BILL ANALYSIS Ó SB 1150 Page 1 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 | | | | | | | | | | | | -------------------------------------------------------------------- SB 1150 Page 2 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 SB 1150 Page 3 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 SB 1150 Page 4 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 SB 1150 Page 5 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. SB 1150 Page 6 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 SB 1150 Page 7 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 SB 1150 Page 8 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: SB 1150 Page 9 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, SB 1150 Page 10 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 SB 1150 Page 11 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. SB 1150 Page 12 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. SB 1150 Page 13 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." SB 1150 Page 14 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 SB 1150 Page 15 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 SB 1150 Page 16 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