BILL ANALYSIS Ó SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE Senator Lou Correa, Chair 2013-2014 Regular Session SB 310 (Calderon) Hearing Date: April 17, 2013 As Amended: March 21, 2013 Fiscal: No Urgency: No SUMMARY Would provide that title insurers are not liable for violations of specified portions of the 2012 Homeowners' Bill of Rights, when they record notices of default or notices of sale in good faith, at the direction of others, and in the normal course of their business activities. DESCRIPTION 1. Would provide that, until January 1, 2018, a licensed title company or underwritten title company shall not be liable for a violation of Civil Code Sections 2923.5, 2923.55, 2923.6, 2924.11, 2924.18, and 2924.19, if it records or causes to record a notice of default or notice of sale at the request of a trustee, substitute trustee, or beneficiary, in good faith and in the normal course of its business activities. 2. Would provide that, on and after January 1, 2018, a licensed title company or underwritten title company shall not be liable for a violation of Civil Code Sections 2923.5 and 2924.11, if it records or causes to record a notice of default or notice of sale at the request of a trustee, substitute trustee, or beneficiary, in good faith and in the normal course of its business activities. EXISTING LAW provides several rules that must be followed in order to nonjudicially foreclose on single-family, residential real property. A subset of the rules that are relevant to this bill is provided immediately below. 3. Provides for two versions of Section 2923.5, one of which is operative from January 1, 2013 through December 31, 2017 (see 1a immediately below), and one of which is operative SB 310 (Calderon), Page 2 beginning on January 1, 2018 (see 1b immediately below). a. From January 1, 2013 through December 31, 2017, with respect to specified entities that foreclose on 175 or fewer, single-family, residential real properties in a calendar year, Section 2923.5 prohibits a mortgage servicer, mortgagee, trustee, beneficiary, or authorized agent from recording a notice of default until at least 30 days after establishing contact with a delinquent borrower or complying with specified due diligence requirements to establish contact, and, if a borrower submits a complete application for a first lien loan modification, before that borrower has been provided with a written determination by the servicer regarding that borrower's eligibility for that loan modification. b. Beginning on January 1, 2018, without the limitation to entities that foreclose on 175 or fewer, single-family residential real properties, Section 2923.5 prohibits a mortgage servicer, mortgagee, trustee, beneficiary, or authorized agent from recording a notice of default until at least 30 days after establishing contact with a delinquent borrower or complying with specified due diligence requirements to establish contact, and, if a borrower submits a complete application for a foreclosure prevention alternative, before that borrower has been provided with a written determination by the servicer regarding that borrower's eligibility for the requested alternative. 4. Pursuant to Section 2923.55, from January 1, 2013 through December 31, 2017, with respect to specified entities that foreclose on more than 175 residential real properties in a calendar year, prohibits a mortgage servicer, mortgagee, trustee, beneficiary, or authorized agent from recording a notice of default: a. Until the servicer provides specified information to the borrower about special rights afforded to members of the military and their dependents, and informs the borrower about information he/she is eligible to request from their servicer about their loan. b. Until at least 30 days after the servicer establishes contact with a delinquent borrower or complies with specified due diligence requirements to SB 310 (Calderon), Page 3 establish contact. c. While a complete first lien loan modification is pending review. d. If a complete first lien loan modification application has been submitted by a borrower, until any of the following occurs: i. The servicer makes a written determination that the borrower is not eligible for a first lien loan modification, and any appeal period has expired; ii. The borrower does not accept an offered first lien loan modification within 14 days of its offer; or, iii. The borrower accepts a written first lien loan modification, but defaults on or otherwise breaches his or her obligation under that loan modification agreement. 5. Pursuant to 2923.6, from January 1, 2013 through December 31, 2017, with respect to specified entities that foreclose on more than 175 residential real properties in a calendar year, prohibits a mortgage servicer, mortgagee, trustee, beneficiary, or authorized agent from recording a notice of default or notice of sale, or from conducting a trustee's sale: a. While a complete first lien loan modification is pending review. b. If a complete first lien loan modification application has been submitted by a borrower, until any of the following occurs: i. The servicer makes a written determination that the borrower is not eligible for a first lien loan modification, and any appeal period has expired; ii. The borrower does not accept an offered first lien loan modification within 14 days of its offer; or, SB 310 (Calderon), Page 4 iii. The borrower accepts a written first lien loan modification, but defaults or otherwise breaches his or her obligation under that loan modification agreement. 6. Provides for two versions of Section 2924.11 one of which is operative from January 1, 2013 through December 31, 2017 (see 4a immediately below), and one of which is operative beginning on January 1, 2018 (see 4b immediately below). a. From January 1, 2013 through December 31, 2017, with respect to specified entities that foreclose more than 175 single-family, residential real properties in a calendar year, Section 2923.11 prohibits a mortgage servicer, mortgagee, trustee, beneficiary, or authorized agent from recording a notice or default or notice of sale, or conducting a trustee's sale, once a borrower has been approved for a foreclosure prevention alternative in writing, and as long as one of the following two conditions is met: i. The borrower is in compliance with the terms of a written trial or permanent loan modification, forbearance, or repayment plan; or ii. A foreclosure prevention alternative has been approved in writing by all parties, and proof of funds or financing has been provided to the servicer. b. Beginning on January 1, 2018, without the limitation to entities that foreclose on more than 175 residential foreclosures, Section 2923.11 prohibits a mortgage servicer, mortgagee, trustee, beneficiary, or authorized agent from: i. Recording a notice of sale or conducting a trustee's sale while a complete application for a foreclosure prevention alternative is pending, and until the borrower has been provided with a written determination by the servicer regarding that borrower's eligibility for the requested foreclosure prevention alternative; ii. Recording a notice of default or notice SB 310 (Calderon), Page 5 of sale, or conducting a trustee's sale, once a foreclosure prevention alternative is approved in writing, and as long as one of the following two conditions is met: 1. The borrower is in compliance with the terms of a written trial or permanent loan modification, forbearance, or repayment plan; or 2. A foreclosure prevention alternative has been approved in writing by all parties, and proof of funds or financing has been provided to the servicer. 7. Pursuant to Section 2924.18, from January 1, 2013 through December 31, 2017, with respect to specified entities that foreclose on 175 or fewer residential real properties in a calendar year, prohibits a mortgage servicer, trustee, mortgagee, beneficiary, or authorized agent from recording a notice of default or notice of sale, or from conducting a trustee's sale: a. While a complete first lien loan modification application is pending, and until the borrower has been provided with a written determination by the servicer regarding that borrower's eligibility for that loan modification. b. Under either of the following circumstances, if a borrower has been approved for a foreclosure prevention alternative in writing by the servicer: i. The borrower is in compliance with the terms of a written trial or permanent loan modification, forbearance, or repayment plan; or ii. A foreclosure prevention alternative has been approved in writing by all parties, and proof of funds or financing has been provided to the servicer. COMMENTS 1. Purpose: This bill is intended to protect title insurers from incurring liability pursuant to last year's foreclosure SB 310 (Calderon), Page 6 conference committee report (AB 278, Eng et al., Chapter 86, Statutes of 2012, and SB 900, Leno et al., Chapter 87, Statutes of 2012), when performing ministerial acts in good faith, at the direction of trustees, substitute trustees, or beneficiaries, and in the normal course of their business activities. 2. Background: After several years of extensive discussion and debate, California enacted a comprehensive package of reforms in 2012, intended to improve communication between mortgage servicers and delinquent borrowers, eliminate the practice of dual-tracking (the act of simultaneously working with a borrower to avoid foreclosure while moving forward in the foreclosure process), codify responsible mortgage servicing practices, minimize avoidable nonjudicial foreclosures, ensure the accuracy of recorded documents, and make other homeowner-friendly changes to the nonjudicial foreclosure process. These reforms were contained in a conference committee report, which was codified as AB 278 and SB 900. Shortly before the final conference committee language was adopted, representatives of the title insurance industry expressed concern that the language of the legislation could result in unintended liability for title insurers. Their concerns were based on the fact that title insurers routinely record notices of default at the direction of beneficiaries and trustees. The title insurers assert that they cannot verify "off the record" (unrecorded) matters involving lenders and mortgage servicers, because they rely on searches of recorded documents to determine the status of title and compliance with the law. The new obligations imposed by AB 278 and SB 900 are all "off record" responsibilities, which title companies have no ability to verify. As a result, title companies are left with assurances by lenders and servicers that those entities have complied with all of the new requirements. The sponsors of this bill are seeking assurances that title companies' inability to independently verify whether the third parties directing them to record documents have complied with the new rules does not result in liability for the title companies under AB 278 and SB 900. They do not believe that they should incur liability for carrying out the ministerial act of delivering documents to county recorders' offices for recordation, in reliance on a good SB 310 (Calderon), Page 7 faith belief that the entity directing them to record the documents has complied with the law. There was insufficient time to address the title insurers' concerns by amending the conference committee report, before it was sent to the Governor for signature. SB 310 is an attempt to make the changes initially sought by the title insurance industry last year. 3. Summary of Arguments in Support: This bill is sponsored by the California Land Title Association for the reasons stated immediately above. It cites language in the analysis of last year's SB 900 and AB 278, which stated, "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." CLTA is seeking to clarify that intent in statute, to remove any potential ambiguity. First American Financial Corporation and Fidelity National Financial also support the bill. SB 900 and AB 278 created a "loop hole in which mortgage servicers, mortgagees, trustees, or beneficiaries can shift liability for their own failure to comply with the pre-notice of default provisions on to title companies or underwritten title companies, simply by virtue of the fact that they are acting as 'authorized agents' when recording notices of default." SB 310 will close this loophole. 4. Summary of Arguments in Opposition: None received. 5. Amendments: a. The current language of the bill uses the word "and" where it should use the word "or." While a very small distinction, use of the word "and" could be read as relieving title insurers from liability, only if they violate all of the code sections listed in the bill. If a title insurer were alleged to have violated only one or two of the sections listed in the bill, a strict reading of this bill could result in that insurer being found liable for the violation. Striking the word "Sections" and replacing it with "Section" and striking the word SB 310 (Calderon), Page 8 "and" and replacing it with "or" on page 2, lines 4, 5, and 14, will provide the sponsors with the legal protection they are seeking. b. The Western Center on Law and Poverty has also requested an amendment to clarify that the language of the bill does not apply to title companies that are acting in the capacity of a trustee. To accomplish this intent, the author has agreed to add the word, "Unless acting in the capacity of a trustee," at the beginning of both code sections being added by this bill. 6. Prior and Related Legislation: a. AB 278 (Eng et al.), Chapter 86, Statutes of 2012, and SB 900 (Leno et al.), Chapter 87, Statutes of 2012: Enacted comprehensive changes to California's nonjudicial foreclosure process, and to California's mortgage loan servicing requirements. LIST OF REGISTERED SUPPORT/OPPOSITION Support California Land Title Association (sponsor) First American Financial Corporation Fidelity National Financial Opposition None received Consultant: Eileen Newhall (916) 651-4102