BILL ANALYSIS Ó
SB 1150
Page 1
Date of Hearing: June 20, 2016
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Matthew Dababneh, Chair
SB
1150 (Leno) - As Amended June 13, 2016
SENATE VOTE: 21-14
SUBJECT: Mortgages and deeds of trust: mortgage servicers and
lenders: successors in interest
SUMMARY: Requires mortgage servicers and lenders to provide
successors in interest with key information about outstanding
mortgages previously held by a deceased borrower; requires
servicers and lenders 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 lenders
and servicers to comply with the bill's provisions.
Specifically, this bill:
1)Provides that upon notification by someone claiming to be a
successor in interest that a borrower has died, and where the
person claiming to be a successor is not a party to the loan
or promissory note, the mortgage servicer shall not record a
notice of default (NOD) until the servicer does both of the
following:
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a) Request reasonable documentation of the death of the
borrower from the claimant, including but not limited to, a
death certificate or other written evidence of the death of
the borrower. The servicer is required to provide the
claimant a minimum of 30 days to respond to the request for
information; and,
b) Request reasonable documentation from the claimant
regarding the status of the claimant as a successor in
interest. The servicer is required to provide the claimant
at least 90 days from the date of the written request.
2)Specifies that upon receipt by the mortgage servicer of the
reasonable documentation of the claimant as successor in
interest the claimant shall be deemed a "successor in
interest."
3)Requires a servicer to apply the provisions specified to
multiple successors in interest.
4)States that an affirmative duty is not on a servicer to
provide a loan modification to a successor in interest.
5)Provides that a successor in interest that assumes the loan
may be required to otherwise qualify for available foreclosure
prevention alternatives offered by the mortgage servicer.
6)Requires a mortgage servicer, with 10 days of a claimant being
deemed a successor in interest to provide the successor in
interest with information in writing about the loan, including
loan balance, interest rate, interest reset dates and amounts,
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balloon payments, if any, prepayment penalties if any, default
or delinquency status, the monthly payment amount, and payoff
amounts.
7)Specifies that a mortgage servicer shall allow a successor in
interest to either:
a) Assume the deceased borrower's loan to the extent
permitted under state and federal law and terms of the
loan; and,
b) In the case where a successor in interest seeks a
foreclosure prevention alternative, simultaneously apply to
assume the loan and for a foreclosure prevention
alternative that is offered by the loan lender or
applicable loss mitigation rules.
8)Requires the servicer to allow the successor in interest to
assume the loan if they qualify for a foreclosure prevention
alternative.
9)Provides that a successor in interest shall have all the
rights and remedies available under the California Homeowner
Bill of Rights (HBOR).
10)Specifies, that in order to receive the protections of HBOR
the successor in interest must meet the following criteria:
a) Be eligible to assume a deceased borrower's outstanding
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mortgage loan;
b) Wish to apply for a foreclosure prevention alternative
in connection with the deceased borrower's loan; and,
c) Be either of the following:
i) The spouse, child, or grandchild of the deceased
borrower; or,
ii) A person who occupies the property as his or her
principal residence at the time of the deceased
borrower's death.
11)Provides for the following enforcement mechanisms:
a) If a trustee's deed upon sale has not been recorded, a
successor in interest may bring an action for injunctive
relief. Any injunction shall remain in place and any
trustee's sale shall be enjoined until the court determines
that the mortgage servicer has corrected and remedied the
violation.
b) After a trustee's deed upon sale has been recorded, a
mortgage servicer shall be liable to a successor in
interest for actual economic damages resulting from a
material violation. If the material violation is found to
be intentional or reckless, or resulted from willful
misconduct the court may award the successor in interest
the greater of treble actual damages of statutory damages
of $50,000.
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c) A prevailing successor in interest may be awarded
reasonable attorney's fees and costs. A successor in
interest is considered to be prevailing if they have
obtained injunctive relief or damages.
d) A servicer is not liable for a violation that it has
corrected and remedied prior to recordation of the
trustee's deed upon sale.
12)Provides the Department of Business Oversight and the Bureau
of Real Estate with power to adopt regulations applicable to
any entity or person under their respective jurisdictions that
are necessary to carry out the provisions of this bill.
13)Defines "reasonable documentation" as copies of the following
documents:
a) In the case of a personal representative, letters as
defined in Section 52 of the Probate Code;
b) In the case of devisee or an heir, a copy of the
relevant will or trust document;
c) In the case of a beneficiary of a revocable transfer on
death deed, a copy of that deed;
d) In the case of a surviving joint tenant, an affidavit of
death of the joint tenant or a grant deed showing joint
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tenancy;
e) In the case of a surviving spouse where the real
property was held as community property with right of
survivorship, an affidavit of death of the spouse or a deed
showing community property with right of survivorship;
f) In the case of a trustee of a trust, a certification of
trust pursuant to Section 18100.5 of the Probate Code; and,
g) In the case of a beneficiary of a trust, relevant trust
documents related to the beneficiary's interest.
14)Specifies that if the documents in #13 a) through g) are not
available then "reasonable documentation" may include other
written evidence of the person's status as a successor in
interest.
15)Defines "Successor in interest" as a natural person who
provides the mortgage servicer with notification of the death
of the mortgagor or trustor and reasonable documentation
showing that the person is any of the following:
a) The personal representative, as defined in Section 58 of
the Probate Code, of the mortgagor's or trustor's estate;
b) The devisee, as defined in Section 34 of the Probate
Code, or the heir, as defined in Section 44 of the Probate
Code, of the real property that secures the mortgage or
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deed of trust;
c) The beneficiary, as defined in Section 5608 of the
Probate Code, on a revocable transfer on death deed;
d) The surviving joint tenant of the mortgagor or trustor;
or,
e) The surviving spouse of the mortgagor or trustor if the
real property that secures the mortgage or deed of trust
was held as community property with right of survivorship
pursuant to Section 682.1.
16)Exempts from its provisions a depository institution
chartered under state or federal law, a person licensed under
the California Finance Lenders Law, or the California
Residential Mortgage Lending Act or a person licensed under
the real estate law that during its immediate preceding annual
reporting period foreclosed on 175 or fewer residential real
properties, containing no more than four dwelling units that
are located in California.
17)Makes the following findings and declarations:
a) Beginning in 2008, California faced a foreclosure
crisis, with rapidly dropping home values and skyrocketing
job losses. Indiscriminate foreclosure practices of major
mortgage servicers compounded the problem as they created a
labyrinth of red tape, lost documents, and erroneous
information, and then they started foreclosure proceedings
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while borrowers and their families were in the middle of
applying for a loan modification.
b) The California Legislature responded with a
first-in-the-nation HBOR, which requires mortgage servicers
to provide borrowers a fair and transparent process, a
single point of contact (SPOC), and the opportunity to
finish applying for a loan modification before foreclosure
proceedings can start. HBOR stabilized families,
neighborhoods, and local communities by slowing down
indiscriminate foreclosures.
c) Now, however, district attorneys and legal aid
organizations are reporting an increasing number of cases
in which mortgage servicers use a loophole in HBOR to
foreclose on certain homeowners-people who survive the
death of a borrower and have an ownership interest in the
home but are not named on the mortgage loan. Most often,
the "survivor" is the borrower's spouse and is over 65
years of age.
d) When the surviving widow or widower, domestic partner,
children, or other heirs attempt to obtain basic
information about the loan from the servicer, they face the
same kind of barriers and abuses-and, finally
foreclosure-that convinced the Legislature to pass HBOR.
e) Home ownership is the primary avenue for most Americans
to build generational wealth. Indiscriminate foreclosures
on surviving heirs destroy a family's ability to build for
its financial future. Foreclosures also exacerbate the
racial wealth gap-and overall wealth inequality-in society,
and force seniors who want to "age in place" into the
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overheated rental market instead, with devastating health
impacts.
f) Surviving heirs deserve the same transparency and
opportunity to save their home as HBOR gave the original
borrower. This act would stem a disturbing nationwide trend
and help keep widows and widowers, children, and other
survivors in their homes-without requiring mortgage
servicers to do anything more than they already do for
other homeowners.
g) It is the intent of the Legislature that this act work
in conjunction with federal Consumer Financial Protection
Bureau (CFPB) servicing guidelines.
EXISTING FEDERAL LAW:
1)Defines a due-on-sale clause, pursuant to the Garn-St. Germain
Depository Institutions Act of 1982 (Garn St. Germain; 12 USC
Section 1701j-3), as a contract provision which authorizes a
lender, at its option, to declare due and payable sums secured
by the lender's security instrument if all or any part of the
property, or an interest therein, securing the real property
loan is sold or transferred without the lender's prior written
consent, and authorizes lenders to enter into and enforce real
property loan contracts containing due-on-sale clauses. The
existence of this federal act is the primary reason that
existing mortgages must usually be fully paid off when a house
is sold to a new owner.
2)Provides, pursuant to Garn-St. Germain, that a due-on-sale may
not be enforced on a loan secured by residential real property
containing fewer than five dwelling units, when that real
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property is transferred in any one of the following ways: a
transfer by devise, descent, or operation of law on the death
of a joint tenant or tenant by the entirety; a transfer to a
relative resulting from the death of a borrower; a transfer
where the spouse or children of the borrower become an owner
of the property; a transfer resulting from a decreed of
dissolution of marriage, legal separation agreement, or from
an incidental property settlement agreement, by which the
spouse of the borrower becomes an owner of the property; or a
transfer into an inter vivos trust in which the borrower is
and remains a beneficiary and which does not relate to a
transfer of rights of occupancy in the property. Because of
these exceptions, lenders commonly allow successors in
interest to assume an outstanding mortgage secured by property
they obtain through one of the transfer mechanisms listed
immediately above.
EXISTING STATE LAW:
1)Provides for HBOR, which contains numerous provisions intended
to facilitate communication between mortgage servicers and
borrowers regarding options for borrowers to avoid
foreclosure. The following provisions apply to servicers with
respect to first-lien mortgages secured by owner-occupied
principal residences containing one- to four-dwelling units:
a) Servicers may not record a NOD until at least 30 days
after making initial contact with a borrower to discuss
options for that borrower to avoid foreclosure or, if
contact with the borrower cannot be made, until at least 30
days after the servicer satisfies specified due diligence
requirements to establish contact (Civil Code Section
2923.5 and Civil Code Section 2923.55; all further code
section references are to the Civil Code).
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b) Until January 1, 2018, servicers may not record a NOD
before sending specified documents to delinquent borrowers
informing them of certain rights and providing a toll-free
telephone number that can be used by borrowers to identify
nearby housing counseling agencies (Section 2923.55).
c) Until January 1, 2018, servicers that offer one or more
foreclosure prevention alternatives must send the following
to a borrower in writing, within five business days after
recording a NOD, unless that borrower has previously
exhausted the first lien loan modification process: a
statement that the borrower may still be evaluated for one
or more alternatives to foreclosure; a statement informing
the borrower whether an application is required to be
considered for this alternative/these alternatives; and
information on the means and process by which a borrower
may obtain an application, if one is required (Section
2924.9).
d) Until January 1, 2018, servicers must acknowledge
receipt of any document received in connection with a first
lien loan modification application within five days of
receipt of that document (Section 2924.9).
e) Once a borrower submits a complete first lien loan
modification application, a servicer may not take the next
step in the nonjudicial foreclosure process while that
application is pending, as specified. If a borrower's
first lien loan modification application is denied,
servicers must send written notice of denial to the
borrower, identifying the reasons for denial with
specificity and informing the borrower how to appeal the
denial, including the date by which the appeal must be
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submitted (Section 2923.6, 2924.10. and 2924.11).
f) Before recording any one of several different types of
documents that are required in the context of nonjudicial
foreclosure, servicers must ensure that they have reviewed
competent and reliable evidence to substantiate the
borrower's default and the servicer's right to foreclose.
Any of these documents that are recorded by or on behalf of
a mortgage servicer must be accurate and complete and must
be supported by competent and reliable evidence (Section
2923.17).
g) Servicers must assign a SPOC upon request by any
borrower who requests a foreclosure prevention alternative.
The SPOC is either an individual or a team of personnel,
each of whom has the ability and authority to undertake
several specified responsibilities, and each of whom is
knowledgeable about the borrower's situation and current
status in the loss mitigation process. The requirement to
provide a SPOC concludes when the servicer determines that
all loss mitigation options offered by or through that
servicer have been exhausted, or when the borrower's
mortgage becomes current (Section 2923.7).
h) Authorizes borrowers to bring judicial actions against
servicers to enforce the aforementioned provisions. 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 the aforementioned provisions; 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
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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 any of the
aforementioned provisions. Courts are authorized to award a
prevailing plaintiff reasonable attorney's fees and costs
for actions brought to enforce the aforementioned
provisions; a plaintiff is deemed to have prevailed for
purposes of HBOR if that plaintiff obtained injunctive
relief or was awarded damages (Sections 2924.12 and
2924.19).
FISCAL EFFECT: The bill is keyed non-fiscal
COMMENTS:
Need for the bill .
According to the author:
California led the nation in 2012 with its Homeowners' Bill of
Rights (HBOR), requiring a single point of contact and
prohibiting dual-tracking of borrowers, a practice of driving
owners to foreclosure even while working on loan
modifications. HBOR is credited with having slowed down
foreclosures in 2013 as servicers attended to the new
homeowner protections. HBOR helps stabilize families,
neighborhoods, and local economies. However, there's more to
be done.
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In California and across the country, legal aid organizations
have documented that the very abuses HBOR prohibits are being
endured by widows, widowers, and other survivors who are
losing their homes to foreclosure because the mortgage
servicer refuses to consider them for a loan assumption or
modification. The servicers maintain that surviving
homeowners who aren't listed on the mortgage note have no
protections under HBOR, even though the intent of the bill was
to protect all homeowners.
In the most common scenario, a surviving widow owns her home,
but is not listed on its mortgage loan. She attempts to apply
for a loan assumption and to get information on loan
modification options, just as her spouse could have done under
HBOR. At that point, she faces a mortgage servicer who
exhibits the same problematic behaviors that convinced the
legislature to pass HBOR: refusing to talk to the homeowner,
creating a confusing labyrinth of processes, losing documents
repeatedly, transferring responsibilities between multiple
employees, giving inaccurate information, and foreclosing on
the homeowner without ever considering her for a loan
modification.
Unnecessary foreclosures devastate families' ability to build
for their financial future. As homeownership remains the
primary way that Americans build wealth for themselves and
their offspring, our continued failure to protect surviving
spouses and children only exacerbates the racial wealth gap in
society. Further, foreclosures on survivors thwart the intent
of property, and wills and estates laws. And, unnecessary
foreclosures also are secret, silent killers. Seniors forced
from their home are likely to suffer devastating health
impacts, and with dramatically high and still rising rents
across California, homelessness.
Surviving homeowners deserve a fair chance to take
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responsibility for their mortgage loan attached to their
homes. They deserve the respect of receiving clear
communication and accurate information, especially during the
stressful time following the death of a loved one. SB 1150
clarifies the responsibilities of a lender when a borrower
dies leaving a surviving homeowner who wishes to assume the
loan.
On June 27, 2012, the Conference Committee on the California
Foreclosure Crisis passed HBOR in order to protect homeowners in
the mortgage market, help keep families in their homes, and
revive the state's economy following historic foreclosure rates
and rampant abuse, fraud, and deception that caused more than
one million Californian's to lose their homes. That bill
package sought to: (1) stop the practice of "dual-tracking;" (2)
establish a SPOC for homeowners with their lenders; and (3)
mandate a chain of title of the property.
Generally speaking, HBOR creates requirements intended to
facilitate communication between mortgage servicers and
borrowers regarding options for borrowers to avoid foreclosure.
HBOR restricts servicers from recording a NOD under California's
non-judicial foreclosure process until at least 30 days after
contacting a borrower to discuss options for that borrower to
avoid foreclosure. HBOR requires servicers to send specified
documents to delinquent borrowers informing them of their rights
and to provide a toll-free telephone number that can be used by
borrowers to identify nearby housing counseling agencies before
recording a NOD. Importantly, once a borrower submits a loan
modification application, the servicer is prohibited from taking
any further steps in the non-judicial foreclosure process while
that application is pending. If the loan modification
application is denied, the servicer must send a written notice
of denial to the borrower, identifying the reasons for the
denial and informing the borrower how the denial decision may be
appealed.
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HBOR requires servicers to ensure that they have competent and
reliable evidence to substantiate a borrower's default and the
servicer's right to foreclose before recording documents in the
non-judicial foreclosure process. HBOR also requires servicers
to assign SPOC to any borrower who requests a foreclosure
prevention alternative, and states that the contact must have
authority to act on behalf of the servicer, as specified, and be
knowledgeable about the borrower's situation and current status
in the servicer's loss mitigation process. HBOR includes
various consumer remedies for violations of its provisions,
including treble and statutory damages.
AB 1150 seeks to extend the protections of HBOR to successors in
interest as defined including a right to seek injunctive relief
and economic damages under certain scenarios.
Existing Rules Concerning Successors in Interest.
Under regulations implementing the federal Real Estate
Settlement Procedures Act (RESPA), effective January 10, 2014,
servicers are required to have policies and procedures in place
to, "upon notification of the death of a borrower, promptly
identify and facilitate communication with the successor in
interest of the deceased borrower with respect to the property
secured by the deceased borrower's mortgage loan" (12 CFR
1024.38). Pursuant to the RESPA regulations, those policies and
procedures must be reasonably designed to ensure that a servicer
can do all of the following: (1) provide accurate information
to a borrower regarding loss mitigation options available to
that borrower; (2) identify with specificity all loss mitigation
options for which a borrower may be eligible; (3) identify
documents and information that a borrower is required to submit
to complete a loss mitigation application; (4) provide prompt
access to all documents and information submitted by a borrower
in connection with a loss mitigation option to servicer
personnel that are assigned to assist the borrower; and (5)
properly evaluate a borrower who submits an application for a
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loss mitigation option for all loss mitigation options for which
the borrower may be eligible, as specified.
These regulations, and servicers' responsibilities under them,
were clarified in a bulletin issued by the federal CFPB prior to
the operative date of the regulations
(http://files.consumerfinance.gov/f/201310_cfpb_mortgage-servicin
g_bulletin.pdf). The following year, the CFPB also clarified
that where a successor in interest obtains title to a dwelling
and agrees to be added onto a mortgage secured by that dwelling,
the lender is not required to evaluate that successor's ability
to repay that mortgage using CFPB's Ability-to-Repay Rule
( http://files.consumerfinance.gov/f/201407_cfpb_bulletin_mortgage
-lending-rules_successors.pdf ) as the ability to repay rule is
far more cumbersome and restrictive than simply evaluating basic
creditworthiness and affordability that is required by Fannie
Mae and Freddie Mac for loan assumptions.
The RESPA rules are broadly applicable to all "federally-related
mortgage loans," which, generally speaking, include all
single-family residential mortgages (both purchase money and
refinanced mortgages, and both first and subordinate liens),
which are made by state- or federally-regulated lenders.
Fannie Mae has also issued guidance around the successor in
interest issue, which must be followed by entities that service
loans owned or guaranteed by that government-sponsored
enterprise. In a Lender Letter issued in February 2013, Fannie
Mae requires servicers to "implement policies and procedures to
promptly identify and communicate with the new property owner in
connection with a property transfer that is an exempt
transaction. These policies and procedures must allow the new
owner to continue making mortgage payments and pursue an
assumption of the mortgage loan as well as a foreclosure
prevention alternative, if applicable. This includes a widow,
executor, or administrator of the borrower's estate, or other
authorized representative of the borrower upon notification of
the borrower's death." The Lender Letter's reference to "exempt
transaction" refers to transfers protected under Garn-St.
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Germain.
In its Lender Letter Fannie Mae goes on to say, "If the mortgage
loan is delinquent and the new property owner is unable to bring
the mortgage loan current but may be able to resolve the
delinquency with a foreclosure prevention alternative and assume
the mortgage loan, the servicer must collect a Borrower Response
Package from the new property owner and evaluate the request as
if they were a borrower. If the servicer determines that a
foreclosure prevention alternative is appropriate, it must
submit its recommendation to Fannie Mae for written approval.
Fannie Mae will determine the terms of the foreclosure
prevention alternative and any related assumption."
Fannie Mae's most recently-issued servicing guide reflects the
guidance first issued in February 2013. Freddie Mac has issued
similar guidance for entities that service mortgages which are
owned or guaranteed by it
(http://www.freddiemac.com/singlefamily/guide/bulletins/pdf/bll13
03.pdf).
Finally, the Home Affordable Modification Program (HAMP),
designed by the U.S. Department of the Treasury and applicable
to many mortgages not owned or guaranteed by Fannie Mae or
Freddie Mac, instructs servicers subject to its rules to
consider non-borrower successors in interest for HAMP
modifications as if they were borrowers and to suspend any
ongoing foreclosure while doing so. The HAMP servicer handbook
also states that "Non-borrowers who inherit or are awarded sole
title to a property may be considered for HAMP even if the
borrower who previously owned the property was not already in a
Trial Payment Plan. Such titleholders may be considered for
HAMP if they meet all applicable eligibility criteria. In this
case, servicers should collect an Initial Package from the
non-borrower who now owns the property and evaluate the request
as if he or she was the borrower. The servicer should process
the assumption and loan modification contemporaneously if the
titleholder is eligible for HAMP and investor guidelines and
applicable law permit an assumption of the loan."
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( https://www.hmpadmin.com/portal/programs/docs/hamp_servicer/mhah
andbook_5.pdf; see Section 8.8 ).
Pending Action from CFPB:
On October 15, 2013 CFPB issued Bulletin 2013-12 to provide
guidance regarding the RESPA or Reg X and The Truth in Lending
Act (TILA or Reg Z). This bulletin provided guidance for
mortgage services on policies and procedures servicers must
maintain regarding the identification of and communication with
any successor in interest of a deceased borrower.
On December 15, 2014 CFPB announced changes to the Mortgage
Servicing Rules and Reg Z and Reg X addressing many of the
issues previously offered in Bulletin 2013-12. Among these
proposed changes are three sets of rule changes with respect to
successors in interest - persons who inherit or receive property
when there is still an outstanding mortgage loan. First, the
CFPB is proposing that all of the existing Mortgage Servicing
Rules will apply to the successor once the servicer confirms
that they are, in fact, a successor in interest. Second, the
proposed amendments state how the determination of whether a
person is a successor is made. Third, the proposal ensures that
those confirmed as successors generally receive the same
protections under the CFPB's Mortgage Servicing Rules as the
original borrower. The proposed new definition of successor in
interest would include homeowners who receive property through
inheritance from a family member or upon the death of a joint
tenant, after a divorce or legal separation, through a family
trust, or through a transfer from a parent to a child.
The background and justification for the proposed CFPB
regulations are contained in Federal Register, Vol. 79, No. 240.
In expanding the application of the mortgage servicing rules,
CFPB provides that it is "proposing to apply all of the Mortgage
Servicing Rules to successors in interest whose identify and
ownership interest in the property have been confirmed by the
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servicer." Furthermore, the rules are designed to require
servicers to "maintain policies and procedures reasonable
designed to ensure that the servicer can, upon identification of
a potential successor interest, promptly provide to that person
a description of the documents the servicer reasonably requires
to confirm the person's identity and ownership interest in the
property?"
Summary of arguments in support:
SB 1150 is co-sponsored by the California Alliance for Retired
Americans, California Reinvestment Coalition, and Housing and
Economic Rights Advocates, and is supported by Attorney General
Harris and numerous consumer advocacy, legal services, and
housing rights organizations and unions, including the Consumer
Federation of California, California Rural Legal Assistance,
Nehemiah Corporation of America, CALPIRG, Western Center on Law
& Poverty, SEIU California, UNITE HERE, UDW/AFSCME Local 3930,
California Professional Firefighters, Public Law Center, Public
Counsel, Justice in Aging, Institute on Aging, Family Caregiver
Alliance, Capital Impact Partners, Renaissance Entrepreneurship
Center, Bay Area Legal Aid, Fair Housing of Marin, Neighborhood
Housing Services of Los Angeles County, Project Sentinel, Rural
Community Assistance Corporation, The Arc and United Cerebral
Palsy California Collaboration, and others.
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. This
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
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when the surviving family member has a legal property interest
in the home. During this difficult and unfortunate period when
the loss of a loved one is still fresh, family members should
not have to deal with the added stress of losing their homes.
In 2012, with the passage of the Homeowner Bill of Rights
(HBOR), the state of California provided strong due process
protections to similar vulnerable homeowners. But banks and
loan servicers argue that HBOR does not protect surviving
spouses and other successors in interest. The effect of all
this is that survivors and successors in interest have FEWER
rights and LESS ability to retain their homes than other
homeowners. This is a horrible outcome that the Legislature
did not foresee when HBOR was debated and passed. This is why
support SB 1150. The bill will provide surviving family
members with the opportunity to receive basic information
about the loan, request an assumption and loan modification,
and be given a fair consideration as to whether they will be
able keep their home.
Despite federal Consumer Financial Protection Bureau guidance
regarding communications with successors-in-interest, mortgage
servicers continue to refuse to communicate with successors,
require onerous or nonexistent documentation from successors,
and refuse to suspend foreclosure proceedings to explore
alternatives, which can result in unnecessary loss of family
homes.
Arguments in opposition:
A coalition comprised of mortgage lenders, other financial
services providers involved in mortgage lending and
securitization, the California Chamber of Commerce, Civil
Justice Association of California, and California Citizens
Against Lawsuit Abuse submitted a group letter of opposition to
the bill, citing several concerns.
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Senate Bill 1150 is not a modest bill. The measure creates
unknowable risk where third parties not known to the mortgage
servicer at some point in the future attempt to seek relief
under SB 1150's provisions. The measure imposes significant
new obligations and burdens on mortgage servicers. The measure
will cause a delay in collateral recovery which may leave
properties in disrepair. Significant legal liability will be
visited upon mortgage servicers attempting to comply with an
unclear mandate.
The ramifications of this measure are exacerbated by the
overlap and conflict that will result from the failure to wait
for the CFPB's regulations. If SB 1150 is enacted, mortgage
servicers will confront two standards, one state and one
federal and will be left to interpret which rule, or portion
thereof, to follow. Failure to choose correctly will lead to
alleged violations. Indicating that SB 1150 will "align" with
federal law is not feasible and begs the question of why a
state law is needed if the goal is to align with the federal
law.
The measure forces a mortgage servicer to cause the successor
in interest to assume the loan without clarifying whether the
mortgage servicer can evaluate the successor in interest's
creditworthiness. This mandates a credit decision without the
opportunity to appropriately underwrite. This is expressly
prohibited by §341 of the federal Garn-St. Germain Act, which
explicitly provides that all delinquency remedies are governed
by the mortgage contract, and not by a state law.
It is also notable that the measure is not limited to widows
and orphans and instead applies to any natural person that is
a personal representative, beneficiary of a revocable transfer
on death deed, a joint tenant, or a trustee or beneficiary,
all of which may include individuals without any familial
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relation to the deceased borrower.
As drafted, this measure specifically contemplates that "there
may be more than one successor in interest." Yet, the measure
fails to adequately inform the mortgage servicer what is
necessary to comply with the law when there are multiple
successors in interest. Must a mortgage servicer communicate
with one or all of the successors in interest? May the
mortgage servicer communicate with the successors in interest
separately or collectively? Must the mortgage servicer furnish
all required information regarding the deceased borrower's
loan to one or all the successors in interest? Must the
mortgage servicer assign one single point of contact or must
each successor in interest have their own single point of
contact? How does the mortgage servicer evaluate multiple
successors in interest for consideration of a loan
modification and/or loan assumption? Must the mortgage
servicer underwrite them individually or collectively? These
are just a few questions for which answers have not been
provided.
Discussion & Amendments:
Supporters of this bill have provided case studies concerning
spouses or children residing in a home having monumental
difficulties communicating with their mortgage loan servicer
when the borrower on the loan has passed away. These stories
are terrible to read as successors in interest have been refused
even basic information about the mortgage loan and next to no
possibility of receiving a loan modification if they qualified
for one. However, while these cases are problematic, and no one
should make excuses for the poor treatment of surviving spouses
or children in relation to their mortgage loan servicer, SB 1150
goes further than simply ensuring that successors in interest
receive the proper information about the mortgage loan. In some
cases the motivation of the bill and the actual implementation
of the language diverge.
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The bill contains several issues that need to be revision.
Where possible, staff has suggested potential fixes for the
identified issues.
1)The CFPB is expected to release its final servicing rules that
will address successor in interest issues sometime in July of
this year. The legislative findings and declarations of SB
1150 state, "It is the intent of the Legislature that this act
work in conjunction with federal CFPB servicing guidelines."
It is unclear how the CFPB servicing rules are to work with SB
1150 and the statement "in conjunction" provides no great
clarity as to the meaning of that phrase. Staff recommends
including a clear statement that compliance with the CFPB
rules would be deemed compliance with the provisions proposed
by SB 1150. This is not unlike provisions in HOBR,
specifically Civil Code Section 2924.12 that provides that a
signatory to a consent judgment entered in the case entitled
United States of America et al. v. Bank of America Corporation
et al. is liable for certain violations under HOBR.
Therefore staff recommends the following language be added to
the bill:
Any mortgage servicer, mortgagee, or beneficiary of the deed
of trust or an authorized agent of such person who complies
with the relevant provisions of relating to successors in
interest of 12 C.F.R. Part 1024, known as Regulation X, and 12
C.F.R. Part 1026, known as Regulation Z, as those regulations
are amended by the Final Servicing Rules issued by the
Consumer Financial Protection Bureau in 78 Federal Register
10,696 on February 14th, 2013 and any amendments thereto, is
deemed to be in compliance with this section.
2)The criteria specified on page 5 lines 22-31, is unclear as to
the application of successor in interest status as on page 7,
lines 27-40 and page 8, lines1-5 is a definition of "successor
in interest" that is broader than the "criteria" of a
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successor in interest that occurs back on page 5. This
language is not limited to those residing in the home and
could include children or grandchildren that no longer live in
the home or that may have never lived in the home due to
various family circumstances. This further exacerbates the
ability of competing to successors not even living in the home
to create confusion regarding the mortgage and the property.
Therefor the committee may wish to recommend using the
"criteria" for a successor interest as the definition of those
covered by this bill. The revised definition below also
includes those parties that are currently considered for loan
assumption under mortgage servicer investor guidelines, as
discussed in more detail later in this analysis.
To create clarity on this issue the following amendments are
necessary:
a) Strike the successor in interest criteria on page 5,
lines 22-31.
b) Revise definition of "successor in interest" by striking
lines, 31-40 on page 7, and lines 1-5 on page 8 and then on
page 7, line 30, after "following" insert, The spouse,
domestic partner, parent, grand-parent, adult child, or
adult grandchild, or adult sibling of the deceased
borrower, who occupied the property as his or her principal
residence within the last six continuous months prior to
the deceased borrower's death
3)Once a person is deemed a successor in interest, which happens
upon the claimant presenting "reasonable documentation" that
is not subject to review, the servicer must allow the
successor to assume the deceased borrower's loan. The bill is
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drafted in such a way that this assumption is required without
a determination of whether the successor in interest can
afford the mortgage which could facilitate the transfer the
mortgage to someone with no ability to repay the mortgage or
ability to qualify for a mortgage loan modification. Fannie
Mae and Freddie Mac are the investors for well over 60% of the
residential mortgage market. Their servicing guidelines,
which must be followed by mortgage loan servicers servicing
Fannie Mae and Freddie Mac specify that if a transferee, in
this case a successor in interest, wishes to assume the
mortgage loan they must determine the credit worthiness of
transferee (Section 8406.4 of the Single Family
Seller/Servicing Guide). Under these guidelines a protected
transferee as established in Garn-St. Germain may continue to
pay on the existing loan without assuming the loan which would
not trigger a requirement to determine credit worthiness as
the transferee is paying on the loan without assuming the
underlying debt. However, the guidelines are clear that in
order to assume the loan credit qualification is necessary.
The committee is also in receipt of a letter dated May 30th,
2016 from the general counsel of the Federal Housing Finance
Agency, currently the conservator for Fannie Mae and Freddie
Mac that provides, "Servicers must not impose credit
qualifying criteria on the transferee unless the new owner
desires to assume the loan or seek loss mitigation?(emphasis
added)"
Therefor the committee may wish to consider the following
changes to the language on page 5, lines 1-13:
a) Strike lines 1-13 on page 5 and insert the following:
(1) Assume the deceased borrower's loan subject to an
evaluation of the creditworthiness of the successor in
interest consistent with the appropriate investor requirements
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and guidelines.
(2) If the successor in interest qualifies for the
foreclosure prevention alternative, the servicer shall allow
the successor in interest to assume the loan subject to an
evaluation of the creditworthiness of the successor in
interest consistent with the appropriate investor requirements
and guidelines.
(3) Where a successor in interest of an assumable loan also
seeks a foreclosure prevention alternative, the mortgage loan
servicer shall allow the successor in interest to
simultaneously apply to assume the loan and for a foreclosure
prevention alternative that is offered by the mortgage loan
servicer.
This language provides additional points of clarification
necessary to ensure appropriate loan assumption. In order for
a borrower, or in this case a successor in interest to be
considered for a loan modification they must present
documentation of some economic distress, whether temporary or
long-term and the ability to afford a modified mortgage loan
payment. For example, HOBR, under Civil Code 2920.5 provides
that a "borrower" for consideration of the protections
provided under HOBR is considered someone "potentially
eligible" for a loan modification under certain circumstances.
The current version of SB 1150 is not clear that the
successor in interest seeking loss mitigation must be
potentially eligible. The amendments in sub a) above clarify
this by including the language "If the successor in interest
qualifies?" This will ensure that a mortgage loan servicer is
not required to provide a loan modification to someone who
does not qualify for a modification.
Prior and Related Legislation:
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AB 244 (Eggman), 2015: Would have included successors in
interest, as defined, within the HBOR definition of borrower and
thus provided those successors with all of the rights that
borrowers possess under that law. Never taken up by its author
in the Assembly Banking & Finance Committee.
AB 278 (Eng et al., Chapter 86, Statutes of 2012) and SB 900
(Leno et al., Chapter 87, Statutes of 2012): Enacted
comprehensive mortgage loan servicing reforms, established
mortgage loan borrower protections, and modified California's
nonjudicial foreclosure process. Although certain provisions
sunset on January 1, 2018, the majority remain in force past
that sunset date.
SB 7 (Corbett), Chapter 4, 2009-2010 Second Extraordinary
Session, and AB 7 (Lieu), Chapter 5, 2009-2010 Second
Extraordinary Session: Required mortgage loan servicers that
lacked comprehensive mortgage loan modification programs, as
defined, to wait an additional 90 days before recording a notice
of sale on mortgages or deeds of trust, which were recorded from
January 1, 2003 to January 1, 2008, and were secured by
single-family, owner-occupied residential real property.
SB 1137 (Perata), Chapter 69, Statutes of 2008: Established the
contact requirements summarized in Existing Law 1a. Sunset on
January 1, 2013 (though its provisions were extended
indefinitely through enactment of HBOR).
REGISTERED SUPPORT / OPPOSITION:
Support
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California Alliance for Retired Americans (CARA) - Co-sponsor
California Reinvestment Coalition (CRC) - Co-sponsor
Housing and Economic Rights Advocates (HERA) - Co-sponsor
AARP California
AIDS Legal Referral Panel (ALRP)
Alameda County Board of Supervisors
Bay Area Legal Aid (BayLegal)
Burbank Housing Development Corporation
California Attorney General
California District Attorneys Association (CDAA)
California Nurses Association
California Professional Firefighters (CPF)
California Rural Legal Assistance, Inc.
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California State Council of the Service Employees International
Union (SEIU)
CALPIRG
Capitol Impact Partners
Center for California Homeowner Association Law (CCHAL)
Center for Responsible Lending (CRL)
Central Valley Realtist Board (CVRB)
Community Legal Services in East Palo Alto
Consumer Attorneys of California
Consumer Federation of California (CFC)
Consumers Union
County of Alameda
Courage Campaign
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Fair Housing Council of San Fernando Valley Council
Fair Housing of Marin
Family Caregiver Alliance
Housing California
Inland Fair Housing and Mediation Board (IFHMB)
Institute on Aging Elder Abuse Prevention Program
Justice in Aging
Law Foundation of Silicon Valley
Legal Aid Foundation of Los Angeles (LAFLA)
Legal Services of Northern California (LSNC)
Los Angeles County Consumer & Business Affairs (DCBA)
Los Angeles County Democratic Party (LACDP)
Montebello Housing Development Corporation (MHDC)
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National Center for Lesbian Rights (NCLR)
National Council of La Raza (NCLR)
National Housing Law Project
Nehemiah Corporation of America
Neighborhood Housing Services of Los Angeles County (nhs)
NeighborWorks Homeownership Center Sacramento Region
Non-Profit Housing Association of Northern California (NPH)
Peoples' Self-Help Housing
Project Sentinel
Public Counsel
Public Law Center (PLC)
Renaissance Entrepreneurship Center
Retired Public Employees Association (RPEA)
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Rural Community Assistance Corporation (RCAC)
Shalom Center for T.R.E.E. of Life
Tenants Together
The Arc
Unite Here
United Cerebral Palsy California Collaboration
United Domestic Workers of America - AFSCME local 3930
Valley Economic Development Center (VEDC)
Valley Industry and Commerce Association (VICA)
Western Center on Law & Poverty
1 Individual
Opposition
American Securitization Forum
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California Bankers Association
California Building Industry Association
California Business Roundtable
California Chamber of Commerce
California Citizens against Lawsuit Abuse
California Community Banking Network
California Financial Services Association
California Land Title Association
California Mortgage Association
California Mortgage Bankers Association
Civil Justice Association of California
Consumer Mortgage Coalition
Securities Industry and Financial Markets Association
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United Trustees Association
Analysis Prepared by:Mark Farouk / B. & F. / (916)
319-3081