BILL ANALYSIS Ó SB 827 Page 1 Date of Hearing: June 10, 2014 ASSEMBLY COMMITTEE ON JUDICIARY Bob Wieckowski, Chair SB 827 (Liu) - As Amended: April 8, 2014 SENATE VOTE : 25-10 SUBJECT : LOCAL GOVERNMENT: LOS ANGELES COUNTY: NOTICE OF RECORDATION KEY ISSUE : IN ORDER TO CONTINUE PREVENTION OF FORECLOSURE AND LOAN MODIFICATION SCAMS, SHOULD THE SUNSET DATE BE EXTENDED ANOTHER FIVE YEARS FOR THE CURRENT PILOT PROGRAM THAT AUTHORIZES THE LOS ANGELES COUNTY RECORDER TO NOTIFY OWNERS AND OCCUPANTS OF PROPERTY BY MAIL WHEN A NOTICE OF DEFAULT OR NOTICE OF SALE HAS BEEN RECORDED ON THE PROPERTY? SYNOPSIS Under SB 62 (Liu), Ch. 141, Stats. 2011, the Los Angeles County Recorder is authorized to: (1) notify owners and occupants of a property by mail when a notice of default or notice of sale has been recorded on the property; and (2) collect a fee of up to $7, as specified, in order to cover the costs of notifying the parties, as well as providing information about housing assistance and counseling to callers to a telephone hotline publicized on the mailed notice. SB 62 expanded and enhanced the Homeowner Notification Program that has been employed in Los Angeles since the 1990's to combat foreclosure and loan modification fraud, but the expanded SB 62 component is set to expire on January 1, 2015. This bill, sponsored by Los Angeles County, would simply reauthorize, until January 1, 2020, the additional SB 62 owner notification and the accompanying fee that covers the cost of the program. In addition, this bill shortens by six days the time that the Recorder must send the notification to affected parties, and expands reporting requirements to facilitate more comprehensive evaluation of the program by the Legislature in 2020. Supporters of the bill, including several consumer advocate groups and the city and county attorneys representing Los Angeles, contend that this bill will continue to enable homeowners to act promptly to protect themselves from possible fraud and property-related scams. This bill was approved by the SB 827 Page 2 Assembly Local Government Committee by a 7-1 vote and has no registered opposition. SUMMARY : Extends by five years the sunset date for a pilot program in Los Angeles County that authorizes the County Recorder, to notify occupants and other persons when a notice of default or sale has been recorded on a property. Specifically, this bill : 1)Extends, until January 1, 2020, the pilot authority of the Los Angeles County Recorder (Recorder) to notify parties of the recording of a notice of default or a notice of sale, and to collect an additional fee from the party recording the notice. 2)Reduces, from 20 days to 14 days of recordation, the time by which the Recorder is to notify the party or parties subject to a notice of default or a notice of sale. 3)Requires the Los Angeles County Board of Supervisors to submit a report on or before January 1, 2019 to the Senate Committee on Judiciary and the Assembly Committee on Local Government that includes, but is not limited to, a copy of the type of notices mailed, the number of recorded notices of default and sale for which a fee was collected, the amount of fees collected, and the amount of fees spent to provide housing information, counseling, and assistance. 4)Requires the above report to include the following additional information: a) Documented examples showing how the county's homeowner notification program led to successful investigations of real estate fraud activity, referrals to prosecuting agencies, avoided foreclosures, or helped property owners and residents avoid falling victim to real estate fraud. b) An evaluation of whether the county's homeowner notification program, in comparison to other available policy tools in the County of Los Angeles, is a cost-effective approach to combating real estate fraud and reducing foreclosures. c) An evaluation of whether L.A. County's homeowner notification program is an effective way to inform tenants of an impending foreclosure and to combat abusive SB 827 Page 3 post-foreclosure practices by property owners. d) An assessment of how the county's homeowner notification program compares to real estate fraud and foreclosure prevention programs being implemented in at least three other large, urban California counties. 5)Finds and declares that a special law is necessary and that a general law cannot be made applicable within the meaning of Section 16 of Article IV of the California Constitution because the County of L.A. is experiencing a unique and prolonged recovery from the financial and real estate fraud crisis. EXISTING LAW : 1)Authorizes the Los Angeles County Recorder, upon the adoption of an authorizing resolution by the board of supervisors, to mail a notice to the party or parties executing a deed, quitclaim deed, or deed of trust, within 30 days of recordation. (Government Code Section 27297.6(a)(1)(A). All further references are to this code unless otherwise stated.) 2)Authorizes the Recorder, upon adoption of an authorizing resolution by the Los Angeles County Board of Supervisors, to mail a notice to the party or parties subject to a notice of default or notice of sale, including the occupants of that property, within five days, but in any event no more than 20 days, of the recording of those documents. (Section 27297.6(a)(1)(B).) 3)Permits the Recorder to collect an additional fee from the party filing a deed, quitclaim deed, deed of trust, notice of default, or notice of sale, for implementing the above provisions, in an amount not to exceed the mailing cost of the notice and the actual cost, if any, to provide information, counseling, or assistance to a person who receives the notice, but in no case more than $7. (Section 27387.1(a).) 4)Provides that the fee may include specified administrative costs to carry out the notification program so long as they do not exceed ten percent of the total fee collected. (Section 27387.1(b).) 5)Provides that the authority of the Recorder to provide such SB 827 Page 4 notification upon recordation, and to collect an additional fee from the party recording the notice, shall remain in effect only until January 1, 2015, and as of that date shall be repealed, unless a later enacted statute, that is enacted before January 1, 2015, deletes or extends that date. (Section 27297.6(e) and Section 27387.1(c).) 6)Requires the trustee, or authorized agent, that represents the foreclosing financial institution to post and mail a notice informing the residents of a property about a pending foreclosure sale. That notice informs residents that the property may be sold at a foreclosure sale, the requirements of an eviction notice, and that they may wish to contact a lawyer or a local legal aid or housing counseling agency to discuss any rights they may have. (Civil Code Section 2924.8.) FISCAL EFFECT : As currently in print this bill is keyed non-fiscal. COMMENTS : This bill, sponsored by the Los Angeles County Board of Supervisors, seeks to extend, until January 1, 2020, authority for the Los Angeles County Recorder (Recorder) to notify by mail any party subject to a notice of default or a notice of sale, including the occupants of that property, and to collect fees for this purpose from those recording such documents. Current authority for this notification program, pursuant to SB 62 (Liu), Ch. 141, Stats. 2011, expires on January 1, 2015. According to the author: The home foreclosure crisis has created opportunities for more fraudulent transactions, as well as displacing renters who had no idea that the home they occupy was in the process of foreclosure. The County has established the initial framework to implement the SB 62 notice program, but the original bill expires on January 1, 2015. The County needs more time to implement the SB 62 notice program, given the size of Los Angeles County and the large number of foreclosures. This bill will help prevent property sale fraud and protect homeowners and renters in Los Angeles County. When the County records a notice of default or notice of sale for a home, the occupants will receive a notice in the mail. Residents will know that a home is being sold, foreclosed on, or is possibly involved in a fraudulent transaction. SB 827 Page 5 Background on longstanding homeowner notification program in Los Angeles. The non-judicial foreclosure process in California begins with the filing of a notice of default, which usually occurs after three or more months of delinquency. The foreclosing entity must then generally wait at least three months before noticing the sale of the property, which must be posted, published, and filed with the county recorder. As a result, the property owner, at minimum, should receive a mailed copy of the notice of default and notice of sale, which generally provide the owner with information about his or her rights at that point in the foreclosure process. The tenant of the property being foreclosed upon should also receive a mailed copy of the notice of sale, and should see the same physically posted on the property being sold. The County of Los Angeles has, since 1992, operated a county-specific "Homeowner Notification Program" that is designed to help combat real estate fraud in Los Angeles County. According to the author, the intent of the additional notice is to warn homeowners about potentially fraudulent foreclosure activity and to provide owners and occupants of distressed properties with counseling services to avoid or mitigate the effects of foreclosure. Under this program, the County Recorder is authorized to collect a distinct fee from parties that record certain documents evidencing the transfer of title, specifically deeds, quitclaim deeds, and deeds of trust. That fee is used to mail a notice of recordation to the party that purportedly executed the document, and to fund a help line at the Los Angeles County Department of Consumer Affairs (DCA) that property owners who receive these notices can call to receive information and assistance. This notification program, enacted in 1992 and renewed in 1996, seeks to address problems related to forged real estate documents by notifying property owners that their real estate is subject to a recently filed document that could affect their property interests. By informing property owners about recently filed title transfer documents, the notice allows these owners to contact law enforcement if they suspect that the documents are fraudulent. With SB 62 (Liu) becoming operative law in January 2012, the homeowner notification program expanded to allow the County Recorder to also notify owners of a property (and occupants of the home) when a notice of default or notice of sale is recorded against the property. Those documents signify either the SB 827 Page 6 beginning of the non-judicial foreclosure process (notice of default), or the announcement of the sale date (notice of sale), indicating that the home could be very close to being sold at auction. Although existing law mandates mailing or posting several other statutory notices to both property owners and tenants impacted by a non-judicial foreclosure, this additional notice allows Los Angeles County to send region-specific information to help affected individuals both become aware of available resources, and aware of potential scams that may target owners of distressed properties. As with the recording of deeds, quitclaim deeds, and deeds of trust, the expanded SB 62 notification program authorizes the Recorder to collect a specified fee from parties that record notices of default and notices of sale in order to fund the program. These fees are used to cover the cost of mailing the notices as well as to provide foreclosure avoidance assistance and housing counseling via the DCA help line. Authorization for this expanded SB 62 component of the Homeowner Notification Program is set to expire on January 1, 2015. This bill would reauthorize the expanded component of the Homeowner Notification Program for an additional five years. The bill would also require the Los Angeles County Board of Supervisors to submit a report to the Senate Committee on Judiciary and the Assembly Committee on Local Government for the purpose of assessing the performance of the expanded program one year before its proposed termination date of January 1, 2020. Analysis of fee provision under Proposition 26 . This bill would authorize the county recorder to continue collecting fees from parties filing notices of default and notices of sale, not to exceed $7, to cover the cost of mailing the county-specific homeowner notices and the actual cost, if any, to provide information, counseling, or assistance to recipients of the notices under the expanded Homeowner Notification Program. It appears that the bill allows those fees to also fund counseling and assistance programs, thereby providing financial assistance to Los Angeles County housing assistance programs that are losing funds due to budget constraints. Recipients of the county-specific notices would likely be given the contact information for those programs and would therefore benefit from the collection of the fees to assist in their funding. Proposition 26, passed by the voters in 2010, may complicate the continued imposition of the fee by potentially requiring that SB 827 Page 7 the $7 fee be approved by a vote of the people. Proposition 26 amended the California Constitution to expand the scope of taxes and tax increases that require approval by local voters. Proposition 26 defined "tax" as "any levy, charge or exaction of any kind imposed by a local government" except as specified. (Cal. Const. art. XIII C, Sec. 1(e) [emphasis added].) Of the seven specific exceptions to the definition of tax included in Proposition 26, the first two would appear to be most relevant to Los Angeles County's notice of default and notice of sale recordation fee: (1) A charge imposed for a specific benefit conferred or privilege granted directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of conferring the benefit or granting the privilege. (2) A charge imposed for a specific government service or product provided directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of providing the service or product. (Cal. Const. art. XIII C, Secs. 1(e)(1) and (2).) The County of Los Angeles asserts that placing the $7.00 fee on the ballot is not required under Proposition 26 because the foreclosure prevention programs financed by the fee confer a direct benefit to the payor - typically a bank or trustee - that is not provided to those not charged. They contend that the notification program, to include the notice to homeowners in default, benefits lenders as well because lenders lose on average tens of thousands of dollars on each foreclosed home. DCA notes that for a $7.00 fee, which includes the cost of mailing a notification, it can work with the lender and the homeowner to reach a resolution that avoids foreclosure such as a loan modification, short sale, or cash-for-keys agreement. According to recent assessments of the program, DCA estimates that it can successfully help homeowners, and, by extension, lenders, avoid foreclosure in approximately 25 percent of cases where homeowners request assistance, potentially saving lenders an estimated $30 million annually. It should also be noted that the fee re-authorized by this bill is reasonably limited to actual costs incurred by the county for SB 827 Page 8 mailing and providing services. Consistent with the existing SB 62 program, the re-authorized may not exceed the cost of mailing the notice and the actual cost to provide information, counseling, or assistance to recipients of the notice, and may not in any case exceed $7. Under the program, the notification letter must continue to be sent to the appropriate parties whenever the fee is collected from the party filing the notice of default or notice of sale, without exception. Furthermore, the actual costs may include administrative costs incurred by the County Recorder in performing its duties, but under this bill these administrative costs may still not exceed 10 percent of the total fee collected. Because the re-authorized program would continue to limit the fee to no more than the actual costs, including modest administrative costs of operating the notification program, it appears that the fee re-authorized by this bill meet the criteria under either exception (1) or (2) that would exempt the fee from having to be placed on the ballot for voter approval pursuant to Proposition 26. This bill expands reporting requirements to facilitate better evaluation of the program by the Legislature in 2020. In order to give the Legislature an opportunity to review the expanded Homeowner Notification program and evaluate the SB 62 program's effectiveness, this bill expands existing reporting requirements that Los Angeles County must meet on or before January 1, 2019, to include the following additional information about the county's homeowner notification program: (1) documented examples showing how the program led to successful investigations of real estate fraud activity, referrals to prosecuting agencies, avoided foreclosures, or helped property owners and residents avoid falling victim to real estate fraud; (2) an evaluation of whether the program, in comparison to other available policy tools in the County of Los Angeles, is a cost-effective approach to combating real estate fraud and reducing foreclosures; (3) an evaluation of whether the program is an effective way to inform tenants of an impending foreclosure and to combat abusive post-foreclosure practices by property owners; and (4) an assessment of how the program compares to real estate fraud and foreclosure prevention programs being implemented in at least three other large, urban California counties. According to the author, these additional qualitative assessments of the expanded notification program's performance will better help the Legislature determine whether the program is effective and fulfilling its goals. SB 827 Page 9 Prior Legislation : SB 62 (Liu, Ch. 141, Stats. 2011) authorizes the Los Angeles County Recorder to notify affected parties, including occupants of the property, when a notice of default or notice of sale has been recorded on a property. This bill permits the Los Angeles County Recorder to collect a fee of up to $7 in order to cover the costs of notifying the parties and providing information about housing assistance and counseling. SB 878 (Liu, 2010) would have authorized a notification program identical to that in SB 62 (Liu, Ch. 141, Stats. 2011), but was vetoed by then-Governor Schwarzenegger. REGISTERED SUPPORT / OPPOSITION : Support Consumer Federation of America Consumer Federation of California Los Angeles County District Attorney's Office Los Angeles County Sheriff's Department SEIU Western Center on Law and Poverty Opposition None on file Analysis Prepared by : Anthony Lew / JUD. / (916) 319-2334