BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                    SB 1150


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          SENATE THIRD READING


          SB  
          1150 (Leno and Galgiani)


          As Amended  August 19, 2016


          Majority vote


          SENATE VOTE:  21-14


           -------------------------------------------------------------------- 
          |Committee       |Votes|Ayes                   |Noes                 |
          |                |     |                       |                     |
          |                |     |                       |                     |
          |                |     |                       |                     |
          |----------------+-----+-----------------------+---------------------|
          |Banking         |8-2  |Dababneh, Bonilla,     |Travis Allen, Kim    |
          |                |     |Brown, Chau, Gatto,    |                     |
          |                |     |Low,                   |                     |
          |                |     |                       |                     |
          |                |     |                       |                     |
          |                |     |Ridley-Thomas, Mark    |                     |
          |                |     |Stone                  |                     |
          |                |     |                       |                     |
          |----------------+-----+-----------------------+---------------------|
          |Judiciary       |7-3  |Mark Stone, Alejo,     |Wagner, Gallagher,   |
          |                |     |Chau, Chiu, Cristina   |Maienschein          |
          |                |     |Garcia, Holden, Ting   |                     |
          |                |     |                       |                     |
          |                |     |                       |                     |
           -------------------------------------------------------------------- 










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          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:
             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  
               demonstrating the ownership interest 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)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 the spouse, domestic partner, joint  
            tenant as evidenced by grant deed, parent, grandparent, adult  
            child, adult grandchild, or adult sibling of the deceased  








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            borrower, who occupied the property as his or her principal  
            residence within the last six continuous months prior to the  
            deceased borrower's death and currently resides in the  
            property.


          4)Requires a servicer to apply the provisions specified to  
            multiple successors in interest.


          5)States that an affirmative duty is not on a servicer to  
            provide a loan modification to a successor in interest.


          6)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.


          7)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,  
            balloon payments, if any, prepayment penalties if any, default  
            or delinquency status, the monthly payment amount, and payoff  
            amounts.


          8)Specifies that a mortgage servicer shall allow a successor in  
            interest to:


             a)   Apply to assume the deceased borrower's loan.  
             b)   Simultaneously apply to assume the loan and for a  
               foreclosure prevention alternative that may be offered by,  
               or available through the mortgage loan servicer.


             c)   Assume the loan if the successor qualifies for a  








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               foreclosure prevention alternative.


          9)Allows the servicer to evaluate the creditworthiness of the  
            successor in interest that wishes to assume the loan and/or  
            apply for a foreclosure prevention alternative subject to  
            applicable investor requirements and guidelines.
          10)Requires the servicer to allow the successor in interest to  
            assume the loan if they qualify for a foreclosure prevention  
            alternative.


          11)Provides that when there are multiple successors in interest  
            who do not wish to proceed as coborrowers or coapplicants, a  
            mortgage servicer may require any nonapplicant successor in  
            interest to consent in writing to the application for loan  
            assumption.


          12)Provides that a successor in interest shall have all the  
            rights and remedies available under the California Homeowner  
            Bill of Rights (HBOR).


          13)Provides that any mortgage servicer, mortgagee, or  
            beneficiary of the deed of trust, or an authorized agent  
            thereof, who, with respect to the successor in interest or  
            person claiming to be a successor in interest, complies with  
            the relevant provisions regarding successors in interest of  
            Part 1024 of Title 12 of the Code of Federal Regulations (CFR)  
            (12 CFR Part 1024), known as Regulation X, and Part 1026 of  
            Title 12 of the Code of Federal Regulations (12 CFR Part  
            1026), known as Regulation Z, including any revisions to those  
            regulations, shall be deemed to be in compliance with this  
            section.


          14)Specifies that the provisions of the bill shall not apply to  
            a successor in interest who is engaged in a legal dispute over  








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            the property that is security for the borrower's outstanding  
            mortgage loan and has filed a claim raising this dispute in a  
            legal proceeding.


          15)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.


             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.


          16)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.








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          17)Defines "reasonable documentation" as copies of the following  
            documents:


             a)   In the case of a personal representative, letters as  
               defined in Probate Code Section 52;
             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  
               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 Probate Code Section 18100.5; and,


             g)   In the case of a beneficiary of a trust, relevant trust  
               documents related to the beneficiary's interest.


          18)Specifies that if the documents in 17) a) through g) above,  
            are not available then "reasonable documentation" may include  
            other written evidence of the person's status as a successor  
            in interest.
          19)Exempts from its provisions a depository institution  
            chartered under state or federal law, a person licensed under  








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            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.


          20)Sunsets the provisions on January 1, 2020.


          21)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  
               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  








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               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 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.


          FISCAL EFFECT:  None.  The bill is keyed non-fiscal by the  
          Legislative Counsel.


          COMMENTS:  








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          Need for the bill.


          According to the author:


            California led the nation in 2012 with its 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. 


            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,  








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            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  
            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.  This  
            bill 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  








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          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.


          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.


          This bill 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.









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          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  
          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.









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          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.  
          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."










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          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 United States 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."   
          (https://www.hmpadmin.com/portal/programs/docs/hamp_servicer/mhah 
          andbook_5.pdf; see Section 8.8).


          Action from CFPB: 


          On August 4th, 2016 CFPB issued their final rule regarding  
          Mortgage Servicing Rules and Regulation Z and Regulation X.   
          These final rules include provisions for dealing with successors  
          in interest.  If a borrower dies, existing CFPB rules require  
          that servicers have policies and procedures in place to promptly  
          identify and communicate with family members, heirs, or other  








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          parties, known as "successors in interest," who have a legal  
          interest in the home.  The final rule establishes a broad  
          definition of successor in interest that generally includes  
          persons who receive property upon the death of a relative or  
          joint tenant; as a result of a divorce or legal separation;  
          through certain trusts; or from a spouse or parent.  The final  
          rule ensures that those confirmed as successors in interest will  
          generally receive the same protections under the CFPB's mortgage  
          servicing rules as the original borrower.  These rules are  
          expected to be active sometime in the Spring of 2018.


          Prior and Related Legislation:  


          AB 244 (Eggman) of 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.  AB 244 was not taken up by  
          its author in the Assembly Banking & Finance Committee.


          AB 278 (Eng), 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 X2 (Corbett), Chapter 4, Statutes of 2009-10 Second  
          Extraordinary Session, and AB 7 X2 (Lieu), Chapter 5, Statutes  
          of 2009-10 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  








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          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).




          Analysis Prepared by:                                             
                          Mark Farouk / B. & F. / (916) 319-3081  FN:  
          0004699