence requirements
to make contact, before it may record a NOD on a loan covered
by the provisions of SB 1137.
c. Each NOD that is recorded on a loan covered by the
provisions of SB 1137 must 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 express
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.
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729 (Leno and Steinberg), Page 10
COMMENTS
1. Purpose: According to the authors and sponsors, "SB 729
fills the gaps in current law and addresses the mounting
evidence of servicer shortcomings and abuses by improving
fairness, transparency, accountability, and enforcement in
the foreclosure process. The bill would require loan
servicers to give eligible homeowners who submit timely loan
modification applications a yes or no decision on their
applications before beginning the foreclosure process.
Additionally, the bill would provide homeowners with sorely
needed remedies when serious violations occur, to give
homeowners a chance to save their homes and provide a small
measure of recourse to families who lose their homes due to
servicer misconduct."
2. Background and Discussion: This bill is very similar to a
bill (SB 1275), carried by the same authors last year. Both
bills were introduced out of frustration, and a belief among
the bill's sponsors, that existing state and federal
programs are not effectively preventing unnecessary
foreclosures. In background material provided to this
committee by the authors and sponsors, they cite findings of
a recent (January 2011) report from the federal Office of
the Special Inspector General for the Troubled Asset Relief
Program (SIGTARP): "One of the greatest frustrations with
Ýthe federal foreclosure prevention program] HAMP...has been
the abysmal performance of loan servicers, which not only
operate as the point of contact for distressed homeowners
seeking to participate in the program but also administer
the loans on behalf of investors. Anecdotal evidence of
their failures has been well chronicled. From the repeated
loss of homeowner paperwork, to blatant failure to follow
program standards, to unnecessary delays that severely harm
homeowners while benefiting servicers themselves, stories of
servicer negligence and misconduct are legion, and the
servicers' conflicts of interest in administering HAMP -
they too often have financial interests that don't align
with those of either homeowners or investors."
The authors and sponsors also cite the key limitations of
federal foreclosure prevention programs as lack of
meaningful oversight, lack of accountability, and lack of
enforcement. A report released by the Congressional
Oversight Panel in December 2010, and referenced by the
authors and sponsors in their background material, reached
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729 (Leno and Steinberg), Page 11
similar conclusions: "Although Treasury oversees servicers
and encourages compliance, there is little real
accountability for servicers that fail to adhere to program
standards, lose borrower submitted paperwork, unnecessarily
delay the process, or otherwise don't make
modifications...The Panel has previously noted that
servicers need to face 'meaningful monetary penalties' for
noncompliance with servicer participation agreements and
denial of modification for an unexplained reason, a breach
of their contractual obligations under HAMP servicer
participation agreements. However, Treasury has seemed
reluctant to do more than vaguely threaten the potential for
clawbacks of HAMP payments."
3. What is new since SB 1275? In the time since SB 1275 failed
passage on the Assembly Floor last year, at least three
relevant new developments have occurred: a) enforcement
orders issued by federal banking regulators against fourteen
of the country's largest servicers; b) an investigation of
many of the country's largest mortgage servicers by the
fifty state Attorneys General and several state regulators,
which is expected to lead to a settlement agreement that is
binding on those servicers; and c) the announcement of an
ongoing interagency effort among federal regulators to
develop national mortgage servicing standards. Each of
these new developments is summarized below.
Enforcement Orders: In April 2011, four federal regulators
issued final enforcement orders against the nation's
fourteen largest mortgage servicers, ordering these
institutions to take several steps to improve their
foreclosure processing. The enforcement action followed
on-site reviews of foreclosure processing at Ally Bank/GMAC,
Aurora Bank, Bank of America, Citibank, EverBank, HSBC,
JPMChase, MetLife, OneWest, PNC, Sovereign Bank, SunTrust,
US Bank, and Wells Fargo. The fourteen servicers were
selected based on the concentration of their mortgage
servicing and foreclosure processing activities. Together,
these companies service approximately two-thirds of the
outstanding mortgage loans in the United States. Monetary
penalties are expected to be announced by the federal
regulators against these servicers in the near future.
Quoting from the Executive Summary of the regulators' report
("Interagency Review of Foreclosure Policies and Practices,"
by the Federal Reserve System, Office of the Comptroller of
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729 (Leno and Steinberg), Page 12
the Currency, and Office of Thrift Supervision; the Federal
Deposit Insurance Corporation joined with the others in
issuing the enforcement orders but did not co-author the
report): "The reviews found critical weaknesses in
servicers' foreclosure governance processes, foreclosure
document preparation processes, and oversight and monitoring
of third-party vendors, including foreclosure attorneys.
While it is important to note that findings varied across
institutions, the weaknesses at each servicer, individually
or collectively, resulted in unsafe and unsound practices
and violations of applicable federal and state law and
requirements."
Despite observing weaknesses in several areas, the federal
agencies noted, "The loan-file reviews showed that borrowers
subject to foreclosure in the reviewed files were seriously
delinquent on their loans...The reviews also showed that
servicers possessed original notes and mortgages and,
therefore, had sufficient documentation available to
demonstrate authority to foreclose. Further, examiners
found evidence that servicers generally attempted to contact
distressed borrowers prior to initiating the foreclosure
process to pursue loss-mitigation alternatives, including
loan modifications."
The enforcement orders require servicers to submit acceptable
written plans to their regulators, to comply with the terms
of the enforcement orders, within 60 days of the orders'
issuance. Among the requirements of the orders:
a. Establish a compliance program to ensure
mortgage-servicing and foreclosure operations,
including loss mitigation and loan modification,
comply with all applicable legal requirements and
supervisory guidance, and assure appropriate policies
and procedures, staffing, training, oversight, and
quality control of those processes.
b. Retain an independent firm to conduct a review
of residential foreclosure actions pending at any time
from January 1, 2009 through December 31, 2010, to
determine any financial injury to borrowers caused by
errors, misrepresentations, or other deficiencies
identified in the review, and to remediate these
deficiencies, as appropriate.
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729 (Leno and Steinberg), Page 13
c. Establish a single point of contact for
borrowers who contact the servicer regarding
foreclosure, loss mitigation, and loan modification
activities.
d. Establish policies and procedures for
outsourcing foreclosure or related functions to ensure
appropriate oversight.
e. Improve management information systems for
foreclosure, loss mitigation, and loan modification
activities to ensure timely delivery of complete and
accurate information.
f. Retain an independent firm to conduct a
written, comprehensive assessment of risks in
servicing operations, particularly in the areas of
foreclosure, loss mitigation, and the administration
and disposition of other real estate owned property.
According to the agencies issuing the orders,
"Enforcement actions and more frequent monitoring will
remain in place at each servicer until that servicer has
demonstrated that its weaknesses and deficiencies have
been corrected, including that adequate policies,
procedures, and controls are in place."
In addition to the actions against the servicers, the
Federal Reserve Board and the Office of Thrift
Supervision issued formal enforcement actions against the
parent holding companies of these servicers, to require
that they enhance their oversight of the mortgage
servicing activities of the banks and thrifts they
oversee.
Attorneys General Settlement: In October 2010, the
National Association of Attorneys General announced a
bipartisan, multistate investigation being undertaken
jointly by 50 state Attorneys General and selected state
bank and mortgage regulators. While the initial
investigation was focused on whether individual mortgage
servicers improperly submitted affidavits or other
documents in support of foreclosures (i.e., the
"robosigning scandal"), the investigation has since grown
to include a broader focus.
SB
729 (Leno and Steinberg), Page 14
On March 3, 2011, the AG group released a draft
settlement terms sheet, which it provided to the
country's five largest servicers (Bank of America, Wells
Fargo, JPMorgan Chase, Citibank, and Ally Bank/GMAC).
Although the settlement terms sheet was criticized by the
mortgage servicing industry, and was not accepted by any
of the five servicers to which it was offered, the
contents of the draft terms sheet are illustrative of the
broad focus adopted by the AG/state regulator working
group and suggestive of the topics that will be covered
by the final settlement agreement. Spanning 27 pages,
the draft terms sheet covers topics very similar to those
contained in SB 729. A listing of relevant portions of
the settlement agreement is provided below, to
demonstrate the significant overlap between the items
included in the draft settlement agreement and the
contents of SB 729.
The draft settlement agreement: establishes that
servicers have an affirmative duty to thoroughly evaluate
borrowers for all available loss mitigation options
before referring them for foreclosure, and requires
servicers to modify loans when loan modifications result
in a greater net present value than foreclosure;
prohibits servicers from referring borrowers to or
initiating foreclosure while a borrower's application for
any loss mitigation program is pending; requires
servicers to provide borrowers with a single point of
contact - a designated employee with the primary
responsibility to handle all loss mitigation
communications with that borrower; requires servicers to
create a single electronic record for each account, the
contents of which must be accessible throughout the
servicer's operations, including all loss mitigation
staff, foreclosure staff, and bankruptcy staff; requires
servicers to conduct borrower outreach in accordance with
HAMP timelines, regardless of whether the borrower is
eligible for a HAMP modification; requires servicers to
provide a written acknowledgement of the receipt of loan
modification documentation submitted by a borrower within
ten days, and, if any additional documents are required,
requires servicers to identify those documents and notify
borrowers about which documents are required within 30
days of receiving the borrower's initial loan
modification documentation; requires servicers to send a
written adverse action notice to each borrower who is
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729 (Leno and Steinberg), Page 15
denied either a trial or a permanent loan modification,
identifying specific reasons for the denial, the
calculations made and factual information used to arrive
at the denial, and give borrowers up to 30 days in which
to dispute the basis for the adverse action notice;
requires servicers to develop or contract with a third
party vendor to implement loan servicing technology to
enhance tracking of and provide a borrower with a link to
loss mitigation information (the portal must operate in
real time, allow borrowers to submit documents
electronically, accept and confirm receipt of documents,
provide information and eligibility factors for
proprietary loss mitigation programs, and operate at no
cost to the borrower); requires servicers to cooperate in
the development, funding, and implementation of a
neutral, nationwide loan portal system to serve as the
primary method for housing counselors to submit borrower
information; requires servicers to support and assist in
the development and funding of state efforts to create
and maintain consumer hotlines to provide information on
foreclosure relief options and/or link borrowers with
housing counselors; requires servicers to maintain
adequate staffing and systems for tracking borrower
documents and information relevant to foreclosure, loss
mitigation, bankruptcy, and other servicing operations;
requires servicers to adopt incentives and compensation
plans that encourage appropriate loss mitigation over
foreclosure; requires servicers to apply principal
reductions in appropriate circumstances; requires
servicers to modify second liens at least proportionately
to first liens or to extinguish second liens when they
offer borrowers a permanent loan modification; requires
servicers to develop short sale processes that allow
borrowers to obtain short sale evaluations before putting
their homes on the market, provide written confirmation
to borrowers regarding short sale offers within 30 days
of receiving all required information, and, if a short
sale offer is denied, provide reasons for the denial in
their written notice to the borrower; requires servicers
who transfer the servicing rights on a loan to inform the
successor servicer whether a loan modification is pending
and ensure, by contract or otherwise, that the successor
servicer accepts and continues processing previously
submitted loan modification documents; requires servicers
to make specified disclosures to investors regarding any
private-label mortgage-backed security transaction in
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729 (Leno and Steinberg), Page 16
which the servicer, its parent company, or an affiliate
holds an equity interest or other investment position in
the certificates, notes, or bonds issued by the
securitization trust; restricts servicers from charging
default, foreclosure-related, or bankruptcy-related fees
while a completed loan modification application is under
consideration or a trial modification is in existence;
limits the amounts and frequency of third party fees that
servicers may impose on borrowers; prevents pyramiding of
late fees by servicers; restricts the application of
force-placed insurance by servicers; contains rules for
use by servicers when making affidavits and sworn
statements in foreclosure and bankruptcy proceedings,
imposes requirements that servicers accurately and timely
update borrower's account information and maintain
detailed records of fees imposed on borrowers;
establishes the information that must be provided by
servicers on behalf of note holders to prove that they
have the right to foreclose; makes findings that
servicers have a general duty of good faith and fair
dealing in their communications, transactions, and
dealings with borrowers whose loans they service;
prohibits servicers from engaging in unfair or deceptive
business practices or misrepresenting or omitting any
material information in connection with the servicing of
a loan; requires servicers to provide monetary relief as
compensation or penalties for unlawful conduct, settle
claims owed to the government, fund programs to help
borrowers avoid foreclosure, and establish and fund a
process that provides compensation to borrowers who were
victims of servicer misconduct; and requires servicers to
provide the Attorneys General and the Consumer Financial
Protection Bureau (CFPB) with regular, state-specific
data reports on compliance with the settlement agreement.
The draft settlement agreement anticipates that
servicers' compliance with the agreement will be
monitored by an independent third party selected by the
Attorneys General and the CFPB, and funded by the
servicer, which would have the authority to access
records and audit servicers' performance. The draft
settlement agreement also anticipates that the AGs will
set forth specific, quantitative target performance
measures that servicers will be required to meet, in
order to be in compliance with the agreement. Failure to
SB
729 (Leno and Steinberg), Page 17
meet these performance measures will result in monetary
penalties and additional remedial actions. Servicers
will also be subject to automatic penalties for material
failure to meet timelines, as documented by the third
party monitor.
National Servicing Standards: In March 2011, as part of
a rulemaking proposing nationwide risk retention
standards, several federal banking and securities
regulatory agencies noted a separate, ongoing interagency
effort to develop national mortgage servicing standards.
As the regulators explained, the separate interagency
effort is focused on developing a comprehensive,
consistent, and enforceable set of servicing standards
for residential mortgages. In addition to servicing
matters covered in the risk retention proposal, the
separate interagency effort on national mortgage
servicing standards is taking into consideration a number
of other aspects of servicing, including the quality of
customer service provided throughout the life of a
mortgage, the processing and handling of customer
payments, foreclosure processing, operational and
internal controls, and servicer compensation and payment
obligations.
These national servicing standards will apply to
servicers of residential mortgages, including bank and
bank-affiliated servicers, and servicers that are not
affiliated with a bank. The regulators working on these
standards (which include the Federal Reserve Board,
Office of the Comptroller of the Currency, Federal
Deposit Insurance Corporation, Office of Thrift
Supervision, U.S. Department of Housing and Urban
Development, Consumer Financial Protection Bureau, and
the U.S. Department of the Treasury), stated that they
anticipate requesting comments on proposed standards
"later this year," with the goal of having final
standards issued shortly afterward.
4. Summary of Arguments in Support: Several consumer advocacy
groups, representatives of organized labor, and faith-based
organizations submitted very similar letter of support,
echoing the reasons (detailed above) why the authors and
sponsors have introduced the bill. Quoting from the letter
sent by the Center for Responsible Lending (CRL; one of the
bill's three co-sponsors, along with the California Labor
SB
729 (Leno and Steinberg), Page 18
Federation and the California Reinvestment Coalition),
"Sitting by and doing nothing to prevent avoidable
foreclosures is not a viable option." Unnecessary
foreclosures harm neighbors, state and local tax bases, bank
and investor balance sheets, and capital markets. Existing
state and federal programs are not effectively preventing
unnecessary foreclosures. The key limitations of the
federal programs have been lack of meaningful oversight,
lack of accountability, and lack of enforcement. "Given the
shortcomings with the federal response and the failings by
servicers, California needs to act to improve procedures to
prevent unnecessary foreclosures and to provide a measure of
recourse, something that is sorely lacking right now, as
confirmed by SIGTARP, as well as COP and Treasury itself."
SB 729 would provide needed transparency and accountability to
the foreclosure and loan modification process. "Under
existing law, servicers face no consequences when they break
the rules or make a mistake that may wrongly cost a
California family their home. By contrast, homeowners - as
well as their neighbors, communities, and all of California
- suffer the consequences of a foreclosure that could have
been prevented...The limited private right of action in SB
729 is intended to be a sorely needed deterrent that is
missing in current law and practice. This right is not
provided to trigger an avalanche of lawsuits; rather it is
intended to provide a strong incentive for servicers to
comply with the law and ensure that they are acting in the
economic best interest of homeowners and investors."
In its support letter, the California Labor Federation (another
co-sponsor) cites the noneconomic costs of the foreclosure
crisis. When a family loses its home to foreclosure,
"families have to move, forcing children to get pulled out
of school, disrupting their education and their sense of
stability. Families often have to leave behind not just
memories, but family heirlooms, possessions they cannot
afford to move or fit into a smaller home, and family pets
forbidden in rental properties. There are real costs to this
private pain. A study conducted by the Alameda County
Public Health Department and the housing rights group Causa
Justa found that those who have had their homes foreclosed
on are twice as likely to report that their mental and
physical health has declined. Anxiety and depression are
commonplace in these families." The Labor Federation
SB
729 (Leno and Steinberg), Page 19
believes that "the best outcome for all Californians is to
increase loan modifications," but it believes that loan
modifications are not happening on the scale required to
make a dent in the foreclosure rate. According to the Labor
Federation, only one loan modification is occurring for
every 15 homeowners in need of assistance. By promoting
loan modifications, SB 729 will help California stay on
track on the road to economic recovery.
The third co-sponsor (California Reinvestment Coalition), echoes
the sentiments of its fellow co-sponsors, and additionally
observes that dual-track foreclosures and related servicing
abuses are getting worse. On the basis of a recent survey
of housing counselors, CRC finds that servicers commonly
move forward with foreclosure actions while borrowers are in
the process of applying for and negotiating loan
modifications. Virtually all housing counselors who
responded to the survey had clients whose homes had been
sold at trustee sale, while borrowers were actively
negotiating with the foreclosing lender regarding a loan
modification. SB 729 will prevent this outcome.
CALPIRG observes that the current system - proceeding with
foreclosure concurrent with any foreclosure avoidance
discussions - is not working. "No one benefits - not the
servicer, not the investor, not the homeowners, not the
community, and not the California economy, when a home that
is in the process of being saved through a loan modification
is sold in foreclosure."
Myriad other organizations in support of the bill expressed
similar sentiments to those above.
5. Summary of Arguments in Opposition: A coalition of
financial services industry and business industry trade
associations, including the California Bankers Association,
California Chamber of Commerce, California Financial
Services Association, California Independent Bankers,
California Land Title Association, California Mortgage
Association, California Mortgage Bankers Association,
Securities Industry and Financial Markets Association, and
United Trustees Association, are opposed to the measure on
several grounds, as follows:
a. The measure is unnecessarily complex and
riddled with procedural traps, will lead to
SB
729 (Leno and Steinberg), Page 20
ever-increasing litigation, and will further frustrate
and prolong existing foreclosure and loss mitigation
efforts. Federal data indicate that unemployment and
underemployment are the predominant reasons why
borrowers seek loan modifications. Legislative
efforts are better directed at improving employment
opportunities.
b. Ongoing efforts being undertaken at the
federal level (summarized above, and including the
state AG settlement, federal regulator enforcement
actions, and nationwide servicing standards) may
overlap with and contradict elements of SB 729.
c. SB 729 fails to narrowly target at-risk
borrowers and fails to require borrowers to tender any
amounts as a symbol of good faith. Through its broad
application, the bill extends aid to borrowers who
strategically default and, in doing so, diverts
resources away from borrowers who wish to avoid
foreclosure and remain in their homes. SB 729 will be
used as a delay and a leveraging tactic by borrowers
who have no intention of remaining in their homes.
d. SB 729 invites litigation through inclusion of
private rights of action and awards damages to
borrowers, irrespective of whether they have
experienced real harm. The remedies extended to
borrowers by the bill are not narrowly focused on
circumstances in which lenders ignore or fail to
respond to borrowers, but instead grant remedies for
failure to adequately complete documents in the very
precise manner prescribed by the bill.
e. SB 729 will cloud title for a year following a
trustee sale, leaving properties vacant. SB 729 gives
borrowers up to one year following a trustee sale to
pursue an action to void that sale. Individuals
seeking to obtain a loan to buy a home that has been
foreclosed on will be unable to obtain financing for
their purchase for up to one year following the
trustee sale, because title insurers will not issue
policies. While nothing requires lenders to purchase
title insurance, the secondary market requires it to
protect their security interests in loans they buy;
thus, lenders providing loans typically don't lend
SB
729 (Leno and Steinberg), Page 21
without title insurance policies in place.
While investors seeking to fix up and flip a real estate
owned property may have the cash necessary to purchase
that property from a foreclosing lender without the
need for financing, they may be unable to sell the
property to a subsequent purchaser during the one year
following the trustee sale, due to the inability of
that subsequent purchaser to obtain financing for
title insurance reasons.
Furthermore, in the event a buyer (such as an investor
who makes a cash sale) acquires real property, but
does not obtain title insurance, that buyer could be
at risk that their acquisition of the property will be
rescinded through the action of a prior homeowner to
challenge the sale. Thus, the bill could result in
several tens of thousands of properties remaining
vacant and unmarketable, a situation that will further
delay the clearing of excess inventory and
California's economic recovery.
f. SB 729 also inappropriately meddles with
pending litigation, by amending Civil Code Section
2923.5, a section that has been the subject of several
legal claims and class action litigation.
g. HAMP and lenders' proprietary loss mitigation
program are helping borrowers that qualify. The
proponents of SB 729 are seeking to codify HAMP, but
have also admitted that their codification exceeds
HAMP requirements. For example, SB 729 front loads
the determination of loan modification eligibility in
the pre-NOD time period, which is inconsistent with
HAMP. Because HAMP is a nationwide program,
California-specific variations to the program will
result in compliance hurdles and represent a
detrimental distraction from our efforts to assist
financial institution customers.
The California Credit Union League (CCUL) also opposes
the bill, citing credit unions' strong track record of
modifying the mortgage loans of their members on a
voluntary, individualized basis. SB 729 would require
credit unions to change their successful approaches to
modifying loans. Permanently amending the foreclosure
SB
729 (Leno and Steinberg), Page 22
process and creating onerous pre-NOD requirements will
limit credit unions' ability to be flexible with their
members and lead to fewer positive outcomes for credit
union borrowers.
CCUL is also concerned that SB 729 will elongate the
foreclosure process and force credit unions to hold on to
properties in circumstances where it is not feasible to
save the loan. Also of great concern is the private
right of action, which threatens credit unions and other
good players with unnecessary legal action and fees.
Finally, credit unions and other financial institutions
are still acclimating to the effects of legislation such
as the Dodd-Frank Wall Street Reform and Consumer
Protection Act and more than three dozen laws reforming
the residential mortgage lending market. SB 729
represents a harmful, permanent change to the mortgage
loan process in this transforming landscape, where
legislative and regulatory consequences on lenders and
borrowers are still being discovered. Given this
changing regulatory environment, SB 729 will be
counterproductive and may be ineffective as new standards
are put in place.
6. Unintended Consequences -- Possible Conflict with Ongoing
Federal and State AG Actions: As noted above, this bill
provides prescriptive rules for some of the same topics
addressed in the pending AG settlement, ongoing federal
regulator enforcement actions, and upcoming nationwide
servicing standards. All of the parties involved in AG
settlement, federal regulator enforcement actions, and
nationwide servicing standards have publicly committed to
ensuring that the requirements imposed on servicers by these
actions will be complementary to one another, rather than
inconsistent or conflicting.
Unfortunately, there is no assurance at the present time that
the provisions of SB 729 will complement the activities
ongoing at the federal level and among the state AGs;
instead, it is very likely that SB 729 will contain
provisions that are inconsistent with, and possibly in
conflict with, these other, similarly-focused efforts.
Enacting a state law that imposes requirements on mortgage
servicers, which are inconsistent with, or which conflict
SB
729 (Leno and Steinberg), Page 23
with federal or state AG standards, would place servicers
into a legal and regulatory Catch-22. Either they comply
with state law and risk punishment by federal regulators, or
they comply with federal enforcement orders and risk
lawsuits under state law. There is also the possibility
that SB 729 could place our state AG in a position of having
to enforce two conflicting standards (the settlement
agreement and SB 729), both of which carry significant
monetary penalties for noncompliance.
To mitigate against the possibility that SB 729 will conflict
with federal enforcement orders or servicing standards, or
with the terms of the AG settlement agreement, this
committee may wish to ask for a commitment from the authors
to wait until the details of the ongoing federal and state
AG actions are finalized, before moving their bill to the
Governor.
7. Amendments:
a. The authors plan to propose amendments
(inadvertently omitted from the April 14th version of the
bill by the Legislative Counsel) to modify the provisions
of the bill requiring servicers to prove they have
standing to foreclose. These amendments restate this
provision in a more legally and technically correct
fashion but do not change the concept embodied in the
bill - namely, that the foreclosing party must prove that
it has standing to foreclose before commencing a
foreclosure action.
8. Prior and Related Legislation:
a. SB 1275 (Leno and Steinberg), 2009-10 Legislative
Session: Similar to this bill. Passed the Senate.
Failed passage on the Assembly Floor.
b. 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.
c. SB 1137 (Perata), Chapter 69, Statutes of 2008:
Summarized above in the Existing Law section.
SB
729 (Leno and Steinberg), Page 24
d. 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.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
Center for Responsible Lending (co-sponsor)
California Labor Federation (co-sponsor)
California Reinvestment Coalition (co-sponsor)
AARP California State Office
Advocates for Neighbors, Inc
Affordable Housing Services
Alliance of Californians for Community Empowerment
Asian Americans for Civil Rights & Equality
Asian Pacific American Legal Center
Aspera Housing, Inc.
California Coalition for Rural Housing
California Faculty Association
California Nurses Association
California School Employees Association
CALPIRG
Causa Justa: Just Cause
Center for California Homeowner Association Law
Chrysalis Consulting Group, LLC
Civic Center Barrio Housing Corporation
Community Housing Development Corporation of North Richmond
Community HousingWorks
Community Legal Services of East Palo Alto
Congregations Building Community
Consumer Attorneys of California
Consumer Federation of California
Consumers Union
Contra Costa Interfaith Supporting Community Organization
Contra Costa Interfaith Supporting Community Organization
(CCISCO)
East Los Angeles Community Corporation
East Palo Alto Council of Tenants (EPACT) Education Fund
SB
729 (Leno and Steinberg), Page 25
EPA CAN DO
Fair Housing Council of San Diego
Fair Housing Council of the San Fernando Valley
Fair Housing Federation
Fair Housing Law Project, a project of the Law Foundation of
Silicon Valley
Fair Housing of Marin
Greenlining Institute
Housing and Economic Rights Advocates
Housing Rights Center
Korean Churches for Community Development
LA Voice
Los Angeles Neighborhood Housing Services
MAAC Project of San Diego County
National Council of La Raza
National Housing Law Project
NeighborWorks Sacramento Region
New America Foundation
Opportunity Fund
PACE
Pacoima Beautiful
Peninsula Interfaith Action
People Helping People Ministry and Outreach
PICO California
Project Sentinel
Public Counsel
Sacramento Mutual Housing Association
San Mateo County Central labor Council
Self-Help Enterprises
STAND Affordable Housing
Tenants Together
Unity Council
Vallejo Neighborhood Housing Services, Inc.
Vermont Slauson Economic Development Corporation
Visionary Home Builders
Watts/Century Latino Organization
Yolo Mutual Housing Association
SB
729 (Leno and Steinberg), Page 26
Opposition
California Bankers Association
California Chamber of Commerce
California Credit Union League
California Financial Services Association
California Independent Bankers
California Land Title Association
California Mortgage Association
California Mortgage Bankers Association
Civil Justice Association of California
Securities Industry and Financial Markets Association
United Trustees Association
Consultant: Eileen Newhall (916) 651-4102