BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 900|
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CONFERENCE REPORT NO. 1
Bill No: SB 900
Author: Leno (D), et al.
Amended: 6/27/12
Vote: 21
CONFERENCE COMMITTEE : 4-1, 6/27/12
AYES: Senator Evans, Senator Calderon, Assemblymember
Feuer, Assemblymember Eng
NOES: Assemblymember Wagner
NO VOTE RECORDED: Senator Blakeslee
SUBJECT : Mortgages and deeds of trust: foreclosure
SOURCE : Author
DIGEST : This bill makes changes to California's
non-judicial foreclosure process to provide stability to
California's statewide and regional economies and housing
market by facilitating opportunities for borrowers to
pursue loss mitigation options.
Conference Committee Amendments delete the prior version of
the bill, which stated the intent of Legislature to enact
legislation to amend the state's foreclosure laws to
implement and make permanent the servicing standards and
other provisions of the National Mortgage Settlement.
ANALYSIS : On April 6, 2012, a federal judge signed-off
on the
$25 billion foreclosure settlement, first announced in
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February 2012, between banks (Citi, Wells Fargo, Bank of
America, Chase and Ally), federal agencies, and the state
attorneys general from 49 states and the District of
Columbia. The investigation began in October 2010 as media
stories highlighted widespread allegations regarding the
use of "robo-signed" documents used in foreclosure
proceedings around the country. The attorneys general
formed working groups to investigate the widespread
allegations, however, further investigation led to a larger
discussion with the five largest mortgage loan servicers
regarding various facets of the foreclosure and loan
modification process. While conducting their investigation
the attorneys general identified deceptive practices
regarding loan modifications, foreclosures occurring due to
the servicer's failure to properly process paperwork, and
the use of incomplete paperwork to process foreclosures in
both judicial and non-judicial foreclosure cases.
The complaint filed by the attorneys general, provided a
detailed list of allegations concerning several key areas
related to foreclosure and servicing practices. The
specific allegations include:
1. Unfair, deceptive, and unlawful servicing process;
2. Unfair, deceptive, and unlawful loan modification and
loss mitigation processes;
3. Wrongful conduct related to foreclosures;
4. Unfair and deceptive origination practices; and
5. Violations of the Servicemembers Civil Relief Act.
In resolving the aforementioned claims, the settlement
provides for relief for borrowers in the form of
modifications, mortgage loan servicing reforms, increased
compliance monitoring and enforcement.
The settlement requires a total of $17 billion to be
allocated to facilitate loan modifications to borrowers
with the intent and ability to stay in their homes. Of the
$17 billion, 60% must be allocated to principal reduction
modifications. Additionally, banks must offer refinance
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programs through the use of $3 billion to assist borrowers
with negative equity whom otherwise would be unable to
refinance. Additional settlement monies are dedicated to
borrowers who were wrongfully foreclosed on after January
1, 2008 (approximately $1.5 billion in relief), and another
$2.5 billion to the states for foreclosure relief and
housing programs.
The settlement also requires major changes in loan
servicing required of the five banks party to the
settlement. These changes include:
1. Information in foreclosure affidavits must be personally
reviewed and based on competent evidence.
2. Holders of loans and their legal standing to foreclose
must be documented and disclosed to borrowers.
3. Borrowers must be sent a pre-foreclosure notice that
will include a summary of loss mitigation options
offered, an account summary, description of facts
supporting lender's right to foreclose, and a notice
that the borrower may request a copy of the loan note
and the identity of the investor holding the loan.
4. Borrowers must be thoroughly evaluated for all available
loss mitigation options before foreclosure referral, and
banks must act on loss mitigation applications before
referring loans to foreclosure; i.e. "dual tracking"
will be restricted.
5. Denials of loss mitigation relief must be automatically
reviewed, with a right to appeal for borrowers.
6. Banks must implement procedures to ensure accuracy of
accounts and default fees, including regular audits,
detailed monthly billing statements and enhanced billing
dispute rights for borrowers.
7. Banks are required to adopt procedures to oversee
foreclosure firms, trustees and other agents.
8. Banks will have specific loss mitigation obligations,
including customer outreach and communications, time
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lines to respond to loss mitigation applications, and
e-portals for borrowers to keep informed of loan
modification status.
9. Banks are required to designate an employee as a
continuing single point of contact to assist borrowers
seeking loss mitigation assistance.
10.Military personnel who are covered by the Servicemembers
Civil Relief Act will have enhanced protections.
11.Banks must maintain adequate trained staff to handle the
demand for loss mitigation relief.
12.Application and qualification information for
proprietary loan modifications must be publicly
available.
13.Servicers are required to expedite and facilitate short
sales of distressed properties.
14.Restrictions are imposed on default fees, late fees,
third-party fees, and force-placed insurance.
For a detailed look at the complaint and resulting
settlement, a full list of documents can be found at
http://www.nationalmortgagesettlement.com/.
This bill makes changes to California's non-judicial
foreclosure process. Specifically, the Conference
Committee amendments:
1. Declare that the purpose of the act is ensure that as
part of the non-judicial foreclosure process, borrowers
are considered for, and have a meaningful opportunity to
obtain, available loss mitigation options, if any,
offered by or through the borrower's mortgage servicer,
such as loan modifications or other alternatives to
foreclosure. Additionally, provides that nothing in the
act shall be interpreted to require a particular result
of that process.
2. Define the following terms:
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A. "Mortgage servicer" means a person or entity who
directly services a loan, or who is responsible for
interacting with the borrower, managing the loan
account on a daily basis including collecting and
crediting periodic loan payments, managing any escrow
account, or enforcing the note and security
instrument, either as the current owner of the
promissory note or as the current owner's authorized
agent. Clarifies that a servicer does not include a
trustee.
B. "Foreclosure prevention alternative" means a first
lien loan modification or another available loss
mitigation.
C. "Borrower" means any natural person who is a
mortgagor or trustor and who is potentially eligible
for any federal, state, or proprietary foreclosure
prevention alternative program offered by, or through
his or her mortgage servicer. States that borrower
does not include:
(1) An individual who has surrendered the
secured property as evidenced by either a letter
confirming the surrender or delivery of the keys
to the property to the mortgagee, trustee,
beneficiary or authorized agent (MTBA);
(2) An individual who has contracted with an
organization, person, or entity who primary
business is advising people who have decided to
leave their homes on how to extend the foreclosure
process and avoid their contractual obligations to
mortgagees or beneficiaries; or
(3) An individual who has filed a case under
Chapter 7, 11, 12, or 13 of the bankruptcy code
and the bankruptcy court has not entered an order
closing or dismissing the bankruptcy case.
D. "First lien" means the most senior mortgage or
deed of trust on the property that is the subject of
the notice of default (NOD) or notice of sale (NOS).
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3. Limit scope of application to only mortgages or deeds of
trust that are secured by owner-occupied residential
real property containing no more than four dwelling
units. "Owner-occupied" means that the property is the
principal residence of the borrower and is security for
a loan made for personal, family, or household purposes.
4. Limit the scope of loss mitigation requirements and
activities to first lien mortgages.
5. Make clarifying and conforming changes to existing law
requirements concerning contact to borrowers prior to
the recording of NOD.
6. Require, until January 1, 2018, in addition to existing
requirements for contacting borrowers prior to NOD, the
servicer must also send the following to the borrower in
writing at least 30 days prior to recoding NOD:
A. A statement that if the borrower is a
servicemember, or dependent of a servicemember, he or
she may be entitled to certain protections under the
federal Servicemembers Civil Relief Act; and
B. A statement that the borrower may request the
following:
(1) A copy of the borrower's promissory note or
other evidence of indebtedness;
(2) A copy of the borrower's deed of trust or
mortgage;
(3) A copy of any assignment, if applicable, of
the borrower's mortgage or deed of trust required
to demonstrate the right of the mortgage servicer
to foreclose; and
(4) A copy of the borrower's payment history
since the borrower was last less than 60 days past
due.
7. Establish, until January 1, 2018, the following
processes for borrowers to request loss mitigation
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assistance.
A. If a borrower submits a complete application for a
first-lien loan modification the servicer shall not
record a NOD or NOS, or conduct a trustee's sale
while the application is pending.
B. The servicer may not record the NOD or NOS until
any one of the following occur:
(1) The mortgage servicer makes a written
determination that the borrower is not eligible
for a first-lien loan modification, and any appeal
period has expired;
(2) The borrower does not accept an offered
first-lien loan modification within 14 days of
offer; or
(3) The borrower accepts a written first-lien
loan modification, but defaults on the loan
modification or otherwise breaches the borrower's
obligation under the first-lien loan modification
alternative.
C. If the borrower's application is denied they shall
have at least 30 days from the date of the denial to
appeal the denial and provide evidence to the
servicer that the determination was in error.
D. If the borrower's application is denied, then the
mortgage servicer shall not record a NOD, NOS or
conduct a trustee sale until the later of:
(1) Thirty-one days after the borrower is
notified in writing of the denial; or
(2) If the borrower appeals the denial, the
later of 15 days after denial of the appeal, or 14
days after a first-lien loan modification is
offered, but declined by the borrower.
E. Following the denial of the modification, the
mortgage servicer shall send written notice to the
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borrower identifying the reasons for the denial,
including the following:
(1) The amount of time from the date of the
denial letter in which the borrower may request an
appeal of the denial and instructions on how to
appeal the denial;
(2) The specific reason for an investor denial,
if applicable;
(3) If the denial was a result of a net present
value (NPV) calculation, the monthly gross income
and property value used to calculate the NPV and a
statement that the borrower may request, in
writing, the inputs used to calculate the NPV;
(4) If applicable, a finding the borrower was
previously offered a loan modification and failed
to successfully make payments under the terms of
the modified loans; and
(5) If applicable, a description of other
foreclosure alternatives for which the borrower
may be eligible;
F. Specifies that in order to minimize the risk of
borrowers submitting multiple applications for
first-lien loan modifications for purpose of delay, a
servicer shall not be obligated to evaluate
applications from borrowers who have already been
evaluated unless there has been a material change in
the borrower's financial circumstances since the date
of the borrower's previous application and the change
is documented by the borrower.
G. Provides that an application is "complete" when a
borrower has supplied the mortgage servicer with all
the documents required by the servicer within the
reasonable timeframes specified by the mortgage
servicer.
8. Specify, until January 1, 2018, certain entities that
meet a specified performance metric (as described in
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#29) follow a process different than outlined in #7.
Prohibit these entities from filing a NOD or NOS, or
conducting a trustee sale while a borrower's application
for first-lien loan modification is pending. If the
application is approved, then the NOD or NOS may not be
recorded and a trustee sale may not be conducted if the
borrower is in compliance with the terms of a loan
modification, forbearance or repayment plan, or a
foreclosure prevention alternative has been approved by
all parties.
9. Provide for a borrower who requests a foreclosure
prevention alternative, the mortgage servicer shall
promptly establish a single point of contact (SPOC) and
provide one or more means of communication with the
SPOC. Additionally, require SPOC to be responsible for
the following:
A. Communicating the process by which a borrower may
apply for an available foreclosure prevention
alternative and the deadline for any required
submission to be considered for the options;
B. Coordinating receipt of all documents associated
with available foreclosure prevention alternatives
and notifying the borrower of any missing documents
necessary to complete the application;
C. Having access to current information and personnel
sufficient to inform the borrower of the status of
their foreclosure prevention alterative; and
D. Ensure that a borrower is considered for all
foreclosure prevention alternatives offered, by or
through the mortgage servicer.
10.Require the SPOC to remain assigned to a borrower's
account until the servicer determines that all loss
mitigation options have been exhausted, or the
borrower's account becomes current.
11.Define "SPOC" as an individual or team of personnel each
of whom has the ability and authority to perform the
responsibilities in #A through #D above. Provides that
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the servicer shall ensure that each team member is
knowledgeable about the borrower's financial situation
and current status in the foreclosure prevention
process.
12.Require that, until January 1, 2018, whenever a trustee
sale is postponed for at least 10 business days, the
borrower shall be provided written notice, at least five
business days after postponement, regarding the new
trustee sale date and time.
13.Clarify that no entity shall initiate the foreclosure
process unless it is the holder of the beneficial
interest under the mortgage or deed of trust.
Additionally, no agent of the holder of the beneficial
interest may commence the foreclosure process except
when acting within the scope of authority designated by
the holder of the beneficial interest.
14.Specify, until January 1, 2018, that unless a borrower
has previously exhausted the foreclosure avoidance
process, within five business days after recording NOD,
a mortgage servicer shall send a written communication
to the borrower that includes the following:
A. That the borrower may be evaluated for a
foreclosure prevention alternative;
B. Whether an application is required to be
considered for a foreclosure prevention alternative;
and
C. The means and process by which a borrower may
obtain an application for a foreclosure prevention
alternative.
15.Require, until January 1, 2018, a servicer to provide
written acknowledgment of receipt of any borrower
documentation within five business days of receipt.
Provides that the servicer, in its initial
acknowledgment of receipt of the loan modification
application shall include the following information:
A. A description of the loan modification process;
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B. Any deadlines required to submit missing
documentation that would affect processing of a loan
modification application;
C. Any expiration date of documents; and
D. Any deficiency in the borrower's loan modification
application.
16.Prohibit the recording of a NOD if the borrower is in
compliance with the terms of a written modification,
forbearance, or repayment plan, or the foreclosure
prevention alternative has been approved in writing by
all parties.
17.Provide that if a foreclosure prevention alternative is
approved in writing after recordation of NOD, the
servicer shall not record the NOS or conduct a trustee's
sale if the borrower is in compliance with the terms of
a written modification, forbearance, or repayment plan,
or the foreclosure prevention alternative has been
approved in writing by all parties.
18.Require, until January 1, 2018, the mortgage servicer to
provide a borrower, who accepts an offered loan
modification, a copy of the fully executed loan
modification agreement.
19.Specify, until January 1, 2018, that upon the borrower
executing a permanent first-lien loan modification
alterative, the mortgagee, beneficiary or authorized
agent shall record a rescission of a NOD or cancel a
pending trustee's sale, if applicable.
20.Prohibit, until January 1, 2018, the servicer from
charging any application, processing or other fee for a
modification or other foreclosure prevention
alternative.
21.Prohibit, until January 1, 2018, the servicer from
collecting any late fees for periods during which a
complete loan modification application is under
consideration, a denial is being appealed, the borrower
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is making timely modification payments, or a foreclosure
prevention alternative is being evaluated or exercised.
22.Provide, until January 1, 2018, that if a borrower has
been approved in writing for a first lien loan
modification or other foreclosure prevention
alternative, and the servicing of that borrower's loan
is transferred or sold to another mortgage servicer, the
subsequent mortgage servicer shall continue to honor the
approved loan modification or other foreclosure
prevention alternative.
23.Specify, beginning January 1, 2018, that servicers may
not record a NOS or conduct a trustee sale under certain
circumstances. Specifically, prevents the recordation
of the NOS or conducting the trustee sale until the
borrower has been provided a written determination
regarding the borrower's eligibility for a foreclosure
prevention alternative. If the modification is denied
then the servicer must send the borrower a notice
identifying the reasons for the denial.
24.State that beginning January 1, 2018, if a foreclosure
prevention alternative is approved in writing prior the
filing of a NOD the servicer may not record an NOD, or
if the alternative was approved after NOD, then the
servicer may not record the NOS under the following
circumstances:
A. The borrower is in compliance with the terms of a
written trial or permanent loan modification,
forbearance or repayment plan; or
B. A foreclosure prevention alterative has been
approved in writing by all parties.
25.Require that documents required to initiate or complete
the foreclosure process shall be accurate and complete
and supported by competent and reliable evidence.
Additionally, specifies prior to recording or filing
foreclosure documents the mortgage servicer shall ensure
it has reviewed competent and reliable evince to
substantiate the borrower's default and the right to
foreclose, including the borrower's loan status and loan
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information. Provide, until January 1, 2018, that for
repeated and multiple violations, an entity shall be
liable for a civil penalty up to $7,500 per mortgage or
deed of trust.
26.Provide for the following remedies and enforcement:
A. A borrower may bring an action for injunctive
relief for a material violation if the trustee's deed
has not been recorded. The injunction would remain
in place, and any trustee's sale enjoined, until a
court determines that the violation has been
corrected and remedied. An enjoined entity may move
to dissolve an injunction based on a showing that the
material violation has been corrected and remedied;
B. After a trustee's deed has been recorded, the
mortgage servicer or mortgagee, trustee, beneficiary
or authorized shall be liable for actual economic
damages resulting from a material violation that is
not corrected and remedied prior to the recordation
of the trustee's deed;
C. If the violation was intentional or reckless, or
resulted from willful misconduct by a mortgage
servicer or MTBA the court may award the borrower the
greater of treble damages or statutory damages of
$50,000;
D. Specifies that a mortgage servicer or MTBA shall
not be liable for a violation that has been corrected
and remedied prior to recordation of the trustee's
deed;
E. A violation by a person licensed by the Department
of Corporations (DOC), Department of Financial
Institutions (DFI), or Department of Real Estate
(DRE) shall be deemed to be a violation of that
person's licensing law; and
F. No violation shall affect the validity of a sale
in favor of a bona fide purchaser.
27.State that a signatory to the national mortgage
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settlement that is in compliance with the relevant terms
for the Settlement Term Sheet of that consent judgment
with respect to the borrower who brought an action while
the consent judgment is in effect shall have no
liability for a violation.
28.Allow a court to award a prevailing borrower reasonable
attorney's fees and costs in an action.
29.Provide, until January 1, 2018, that a depository
institution charted under state or federal law, a person
licensed as a California Finance Lender or under the
Residential Mortgage Lending Act or a licensed real
estate broker, acting as a servicer, that during its
immediately preceding annual reporting period,
foreclosed on 175 or fewer residential properties
located in California shall only have to comply with
specific sections. Under this performance metric, an
entity with fewer than 175 foreclosures in the previous
year would not need to comply with the following
sections:
A. Section 2923.55 - Requires, in addition to
existing requirements for attempting contact with
borrowers at 30 days prior to default, that a
servicer send a notice to the borrower including
information regarding loss mitigation and documents
that can be requested.
B. Section 2923.6 - Prohibitions on foreclosure
filing while loan modification is pending. This
section also established appeal process and deadlines
and requires a detailed denial notice.
C. Section 2923.7 - SPOC.
D. Section 2924.9 - Requirement that within five days
of recordation of NOD, servicer must send borrower
notice of their loss mitigation options.
E. Section 2924.10 - Requirement that servicer
respond within 5 days to borrower's written
communication.
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30.Requires, in relation to #29 above, entities with fewer
than 175 foreclosures must comply with the following:
A. Existing legal requirements under 2923.5,
established via SB 1137 (Perata, 2008), which
requires due diligence on the part of servicers to
contact borrowers at least 30 days prior to filing
NOD.
B. Section 2924 - Contains requirement that
postponements of trustee sale of at least 10 days
must be noticed to the borrower within five days and
that an entity cannot record NOD unless it is the
holder of the beneficial interest of the deed of
trust.
C. Section 2924.17 - Prohibition on the use of
foreclosure documents that are unverified or not
supported by competent reliable evidence.
D. Section 2924.18 - Provides a general ban on
initiating or continuing the foreclosure process when
a borrower's request for loss mitigation is under
consideration, or a foreclosure prevention
alternative is approved in writing.
31.Sunset various provisions on January 1, 2018.
Specifically sunsets the following provisions:
A. Existing legal requirements under 2923.5,
established via SB 1137 (Perata, 2008), which
requires due diligence on the part of servicers to
contact borrowers at least 30 days prior to filing
NOD, that includes new notice provision.
B. Section 2923.6 - Prohibitions on foreclosure
filing while loan modification is pending. This
section also established appeal process and deadlines
and requires a detailed denial notice.
C. Section 2924 - Sunset on provision that requires
notice of postponement of trustee sale.
D. Section 2924.9 - Five day post NOD notice.
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E. Section 2924.10 - Requirement that servicers
respond in writing to borrower communications.
F. Section 2924.11 - Additional ban on continuation
of foreclosure process while borrower has pending
modification.
G. Remedies provisions relating to sections described
above that sunset.
32.Provides authority to DOC, DFI and DRE to promulgate
regulations to carry out purposes of the act.
Background
NOTE: The following background information has been
provided by the Conference Committee to highlight
the need for the bill.
Foreclosures blight neighborhoods, put financial pressure
on families and drive down local real estate values, and
consumers, made more cautious by a crippled housing market,
spend less freely, curbing the economy's growth.
Distressed borrowers are certainly among the hardest hit.
But as communities across the country know all too well,
families that lose their homes are not the only victims of
foreclosures. Even homeowners who have never missed a
payment on their loans have suffered as "spillover" costs
extend throughout the neighborhood and the larger
community. By some estimates the foreclosure crisis will
strip neighboring homeowners of $1.9 trillion in equity as
foreclosures drain value from homes located near foreclosed
properties by 2012. As a result of depressed home values,
nearly one out of every four borrowers are "underwater,"
owing more than the home is worth. Meanwhile, state and
local governments continue to be hit hard by declining tax
revenues coupled with increased demand for social services.
In fact, the Urban Institute estimates that a single
foreclosure costs $79,443 after aggregating the costs borne
by financial institutions, investors, the homeowner, their
neighbors, and local governments. However, even this
number may understate the true costs, since it does not
reflect the impact of the foreclosure epidemic on the
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nation's economy or the disparate impact on lower-income
and minority communities.
When a borrower is in danger of defaulting, a commonsense
approach under a traditional mortgage would be for the
lender and borrower to mutually agree to modify the terms
of the loan, or for the bank to agree to allow the borrower
to sell the home in a "short sale" for an amount that
equals or approximates the outstanding balance on the loan
to save the lender the time and costs of foreclosure.
Moreover, in a declining real estate market, the amount
obtained by the lender in a foreclosure sale may be less
than the amount owed on the loan.
Despite the apparent mutual interest of loan holders and
borrowers, many distressed homeowners report obstacles when
trying to obtain a loan modification or short-sale
approval. (See e.g. "Loan Modifications Elude Local
Homeowners," Sacramento Bee, January 17, 2011.) Part of
the answer may be that the mortgage industry has become
more complex. Rarely does a modern mortgage involve only
two players, a lender and a borrower, with a common
interest in avoiding default and the capacity to
communicate directly. Instead, the modern mortgage
industry typically involves at least four players: (1) the
original lender (or originator); (2) a loan servicer (who
may or may not be affiliated with the originator) who
collects from the borrower and remits to the mortgage
holder; (3) an investor who has purchased an interest in
the mortgage (or more likely an interest in the stream of
income from a pool of mortgages); and (4) a borrower.
Under this more complex arrangement, it is the servicer -
not the loan originator or the investor holding an interest
in the mortgage - who collects payments and has the power
to either bring a foreclosure or approve a loan
modification or a short sale if the borrower fails to make
timely payments.
In some cases, difficulty obtaining investor approval is
cited as the primary obstacle. Critics contend, however,
that servicers' financial incentives are the true
explanation. In a review of subprime securitization
pooling and servicing agreements from 2006, UC Davis Law
Professor John Patrick Hunt found that 60% of loans
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reviewed authorized modification, while 32% were silent on
modification. He found that only 8% expressly barred
modification. The aggregate principle of the secured pools
he reviewed accounted for $323 billion, equaling 75% of
subprime securitizations in 2006.
Some analysts and leading economists have cited a failure
by banks to provide long term and sustainable loan
modifications as a single reason that the foreclosure
crisis continues to drag on. Another obstacle to loan
modifications arises if borrowers have second liens, like
home equity loans, on their properties. These liens are
often held by lenders who are also servicers on the first
mortgage. They, too, have little interest in seeing any
modification because it would harm the value of their
holdings and reduce their income from fees. ("A Mortgage
Nightmare's Happy Ending," New York Times, December 25,
2010)
The potential for a loan modification to provide a positive
change for borrowers, communities and even financial
markets is indisputable. TransUnion found that borrowers
who received loan modifications have a better record of
repaying auto and credit-card debt than trouble borrowers
who receive no assistance (Home Loan Modifications Cut
Credit Risk, TransUnion Says, Bloomberg News, June 21,
2012).
Difficulties in Achieving an Equitable Foreclosure and Loan
Modification Process Predate the Multi-State Settlement
The nationwide mortgage settlement is not the beginning of
this story. Borrower frustration with the loan
modification process and their ability to communicate with
their loan servicer dates back to 2006-07 as newspapers,
magazines, blogs, and television news broadcasts have all
detailed borrower difficulties concerning the loan
modification and foreclosure process. In 2010 the problems
became highlighted due to reviews of the various federal
foreclosure relief programs.
A report released by the Congressional Oversight Panel in
December 2010 reviewing these programs, found:
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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.
Then, in April 2011, Federal regulators (Office of
Comptroller of Currency, Office of Thrift Supervision, and
Federal Reserve System) issued enforcement orders against
Ally Bank/GMAC, Aurora Bank, Bank of America, Citibank,
EverBank, HSBC, JPMChase, MetLife, OneWest, PNC, Sovereign
Bank, SunTrust, US Bank, and Wells Fargo. These orders
were based on a review conducted by the regulators of the
foreclosure policies and practices of these servicers. In
their report, "Interagency Review of Foreclosure Policies
and Practices", April 2011, the federal regulators found:
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. The results elevated
the agencies' concern that widespread risks may be
presented-to consumers, communities, various market
participants, and the overall mortgage market. The
servicers included in this review represent more than
two-thirds of the servicing market. Thus, the agencies
consider problems cited within this report to have
widespread consequences for the national housing market
and borrowers.
And,
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Foreclosure governance processes of the servicers were
underdeveloped and insufficient to manage and control
operational, compliance, legal, and reputational risk
associated with an increasing volume of foreclosures.
Weaknesses included:
1) inadequate policies, procedures, and independent
control infrastructure covering all aspects of the
foreclosure process;
2) inadequate monitoring and controls to oversee
foreclosure activities conducted on behalf of
servicers by external law firms or other third-party
vendors;
3) lack of sufficient audit trails to show how
information set out in the affidavits (amount of
indebtedness, fees, penalties, etc.) was linked to the
servicers' internal records at the time the affidavits
were executed;
4) inadequate quality control and audit reviews to
ensure compliance with legal requirements, policies
and procedures, as well as the maintenance of sound
operating environments; and
5) inadequate identification of financial,
reputational, and legal risks, and absence of internal
communication about those risks among boards of
directors and senior management.
And,
Weaknesses in foreclosure processes and controls present
the risk of foreclosing with inaccurate documentation, or
foreclosing when another intervening circumstance should
intercede. Even if a foreclosure action can be completed
properly, deficiencies can result (and have resulted) in
violations of state foreclosure laws designed to protect
consumers. Such weaknesses may also result in inaccurate
fees and charges assessed against the borrower or
property, which may make it more difficult for borrowers
to bring their loans current. In addition, borrowers can
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find their loss-mitigation options curtailed because of
dual-track processes that result in foreclosures even
when a borrower has been approved for a loan
modification. The risks presented by weaknesses in
foreclosure processes are more acute when those processes
are aimed at speed and quantity instead of quality and
accuracy.
The consent order resulting from the investigations
required the creation of an independent foreclosure review
process. This process was created in order to allow
borrowers who are denied foreclosure mitigation to appeal
that decision to a third party for a review. A year after
these enforcement orders, only 3% of eligible borrowers
have requested a review of their loan file, and no servicer
that was party to the enforcement order has faced a penalty
for actions uncovered during the investigation, nor have
any borrowers received compensation for wrongful acts
("Just 3% of Eligible Borrowers Apply for Foreclosure
Review", Wall Street Journal, April 3, 2012).
The arrival of the multi-state settlement must be viewed in
context. As demonstrated in this analysis, the issues and
concerns raised by the settlement are not new, and appear
to have not yet been resolved. At a national level, it
seems that these combined efforts demonstrate that
borrowers with a legitimate chance to stay in their home
have fallen through the cracks. The issues may even be
more pronounced in California as foreclosures are processed
via a non-judicial foreclosure process. California's
foreclosure process relies on all parties carrying out the
foreclosure to meet their statutory deadlines without
independent oversight. This process also assumes that a
borrower facing foreclosure is aware of their rights, and
has the ability and knowledge to challenge their
foreclosure in the proper venue. Under normal
circumstances, this process works and can via its certainty
benefit the overall housing and lending markets. However,
in the extraordinary circumstances currently facing
California, it is a system that places an overwhelming
amount of authority and judgment in the hands of servicers,
many of whom have admitted to being overwhelmed with the
volume of foreclosure activity since 2007.
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Consumer Financial Protection Bureau (CFPB) Mortgage
Servicing Standards
Earlier this year, CFPB announced that they would be
developing national servicing standards later this year,
with a draft of the standards available in the summer of
2012. Specific language of the proposal is not yet
available, but CFPB did release a summary of the issues
they are considering. These issues include:
1. Servicers would be required clear monthly mortgage
statements.
2. Borrowers should receive a warning before interest rate
adjustments.
3. Borrowers should be aware of options to avoid
force-placed insurance.
4. Servicers would be required to contact borrowers prior
to foreclosure to discuss loss mitigation options.
5. Payments should be immediately credited.
6. Servicer records should be up-to-date and accessible.
7. Servicers would be required to correct errors quickly.
8. Servicers should be required to maintain foreclosure
prevention teams.
It is unclear how the final version of these concepts will
look. As with any rule proposed by a federal regulatory
body, the final version can often differ from the initial
press release. However, if the final rules indeed reflect
the initial summary, will these rules interfere or
otherwise upset California's efforts to provide transparent
rules for the loan modification process. In specific to
the servicing and loan modification processes contemplated
by this bill, the CFPB proposal appears to build on
California's existing pre-default contact requirements
contained in Civil Code Section 2923.5. The CFPB proposal
would require servicers to provide delinquent borrowers
with written information, no later than 45 days after
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delinquency about options to avoid foreclosure and how to
access a housing counselor. This information would also
include an explanation of the foreclosure process and
possible foreclosure timelines.
In short, it does not appear that the rules prevent or
otherwise frustrate current efforts, and instead appear to
complement, or indeed, even build upon California's
existing pre-foreclosure contact requirements.
In so far as the preemptive effect of CFPB rules, the
creation of the CFPB included language in the Dodd-Frank
Wall Street Reform Act that specifically provided the
foundation for the interaction between CFPB and state laws.
Section 1041 of the Dodd-Frank Act provides that in its
administration of the federal laws transferred to it, the
CFPB may not preempt state laws that are more protective
than a federal consumer law counterpart. Specifically,
Section 1041 states that a state's law may only be
preempted if it is inconsistent with a federal consumer
protection law-but an inconsistency does not include
providing greater consumer protection.
SPOC
The mortgage settlement requires that the servicers party
to the settlement establish a SPOC for "each potentially
eligible first lien mortgage borrower so that the borrower
has access to an employee of the servicer to obtain
information throughout the loss mitigation, loan
modification and foreclosure processes (Exhibit A, page 21
of the settlement term sheet documents)."
The issues preceding the need for inclusion of a SPOC in
the loan modification process have been well documented.
Borrowers have reported via media outlets and in other
forums regarding frustration in seeking loss mitigation
have resulted in numerous phone calls with different
people, each one not aware of the efforts of the other.
Additionally, borrowers have reported submitting paperwork
to one contact at a servicer to only get passed on to
another contact who then requests the same information for
submission. In the worst cases, paperwork is lost, or the
foreclosure process continues while the borrower believes
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they are being genuinely evaluated for a loan modification.
As mentioned previously, in April 2011, Federal regulators
(Office of Comptroller of Currency, Office of Thrift
Supervision, and Federal Reserve System) issued enforcement
orders against several national banks concerning
foreclosure and loss mitigation practices. Among these new
requirements demanded by federal regulators was the
establishment of a SPOC. The federal regulatory
enforcement orders require, in specific reference to SPOC,
that:
1. A SPOC is established for each borrower to remain with
them throughout the lost mitigation process.
2. Written communications with the borrower identify such
SPOC along with one or more direct means of
communication with the contact.
3. SPOC has access to current information and personnel
(in-house or third-party) sufficient to timely,
accurately, and adequately inform the borrower of the
current status of the Loss Mitigation, loan
modification, and foreclosure activities.
4. Measures to ensure that staff are trained specifically
in handling mortgage delinquencies, Loss Mitigation, and
loan modifications.
5. Procedures and controls to ensure that a final decision
regarding a borrower's loan modification request
(whether on a trial or permanent basis) is made and
communicated to the borrower in writing, including the
reason(s) why the borrower did not qualify for the
modification.
Following these enforcement guidelines, the United States
Treasury Department issued additional guidance under the
Making Home Affordable (MHA) modification program
(Supplemental Directive 11-04, issued May 11, 2011 and
effective on September 1, 2011). The directive provided,
"Each servicer subject to this Supplemental Directive must
establish and implement a process through which borrowers
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who are potentially eligible for HAMP, the Home Affordable
Unemployment Program (UP) or Home Affordable Foreclosure
Alternatives (HAFA) are assigned a relationship manager to
serve as the borrower's single point of contact through the
entire delinquency or imminent default resolution process."
Does the assignment of a SPOC work to encourage greater
efficiency and outcomes in the foreclosure process?
According to Alan Jones, senior Vice President of Wells
Fargo Home Mortgage, while speaking on a panel at a
Mortgage Bankers Association servicing conference in 2011,
"the single-point of contact does work. It has helped to
avoid foreclosures when the borrower has one person to call
while filling out their documentation" ("Wells Fargo
Finalizing Electronic Mortgage Modification Revamp",
Housingwire, February 25, 2011).
The SPOC requirements of the Conference Committee
amendments track consistently the requirements outlined in
the mortgage settlement term sheet, and those requirements
provided for in the previously mentioned consent orders.
However, one major difference, is that the amendments
provide added flexibility for servicers that wish to use
individuals or teams of personnel to meet the SPOC
requirement.
Validity of Foreclosure Documents
The Conference Committee amendments require that the
official documents used in the foreclosure process must be
accurate and complete and supported by competent reliable
evidence. Concerns regarding the validity of foreclosure
documents arose from national media attention to an issue
known as "robosigning."
Robosigning was first discovered in 2009 by Palm Beach,
Florida Attorney Tom Ice after he deposed a bank employee
who admitted to signing hundreds of foreclosure documents
in a day without looking at them.
Often these problems appeared to be limited to judicial
foreclosure states where a foreclosure requires various
court filings. However, media reports demonstrated that
the issue was not limited to judicial foreclosure states.
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A January 20, 2011 article in American Banker ("New Point
of Foreclosure Contention: Default Notice") provided the
following:
At issue is the notice of default, the first letter that
a mortgage lender or servicer sends to a homeowner who
has fallen behind on payments. The notice typically
starts the formal foreclosure process in nonjudicial
states such as California, Arizona and Nevada.
Every notice of default has a signature on it. But just
like the infamously rubber-stamped affidavits in the
robo-signing cases, default notices, in at least some
instances, have been signed by employees who did not
verify the information in them, court papers show. In
several lawsuits filed in nonjudicial states, borrower
attorneys are arguing that this is grounds to stop a
foreclosure.
"Whoever signs the NOD needs to have knowledge that there
is in fact a default," said Christopher Peterson, an
associate dean and law professor at the University of
Utah.
The suits also argue that the default notices are invalid
because the employees who signed them worked for
companies that did not have standing to foreclose.
In a lawsuit against Wells Fargo & Co. in Nevada, an
employee for a title company who signed default notices
admitted in a deposition this month that he did not
review any documents or know who had the right to
foreclose.
"They are starting foreclosures on behalf of companies
with no authority to foreclose," said Robert Hager, an
attorney with the Reno, Nev., law firm Hager & Hearne,
representing the borrower in the case. "The policy of
these companies is to just have a signer execute a notice
of default starting foreclosure without any documentation
to determine whether they are starting an illegal
foreclosure."
The Nevada nonjudicial foreclosure statute requires that
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the company signing a notice of default have the
authority to foreclose, Hager said.
In a deposition on Jan. 4, Stanley Silva, a title officer
at Ticor Title of Nevada Inc., said he "technically
signed" default notices for clients, which were often
acting as agents of other parties, which in turn worked
for others.
"The person at the bottom of the chain, by executing the
document, has taken an action on behalf of all of them
through their various agency agreements," Silva said. In
one case, for example, he said he had signed "on behalf
of Ticor Title of Nevada, who is agent for LPS Title, who
is agent for National Default Servicing."
"Who is agent for Fidelity National?" Hager asked.
"Apparently, yes," Silva replied.
"Which is a servicer for Wilshire?"
"Apparently."
Silva said under oath that he never reviewed any
documents or knew what company was the holder of the
original note at the time he signed the notice of
default. He said he signed about 200 default notices
over a four-year period.
When asked by Hager if he signed notices of default
"without verifying the accuracy of the information,"
Silva replied: "Correct."
?
Walter Hackett, a lawyer with Inland Counties Legal
Services, in San Bernardino, Calif., and a former banker
with Bank of America Corp. and Union Bank, has filed
several cases contesting notices of default, on the
grounds that the employees signing such notices were
working for companies that are not the note holders - or
even their appointed agents.
"A huge percentage of notices of default and notices of
trustee sales are legally questionable and probably
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void," Hackett said. "Nobody with the authority to
trigger the nonjudicial foreclosure process is triggering
it - only third parties who claim they have the right to
do so are triggering it."
After a notice of default is sent to the borrower and
filed at the county recorder's office, a notice of sale
is typically published in the local newspaper and the
sale of the property often takes place without the
borrower even knowing the home has been sold to another
party.
O. Max Gardner 3rd, a consumer bankruptcy attorney at
Gardner & Gardner PLLC in Shelby, N.C., said the default
notice is "the key legal document that is sent to the
borrower" before a notice of sale.
The United States Department of Housing and Urban
Development, Office of Inspector General (OIG) conducted a
review of the servicing practices of the five servicers
party to the national mortgage settlement. These reviews
were conducted due to reported allegations made in Fall
2010 that servicers were engaged in widespread foreclosure
practices that involved the use of unverified foreclosure
documents. The five servicers were examined based on their
status as Federal Housing Administration (FHA) direct
endorsement lenders that can originate, sponsor and service
FHA-insured loans. Among the findings included in one of
the reports (Bank of America Corporation Foreclosure and
Claims Process Review. HUD, Office of Inspector General,
March 12, 2012) were the following
Bank of American did not establish effective control over
its foreclosure process.
Bank of America did not establish a control environment
that ensured that's its notaries met their
responsibilities under State laws that required them to
witness affiants' signatures on documents they
notarized." The sample of documents reviewed by OIG
"included documents with notary stamps from Texas and
California. California law requires a notary to verify
the signature of signers.
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Bank of America's claim files for the 118 sample loans
did not consistently contain relevant pre- foreclosure
information that supported the legal basis for
foreclosure.
Bank of America conveyed a property located in Modesto,
CA, to HUD with incorrect legal description. California
is a two-deed State, requiring a trustee deed and grant
deed. The grant deed conveying the property title to HUD
used a legal description for a property on another
street. Because the legal description was incorrect,
Bank of America did not give HUD good and marketable
title to the property.
Similar HUD OIG reports exist for Wells, Citi, Chase, and
Ally Financial.
Scope of Proposed Conference Committee Amendments
In response to concerns raised by industry stakeholders,
the proposed Conference Committee amendments are limited in
scope in several ways. First, the dual track and SPOC
provisions apply only to first lien loan modifications.
This restriction is consistent with the national mortgage
settlement. Second, the dual track and SPOC provisions
apply only to mortgages or deeds of trust that are secured
by owner-occupied residential real property containing no
more than four dwelling units. The amendments specify that
"owner-occupied" means that the property is the principal
residence of the borrower and is security for a loan made
for personal, family, or household purposes. This
restriction to owner-occupied residences is on the whole
already contained in existing law, Civil Code Section
2923.5, which was added by SB 1137 (Perata, Corbett,
Machado, Chapter 69, Statutes of 2008). Finally, the
amendments define "borrower" by specifying that a borrower
is an individual who is potentially eligible for any
federal, state, or proprietary foreclosure prevention
alternative program offered by, or through, the mortgage
servicer.
Summary of Dual Track Prohibitions
The Conference Committee amendments provide for a
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simplified ban on dual tracking borrowers, in response to
concerns raised by stakeholders. Significantly, the dual
track protections are triggered only when a borrower
submits a "complete" application, which is defined as
meaning that a borrower has supplied the mortgage servicer
with all required documents within the reasonable
timeframes specified by the servicer. It is important to
note that these timeframes are only reasonable if they
permit the borrower sufficient time to complete the
application before the filing of the NOD or the NOS or the
trustee's sale and therefore it would be inherently
unreasonable for a mortgage servicer to file a NOD or NOS
or conduct a trustee's sale prior to the expiration of the
timeframes. Under the amendments, a mortgage servicer must
give a borrower a clear answer on an application before the
servicer may proceed with foreclosure. In addition, if a
borrower's application has been approved and the borrower
is in compliance with the loan modification, forbearance,
or repayment plan, the mortgage servicer may not proceed
with a NOD or NOS, or conduct a trustee's sale. The same
is true if the foreclosure prevention alternative is
approved by all parties and proof of funds or financing has
been provided to the servicer. The amendments would also
provide that if a borrower has been approved in writing for
a foreclosure prevention alternative and the servicing of
the borrower's loan is transferred or sold to another
mortgage servicer, the subsequent mortgage servicer must
continue to honor any previously approved alternative.
This provision is similar to one contained in the
nationwide mortgage settlement. The amendments also
contain several procedural elements of this dual track ban
which sunset on
January 1, 2018. After that date, a general ban on dual
tracking will become operative.
The amendments contain a number of safeguards, including
that servicers are not required to offer foreclosure
prevention alternatives if they do not participate in such
programs. In addition, the amendments would provide that
their purpose is to ensure that, as part of the
non-judicial process, borrowers have a meaningful
opportunity to obtain available loss mitigation options,
but nothing in the amendments is intended to require a
particular result.
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Summary of SPOC Provisions
The Conference Committee amendments build upon existing
best practices by requiring mortgage servicers to maintain
a SPOC for borrowers and allow flexibility by permitting a
team to be used. In response to concerns raised by
industry stakeholders, SPOC are limited to borrowers who
are "potentially eligible" for a federal, state, or
proprietary foreclosure prevention alternative program
offered by, or through, the mortgage servicer. In
addition, the SPOC could include multiple individuals, each
of whom has the ability and the authority to perform
specified responsibilities such as having access to current
information in order to inform the borrower of the current
status of his or her application. These provisions do not
sunset.
Summary of Document Verification Provisions
The Conference Committee amendments do not use the term
"robosigning." Instead, the amendments would require a
mortgage servicer, before recording or filing a declaration
pursuant to Civil Code Sections 2923.5 or 2923.55, a NOD,
NOS, assignment of a deed of trust, or substitution of a
trustee in connection with a foreclosure to ensure that it
has reviewed competent and reliable evidence to
substantiate the borrower's default and the right to
foreclose. Until January 1, 2018, an entity that engages
in "multiple and repeated" violations of this requirement
may be subject to a civil penalty of up to $7,500 per
mortgage or deed of trust in an action brought by a public
prosecutor or in an administrative proceeding brought by
DOC, DFI, or DRE against one of its licensees. In response
to industry stakeholder concerns, this provision was
limited by restricting imposition of the civil penalty only
to multiple and repeated violations, lowering the civil
penalty amount and providing that the actual penalty could
be "up to" that amount, and restricting the penalty to
every loan rather than every document.
In addition, the Conference Committee amendments would
require a declaration pursuant to Civil Code Sections
2923.5 or 2923.55, a NOD, NOS, assignment of a deed of
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trust, or substitution of a trustee recorded in connection
with a foreclosure to be accurate and complete and
supported by competent and reliable evidence. This
requirement would not be subject to the civil penalty
provisions described above.
Under existing law, pursuant to Civil Code Section 2924(b),
trustees do not have liability for any good faith error
when relying on information provided by the beneficiary
regarding the nature and amount of a default. Similarly,
the Conference Committee amendments are not intended to
impose liability on an entity that records documents at the
direction of a trustee, substitute trustee, or beneficiary
who is acting within the scope of authority designated by
the holder of the beneficial interest and where the entity
is carrying out its recording duties in good faith in the
normal course of their activity.
Explanation of Threshold Provision
The Conference Committee amendments would create a
threshold so that a mortgage servicer that foreclosed on
175 or fewer single-family residential real properties
during the immediately preceding annual reporting period
would be subject to the dual track ban and document
verification provisions but would be excused from the
procedural elements of dual track and the requirements to
provide a single point of contact. This threshold
provision would sunset January 1, 2018 and these entities
would then be subject to the general dual track ban
described above.
Summary of Enforcement Provisions
In response to concerns expressed, the Conference Committee
amendments would provide for a narrow and targeted
enforcement mechanism. Because the amendments provide for
individual protections, the bill necessarily allows
individual enforcement. However, to protect against any
potential frivolous claims or efforts to merely delay
legitimate foreclosure proceedings, the amendments would
provide for enforceability only for certain key provisions
related to the prohibitions against dual tracking, SPOC,
and false or incomplete documents. Moreover, no legal
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action whatsoever could be brought unless the violation is
material.
Importantly, no action for money damages would be allowed
until the date the trustee's deed is recorded after a
foreclosure sale. At all times until then, the only legal
remedy a homeowner may seek is an action to enjoin a
substantial violation of the specified sections, along with
any trustee's sale. When a court considers a request for
injunctive relief it must determine whether there is
convincing evidence of harm if the injunction is not
granted. The court will also consider if the borrower has
a likelihood of prevailing on the merits. As part of that
consideration, no legal action would be permissible if
brought in bad faith or intended merely for the purpose of
unnecessary delay, and no injunctive relief could be
awarded unless the homeowner could show a likelihood of
prevailing on the merits in relation to the balance of
harms. Any such injunction is to be dissolved if the
moving party shows that the violation has been redressed.
No special pre-litigation procedures or particular
allegations are required by the amendments, whether or not
the sale is pending. Conversely, the servicer or other
covered entity may avoid legal action by curing the
violation any time prior to recordation of a trustee's
deed. This right to cure is not unprecedented in
comparable circumstances where the parties are known to
each other and have an established relationship of ongoing
communication. Equivalent provisions may be found in Civil
Code Section 910 et seq. and Labor Code Section 2698 et
seq. If it is necessary to order injunctive relief, a
party who obtains an injunction is among those who is
recognized as a prevailing party for the purposes of
attorney's fees and costs. As with the vindication of other
important statutory rights, an award of attorney's fees and
costs is to be decided by the court (See, e.g., Code of
Civil Procedure Section 1021.5; Government Code Section
12965; Civil Code Section 52.1). If an action for damages
is necessary, the amendments are further limited by
providing that the measure of damages in an ordinary case
would be actual economic damages sustained. There are no
statutory damages in this instance. There is also a
provision for treble damages or a statutory minimum when a
violation is committed intentionally, recklessly or
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willfully. The amendments expressly provide that no
violation, regardless of substance, shall affect the
validity of a sale in favor of a bona fide purchaser and
its encumbrancers, as specified.
Finally, the amendments provide that servicers who are
signatories to the national mortgage settlement agreement
have no liability to an individual borrower if the servicer
is in compliance with the term sheet of the settlement
agreement as to the borrower.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: Yes
SUPPORT : (Verified 7/2/12)
Amalgamated Transit Union
American Federation of State, County and Municipal
Employees, AFL-CIO
California Conference of Machinists
California Federation of Teachers
California Labor Federation
California Nurses Association
California Professional Firefighters
California School Employees Association
California State Council of the Service Employees
International Union
California State Pipe Trades Council
California Teamsters Public Affairs Council
Center for Responsible Lending
International Brotherhood of Electrical Workers
International Longshore Workers Union
Service Employees International Union, Local 1000
Sheet Metal Workers
State Building & Construction Trades Council of California
UNITE HERE
United Food & Commercial Workers
Utility Workers Union
OPPOSITION : (Verified 7/2/12)
California Association of Realtors
California Bankers Association
California Chamber of Commerce
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California Financial Services Association
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
JJA:m 7/2/12 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
**** END ****
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