BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | SB 1150| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- THIRD READING Bill No: SB 1150 Author: Leno (D) and Galgiani (D), et al. Amended: 5/26/16 Vote: 21 SENATE BANKING & F.I. COMMITTEE: 4-3, 4/20/16 AYES: Galgiani, Hall, Hueso, Lara NOES: Glazer, Vidak, Morrell SENATE JUDICIARY COMMITTEE: 4-1, 5/3/16 AYES: Jackson, Leno, Monning, Wieckowski NOES: Anderson NO VOTE RECORDED: Moorlach, Hertzberg SUBJECT: Mortgages and deeds of trust: mortgage servicers and lenders: successors in interest SOURCE: California Alliance for Retired Americans California Reinvestment Coalition Housing and Economic Rights Advocates DIGEST: This bill requires mortgage servicers to provide successors in interest to deceased borrowers, as defined, with key information about outstanding mortgages previously held by the deceased borrowers; requires servicers to allow successors in interest to assume those mortgages, as specified, and to apply and be considered for foreclosure prevention alternatives in connection with those mortgages, as specified; and provides judicial enforcement mechanisms for use by successors in interest to compel servicers to comply with the bill's provisions. Senate Floor Amendments of 5/26/16 modify eligibility for SB 1150 Page 2 Homeowner Bill of Rights (HBOR) protections. The amendments provide that a spouse, child, or grandchild of a deceased borrower, who is eligible to assume the deceased borrower's mortgage loan and who wishes to apply for a foreclosure prevention alternative in connection with that loan, is eligible for HBOR protections. That spouse, child, or grandchild need not have lived in the property at the time of the borrower's death nor plan to live in the property following the borrower's death. The amendments further provide that a successor in interest who is not a spouse, child, or grandchild of the deceased borrower, but who is eligible to assume the deceased borrower's mortgage loan and who wishes to apply for a foreclosure prevention alternative in connection with that loan, is eligible for HBOR protections, if that successor in interest occupied the property as his or her principal residence at the time of the deceased borrower's death or will occupy the property as his or her principal residence within 60 days of loan assumption. Senate Floor Amendments of 5/16/16 add an additional statement of legislative intent and clarify that, except as otherwise provided, the bill does not affect the obligations arising from a mortgage or deed of trust. ANALYSIS: Existing law: 1)Provides for HBOR, which contains provisions intended to facilitate communication between mortgage servicers and borrowers regarding options for borrowers to avoid foreclosure; requirements prohibiting mortgage servicers from moving forward in the foreclosure process while a complete loan modification application from a borrower is pending, while a borrower is in compliance with an approved foreclosure prevention alternative, or while a borrower is appealing the denial of a foreclosure prevention alternative; and rules intended to ensure that all foreclosure-related documents SB 1150 Page 3 recorded by servicers are accurate and complete (Civil Code Sections 2920.5, 2923.4, 2923.5, 2923.55, 2923.6, 2923.7, 2924, 2924.9, 2924.10, 2924.11, 2924.15, 2924.17, and 2924.18) 2)Authorizes borrowers to bring judicial actions against servicers to enforce HBOR. If a trustee's deed upon sale has not been recorded (i.e., if a foreclosure has not been completed), a borrower may bring an action for injunctive relief to enjoin an uncorrected, material violation of HBOR; this injunction remains in place, and any trustee's sale is enjoined, until the court determines that the servicer has corrected and remedied the violation or violations giving rise to the action for injunctive relief. After a foreclosure is completed, a former borrower may bring an action for actual economic damages resulting from an uncorrected, material violation of HBOR. Courts are authorized to award a prevailing plaintiff reasonable attorney's fees and costs for actions brought to enforce HBOR; a plaintiff is deemed to have prevailed for purposes of HBOR if that plaintiff obtains injunctive relief or is awarded damages (Civil Code Sections 2924.12 and 2924.19). This bill: 1)Contains findings and declarations regarding passage of HBOR, the inability of surviving heirs to use HBOR to help avoid foreclosure following the death of a borrower named on a mortgage loan, and the importance of providing surviving heirs the same transparency and opportunity to save their homes that HBOR gave the original borrower. 2)Provides that, upon notification of a borrower's death by someone who is not named on the borrower's mortgage loan, but who claims to be a successor in interest to that borrower, a mortgage servicer may not record a notice of default until that servicer does both of the following: SB 1150 Page 4 a) Requests reasonable documentation of the death of the borrower from the claimant and provides that claimant at least 30 days to provide this documentation following written request by the servicer. b) Requests reasonable documentation from the claimant regarding the status of that claimant as a successor in interest and provides that claimant at least 90 days to provide this information. 3)Defines a "successor in interest" as a natural person who notifies a mortgage servicer regarding the death of a borrower and provides reasonable documentation, as defined, showing that he or she meets one of the criteria listed in the bill. 4)Clarifies that there may be more than one successor in interest. 5)Provides that, within 10 days of a claimant being deemed a successor in interest, a mortgage servicer must provide that successor in interest with the following information in writing about the loan, at a minimum: the loan balance; interest rate and interest rate reset dates and amounts; balloon payments, if any; prepayment penalties, if any; default or delinquency status; monthly payment amount; and payoff amount. 6)Requires a mortgage servicer to allow a successor in interest to assume the deceased borrower's loan, unless such assumption is prohibited by the terms of the deceased borrower's loan. In the alternative, where a successor in interest of an assumable loan also seeks a foreclosure prevention alternative in connection with that loan, requires a mortgage servicer to allow that successor in interest to simultaneously apply to assume the deceased borrower's loan and apply for a foreclosure prevention alternative in connection with that loan, to the extent permitted by that loan or applicable loss SB 1150 Page 5 mitigation rules. Provides that if the successor in interest qualifies for the foreclosure prevention alternative, the mortgage servicer must allow the successor in interest to assume the loan. 7)Provides that a successor in interest who meets specified criteria shall have all of the rights and remedies of a borrower under HBOR, as specified. For purposes of those rights and remedies, "owner-occupied" means that the property was the principal residence of the deceased borrower and is security for a loan made for personal, family, or household purposes. To be eligible for HBOR rights and remedies under this bill, a successor in interest must meet all of the following criteria: a) Be eligible to assume the deceased borrower's outstanding mortgage loan. b) Wish to apply for a foreclosure prevention alternative in connection with the deceased borrower's mortgage loan. c) Be one of the following: i) The spouse, child, or grandchild of the deceased borrower; ii) A person who occupies the property as his or her principal residence at the time of the deceased borrower's death; iii) A person who will occupy the property as his or her principal residence within 60 days of loan assumption. SB 1150 Page 6 8)Provides a private right of action with which to enforce its provisions, as specified. This private right of action mirrors the private right of action available with which to enforce HBOR. 9)Clarifies that the Department of Business Oversight and Bureau of Real Estate may adopt regulations applicable to any entity or person under their respective jurisdictions, which are necessary to carry out the bill. Background In July 2012, the California Legislature passed, and Governor Brown signed, two identical pieces of legislation that became effective January 1, 2013. AB 278 (Eng et al., Chapter 86, Statutes of 2012) and SB 900 (Leno et al., Chapter 87, Statutes of 2012), collectively known as HBOR, enacted comprehensive mortgage loan servicing reforms, established mortgage loan borrower protections, and modified California's nonjudicial foreclosure process. After HBOR was enacted, housing counseling agencies encountered problems following the death of a borrower, which mirrored many of the problems they had seen involving borrowers prior to enactment of HBOR. For example, housing counseling agencies observed that the successors in interest to a deceased borrower were having difficulty obtaining information about the outstanding mortgage loan from the deceased borrower's loan servicer. Successors in interest were also having trouble applying for foreclosure prevention alternatives in connection with the outstanding mortgages previously held by the deceased borrowers and, because they were not considered "borrowers" for purposes of HBOR, were not entitled to the protections against foreclosure that are afforded to borrowers under HBOR. This bill extends HBOR protections to persons whose names do not appear on a mortgage loan, but who are successors in interest to deceased borrowers whose names did appear on the mortgage loan. SB 1150 Page 7 Comments Several federal rules already exist to help the successors in interest who are the subject of this bill (e.g., 12 CFR 1024.38, the two guidance documents issued by the Consumer Financial Protection Bureau (CFPB) to interpret that regulation, http://files.consumerfinance.gov/f/201310_cfpb_mortgage-servicing _bulletin.pdf and http://files.consumerfinance.gov/f/201407_cfpb_bulletin_mortgage- lending-rules_successors.pdf, and servicing guidelines issued by Fannie Mae and Freddie Mac). More federal rules to help this group are expected to become final later this year (e.g., http://files.consumerfinance.gov/f/201411_cfpb_proposed-rule_mort gage-servicing.pdf). However, the federal rules listed above are enforceable through a combination of administratively-enforced civil penalties, restitution orders, and mortgage loan buyback requirements. They do not expressly authorize a successor in interest to go to court to seek an injunction to compel a servicer to comply with the rules, nor to petition that court for damages resulting from a foreclosure caused by a servicer's noncompliance with the rules. This bill, in contrast, contains a private right of action modeled on the private right of action contained in HBOR. The arguments for and against this bill hinge on this private right of action. This bill's sponsors believe that the federal rules listed above, while helpful, are insufficient, because borrowers lack a strong mechanism with which to compel servicers to comply with them. This bill's opponents oppose new state law on this topic, in part because they believe it is unnecessary given the existence of federal rules, and in part because they believe that a new private right of action will lead to costly and potentially frivolous litigation. SB 1150 Page 8 FISCAL EFFECT: Appropriation: No Fiscal Com.:NoLocal: No SUPPORT: (Verified5/26/16) California Alliance for Retired Americans (co-source) California Reinvestment Coalition (co-source) Housing and Economic Rights Advocates (co-source) Attorney General Kamala Harris AARP AIDS Legal Referral Panel Bay Area Legal Aid Burbank Housing Development Corporation California District Attorneys Association California Nurses Association California Professional Firefighters California Rural Legal Assistance, Inc. California Rural Legal Assistance Foundation CALPIRG Capital Impact Partners Center for California Homeowner Association Law Center for Responsible Lending Central Valley Realtist Board Community Legal Services in East Palo Alto Consumer Attorneys of California Consumer Federation of California Consumers Union County of Alameda Courage Campaign Fair Housing Council of the San Fernando Valley Fair Housing of Marin Family Caregiver Alliance Housing California Inland Fair Housing and Mediation Board Institute on Aging Justice in Aging Law Foundation of Silicon Valley Legal Aid Foundation of Los Angeles SB 1150 Page 9 Legal Services of Northern California Los Angeles County Democratic Party Montebello Housing Development Corporation National Center for Lesbian Rights National Council of La Raza National Housing Law Project Nehemiah Corporation of America Neighborhood Housing Services of Los Angeles County NeighborWorks HomeOwnership Center Sacramento Region Nonprofit Housing of Northern California People's Self-Help Housing Project Sentinel Public Counsel Public Law Center Renaissance Entrepreneurship Center Retired Public Employees Association Rural Community Assistance Corporation SEIU California Shalom Center for T.R.E.E. of Life Tenants Together The Arc and United Cerebral Palsy California Collaboration UDW/AFSCME Local 3930 UNITE HERE Valley Economic Development Centers Valley Industry and Commerce Association Western Center on Law & Poverty OPPOSITION: (Verified5/26/16) American Securitization Forum California Bankers Association California Building Industry Association California Business Roundtable California Chamber of Commerce California Citizens Against Lawsuit Abuse California Community Banking Network California Credit Union League California Financial Services Association California Land Title Association California Mortgage Association SB 1150 Page 10 California Mortgage Bankers Association Civil Justice Association of California Consumer Mortgage Coalition Securities Industry and Financial Markets Association Travis Credit Union United Trustees Association ARGUMENTS IN SUPPORT: Supporters state, "Currently, widows, widowers, and certain heirs are being denied a fair chance to remain in their homes, as mortgage servicers deny them communication, information, and the opportunity to be considered for a loan modification. Without the right to basic information about the loan, and the right to be considered for a loan modification and a simultaneous loan assumption, family members are being unfairly foreclosed upon and forced from their homes during a difficult time in their lives. "The issue presents itself when a family member who is the sole borrower named on a home loan passes away. The surviving family members who wish to continue paying the mortgage loan may have difficulty assuming the deceased borrower's loan and/or affording the current mortgage payment with the loss of the deceased's income. Surviving family members may then seek a loan assumption and modification, only to be refused by the mortgage servicer because their name is not on the loan, even when the surviving family member has a legal property interest in the home. "During the difficult time after the loss of a loved one, family members should not have to deal with the added stress of losing their home. In 2012, with passage of the Homeowner Bill of Rights, California provided strong due process protections to similar vulnerable homeowners. Unfortunately, banks and loan servicers argue that HBOR does not protect surviving spouses and other successors in interest. The effect is that survivors and successors in interest have fewer rights and less ability to retain their homes than other homeowners. This is an unfortunate outcome that the Legislature did not foresee when HBOR was debated and passed." ARGUMENTS IN OPPOSITION: Opponents assert that SB 1150 SB 1150 Page 11 "mandates an interference of contract rights by allowing third parties not originally a party to a mortgage contract to apply for a loan assumption and foreclosure avoidance alternatives" in connection with the original contract. "The bill provisions will likely delay the foreclosure process by additional months, if not years, if a property is involved in probate following a borrower's death and include a new minimum 90-day mandated statutory timeframe to provide proof of the borrower's death and proof of successor in interest status. Finally, of great concern is the fact that the bill establishes new, lopsided, private rights of action with draconian penalties, injunctive relief and attorney's fees only for the prevailing successor in interest." Opponents also believe that SB 1150 is premature given pending regulations being promulgated by CFPB, which address the same underlying issue being addressed by SB 1150 and are scheduled to be finalized in mid-2016. "It is unclear what deficiencies exist in the federal proposal to cause the proponents to seek a state legislative solution. In fact, the supporting documents provided by the CFPB indicated that the regulations are prompted by concerns raised by consumer advocates... advancing state legislation without the benefit of understanding the final regulation is ill-advised and may create conflict between state and federal law. In fact, having a separate state rule is unnecessary unless one of the key motivations is the creation of a private right of action." Finally, opponents observe that the bill's scope is far broader than that of HBOR. SB 1150 applies to circumstances where a successor in interest does not occupy the property as their principal residence. "Application to potential investment property for the successor in interest, as an example, is a significant departure from the existing law and defeats a threshold principle of focusing on avoiding foreclosure on owner-occupied principal residences... the bill would only require that the property be the owner-occupied residence of the original deceased borrower, not of the third party successor in interest." SB 1150 Page 12 Prepared by: Eileen Newhall / B. & F.I. / (916) 651-4102 5/28/16 17:08:36 **** END ****