BILL ANALYSIS
SENATE COMMITTEE ON BANKING, FINANCE,
AND INSURANCE
Senator Ronald Calderon, Chair
SB 1275 (Leno) Hearing Date: June 2, 2010
As Amended:May 27, 2010
Fiscal: Yes
Urgency: No
SUMMARY Would require servicers to complete additional
actions, as specified, before recording a notice of default
(NOD), and to record a new document, called a declaration of
compliance, as an attachment to every NOD; and would establish
specific penalties to be applied to servicers who failed to
comply with the provisions of the bill, as specified.
DIGEST
Existing law
1. Prescribes rules that govern the nonjudicial foreclosure
process in California (Civil Code Section 2924 et seq.). A
layman's description of the portions of the process that are
relevant to this bill follows immediately below. Modifications
that were made to this process by three recently-enacted pieces
of legislation are described in Existing Law numbers 2 and 3,
below.
a. The nonjudicial foreclosure process begins with the
recordation of a NOD by a mortgagee, trustee, beneficiary, or
authorized agent. The NOD must be recorded in the county in
which the property securing the defaulted loan is located,
and must be mailed to specified persons with a financial
interest in the property, including the property owner.
Existing law does not prescribe the minimum amount of time
that must pass between a delinquency and the recordation of a
NOD, although NODs are commonly recorded only after a
borrower is at least 90 days delinquent on his or her
mortgage loan;
b. At least three months must pass after recordation of a
NOD, before the mortgagee, trustee, beneficiary, or
authorized agent may record a notice of sale. Notices of
SB 1275 (Leno), Page 2
sale must be recorded in the county in which the property
securing the defaulted loan is located, mailed to the
property owner and other specified persons with a financial
interest in the property, published in a newspaper of general
circulation, and posted on the property that is the subject
of the sale;
c. At least 20 days must pass after recordation of a notice
of sale, before a property may be sold. However, sale dates
may be, and often are, postponed. Under existing law, a sale
date may be postponed for any of the following reasons: 1)
upon the order of any court of competent jurisdiction; 2) if
stayed by operation of law; 3) by mutual agreement, whether
oral or in writing, of any trustor and any beneficiary or any
mortgagor and any mortgagee (i.e., by mutual agreement
between a borrower and his or her lender); and/or 4) at the
discretion of the trustee. A new notice of sale must be
recorded, if a postponement or postponements delay the sale
for more than 365 days following the first scheduled sale
date;
2. Pursuant to SB 1137 (Perata), Chapter 69, Statutes of 2008,
until January 1, 2013, requires the following, before a NOD may
be recorded on a mortgage or deed of trust that was recorded
from January 1, 2003 through December 31, 2007, and that is
secured by single-family, owner-occupied residential real
property:
a. A mortgagee, beneficiary, or authorized agent must
contact a borrower in person or by telephone, in order to
assess the borrower's financial situation and explore options
for the borrower to avoid foreclosure. Contact (or attempted
contact, if a borrower is unreachable) must be made
telephonically and in writing, as specified. During the
initial contact, the mortgagee, beneficiary, or authorized
agent must advise the borrower that he or she has the right
to request a subsequent meeting, which, if requested, must
occur within 14 days of request. The mortgagee, beneficiary,
or authorized agent must also provide the borrower with a
toll-free telephone number that can be used by the borrower
to contact a HUD-certified housing counseling agency;
b. A mortgagee, beneficiary, or authorized agent must wait
at least 30 days after making initial contact with a
borrower, or satisfying specified due diligence requirements
to make contact, before it may record a NOD on a loan covered
SB 1275 (Leno), Page 3
by the provisions of SB 1137;
c. Each NOD that is recorded on a loan covered by the
provisions of SB 1137 must include a statement that the
mortgagee, beneficiary, or authorized agent contacted the
borrower, tried with due diligence to contact the borrower,
or that no contact was required, because one of the express
exemptions applied. Exemptions from the bill's contact
requirements are provided, in cases where a borrower has
already surrendered the property, contracted with an
organization or other entity that advises borrowers on how to
"game" the foreclosure process, or filed for a bankruptcy
that is still before a court;
3. Pursuant to SB 7 (Corbett) and AB 7 (Lieu), Chapters 4 and 5,
Statutes of 2009-2010 Second Extraordinary Session, until
January 1, 2011, requires the following, before a notice of sale
may be recorded on a mortgage or deed of trust that was recorded
from January 1, 2003 to January 1, 2008, and that is secured by
single-family, owner-occupied residential real property:
a. A mortgagee, trustee, or other person authorized to take
sale must wait an additional 90 days (over and above the
three months described in Existing law 1b above), before
recording a NOD. Exemptions from this additional 90-day
delay may be obtained by mortgage lenders and servicers who
apply to the Department of Financial Institutions,
Corporations, or Real Estate (depending on their primary
regulator), and who are deemed by the relevant commissioner
to have implemented a comprehensive loan modification
program, as specified;
b. Each notice of sale must include a declaration from the
mortgage loan servicer, indicating whether the servicer
obtained an order of exemption from one of the commissioners,
which was current and valid on the date the notice of sale
was recorded, or a statement that no additional delay was
required, because one of the express exemptions applied.
Exemptions from the bill's 90-day delay requirements are
provided, in cases where a borrower has already surrendered
the property, contracted with an organization or other entity
that advises borrowers on how to "game" the foreclosure
process, or filed for a bankruptcy that is still before a
court; and in cases where the loan was made, purchased, or is
being serviced by a state or local public housing agency or
authority.
SB 1275 (Leno), Page 4
This bill
1. Would apply different sets of provisions to different types
of mortgage loan servicers, as follows:
a. Mortgage loan servicers who are required to review
loans pursuant to the Making Home Affordable Modification
Plan ("HAMP servicers" for purposes of this analysis)
would be subject to one set of requirements, with respect
to mortgages and deeds of trust recorded prior to January
1, 2009, which are secured by single-family,
owner-occupied, residential real property;
b. Mortgage loan servicers who are not required to
review loans pursuant to HAMP ("non-HAMP servicers" for
purposes of this analysis) would be subject to a
different set of requirements, with respect to mortgages
and deeds of trust recorded from January 1, 2003 through
December 31, 2008;
2. HAMP servicers would be required to do the following four
things, in addition to what they are required to do pursuant
to HAMP guidelines and directives:
a. Before recording a NOD on a loan covered by the
bill, provide a specified notice to borrowers, describing
the nonjudicial foreclosure process, informing them of
their foreclosure-related rights, and explaining
potential foreclosure avoidance options. This notice
would have to be made available by an unnamed state
government entity, in English and each of the five
foreign languages listed in Civil Code Section 1632
(Spanish, Tagalog, Korean, Vietnamese, and Chinese);
b. Within ten business days following a decision to
deny a borrower's application for a mortgage loan
modification, mail a denial explanation letter to the
borrower. Although HAMP guidelines and directives
require servicers to mail a denial explanation letter to
borrowers who have not been approved for a HAMP mortgage
loan modification, SB 1275's requirements related to the
denial explanation letter go beyond HAMP in three ways:
i. Several of the inputs used by the
servicer to calculate the net present value of
SB 1275 (Leno), Page 5
modification versus foreclosure must be
automatically provided to the borrower in the denial
explanation letter, rather than provided only upon
request by the borrower;
ii. Three additional items must be provided
to the borrower in the letter of denial: name and
contact information for the holder of the mortgage
note, date a completed application was received from
the borrower, and date the borrower's application
for a loan modification was denied;
iii. If the servicer's communications with the
borrower have been primarily in one of the five
foreign languages specified in Civil Code Section
1632, the denial explanation letter must be
translated into that foreign language;
c. Concurrent with recording a NOD on any type of loan
(whether single-family residential, multi-family
residential, or commercial), record a Declaration of
Compliance. The Declaration of Compliance is a "check
the box" document, which asks the servicer or its agent
to identify which of several specific provisions of law
apply to the loan, which of several specific provisions
of law were followed in connection with the loan, and
which of several specific options the borrower elected,
with respect to requesting a loan modification. The
Declaration of Compliance must be signed by an individual
having personal knowledge of the information it contains,
or by an individual with authority to bind the mortgage
servicer, who certifies that the declaration is based on
records made in the regular course of the servicer's
business;
d. For purposes of completing the declaration of
compliance, compile a record of the dates and times of,
and addresses and telephone numbers used for attempts to
contact the borrower. Servicers are required to make
this record available to a borrower within ten business
days, if requested by the borrower in writing after a NOD
has been recorded;
3. Non-HAMP servicers would be required to do each of the
things described in 2a, 2b, 2c, and 2d above, and would
additionally have to comply with a series of requirements
SB 1275 (Leno), Page 6
related to borrower outreach, contact, and communication.
These requirements reflect a combination of enhancements to
the contact requirements contained in SB 1137, plus some
actions required under HAMP, plus some changes to HAMP
requirements, which the bill's key proponents believe to be
improvements over HAMP rules and procedures. The timing of
some of the requirements on non-HAMP servicers is different
than the timing required of HAMP servicers;
4. Would provide the following remedies to borrowers whose
servicer fails to record a completed Declaration of
Compliance, submits a false Declaration of Compliance, or
fails to send a denial explanation letter that materially
complies with specified provisions of the bill. The
remedies would only become available after the borrower's
property has been foreclosed upon nonjudicially:
a. If the property is sold to a bona fide purchaser at
the trustee sale (i.e., sold to a third party that is not
the foreclosing financial institution), the borrower may
recover the greater of treble actual damages or statutory
damages of $10,000;
b. If the property is taken back by the foreclosing
financial institution at the trustee sale but is later
sold by that institution to a bona fide purchaser, the
borrower may recover the greater of treble actual damages
or statutory damages of $10,000. However, if the
borrower establishes that the servicer had notice of the
borrower's claim under the provisions of the bill before
selling the property to that bona fide purchaser, the
borrower is additionally entitled to recover statutory
damages of $15,000;
c. If the property is taken back by the foreclosing
financial institution at the trustee sale and not
subsequently sold to a bonafide purchaser, the borrower
may bring an action to void the foreclosure sale;
d. In addition to the remedies available under 4a, 4b,
or 4c above, the borrower would be entitled to recover
between $1,500 and $10,000 in statutory damages, if the
servicer failed to mail the translated notice informing
borrowers of their foreclosure-related rights or failed
to materially comply with the loan modification review
process requirements of the bill;
SB 1275 (Leno), Page 7
e. Would not authorize a cause of action for any
failure or error that is technical or de minimis in
nature;
5. Would provide an express exemption from its requirements,
in cases where a borrower has already surrendered the
property, contracted with an organization or other entity
that advises borrowers on how to "game" the foreclosure
process, or filed for a bankruptcy that is still before a
court;
6. Would sunset on January 1, 2013.
COMMENTS
1. Purpose of the bill To improve the procedures and
processes under existing foreclosure prevention programs,
with the following goals: 1) avoid unnecessary or mistaken
foreclosures; 2) encourage fair treatment of borrowers and
more timely outcomes; 3) provide greater transparency to
borrowers about foreclosure prevention decisions and
outcomes; and 4) provide borrowers with a remedy against
servicers who fail to comply with the law.
2. Background The language of SB 1275 was developed by staff
of Housing and Economic Rights Advocates (HERA), a
statewide, not-for-profit legal service and advocacy
organization. HERA drafted the proposal that formed the
basis for SB 1275, in response to its frustrations over the
treatment received by borrowers from their servicers, and
their belief that many borrowers who are eligible for loan
modifications are failing to be offered those modifications,
before being foreclosed on by their lenders.
3. The Making Home Affordable Program: The federal Making
Home Affordable (MHA) Program was developed by the U.S.
Department of the Treasury (Treasury), at the urging of
President Obama, in an effort to help borrowers avoid
foreclosure. The MHA program includes several components,
such as the Home Affordable Modification Program (HAMP),
Home Affordable Refinancing Program (HARP), Second Lien
Modification Program (2MP), and Home Affordable Foreclosure
Alternatives (HAFA) Program.
Since its introduction in February 2009, HAMP has become the
SB 1275 (Leno), Page 8
cornerstone of most servicers' loss mitigation efforts. Any
financial institution that received Troubled Asset Relief
Program (TARP) funding must comply with HAMP, as must any
financial institution that voluntarily enters into a written
agreement to participate in the MHA program (something that,
to date, over 100 financial institutions have agreed to do).
Furthermore, although loans owned or guaranteed by Fannie
Mae and Freddie Mac are not required to be run through the
HAMP program by their servicers, both government-sponsored
enterprises (GSEs) have issued directives to their servicers
that essentially duplicate the HAMP program.
Thus, for all intents and purposes, the vast majority of
borrowers who contact their servicers to discuss options for
avoiding foreclosure must be run through the HAMP
eligibility process, before the servicers may consider those
borrowers for other forms of loss mitigation or for
foreclosure. In August 2009, Treasury estimated that at
least 85% of mortgage loans in the U.S. were required to be
evaluated under HAMP rules. Although Treasury has not
released an updated estimate since then, several more
servicers have signed on to the MHA Program, a factor which
is likely to have pushed coverage above 85% of all mortgage
loans.
The MHA Program has been modified, augmented, and clarified
several times since its introduction, through the issuance
of Supplemental Directives. Treasury issued ten
Supplemental Directives during 2009 (two of which were
significantly modified during 2010), and has so far issued
four Supplemental Directives during 2010, the most recent of
which was issued on May 11, 2010. More Supplemental
Directives, and more modifications to existing Supplemental
Directives, are likely, as Treasury works with servicers and
housing advocates to help refine and improve its Making Home
Affordable programs.
Servicers who are not required to adhere to HAMP guidelines
and directives generally fit into one of three categories --
community banks, credit unions, and other small lenders.
Because very few of these institutions took TARP money, and
very few have signed up to participate in MHA, borrowers
whose loans are serviced by these types of institutions are
often evaluated, using the lender's in-house loss mitigation
programs.
SB 1275 (Leno), Page 9
4. Support SB 1275 is strongly supported by consumer groups,
housing counseling organizations, and organized labor. All
of these groups see SB 1275 as a way to prevent unnecessary
foreclosures in California.
HERA, the group that drafted the proposal which formed the
basis for SB 1275, writes that a number of obstacles stand
in the way of achieving large-scale reductions in the number
of foreclosures in California. HERA believes that SB 1275
will ensure that no homes are unnecessarily foreclosed on,
if they can be saved from foreclosure under existing
programs. "Borrowers and housing counselors throughout the
State report that they regularly face seemingly
insurmountable obstacles when they contact loan servicers
for assistance. These include delays of many months to over
a year in processing applications; financial and other
documentation lost by the servicer; repeated requests from
the servicer for the borrower to send in additional
documentation or to send in the same documentation over and
over again; miscalculations or misreading of borrower income
leading to mistaken denials; misapplication and
misrepresentation of investor guidelines and restrictions
leading to mistaken denials; inconsistent, inaccurate and
contradictory information provided to borrowers about their
rights and obligations; foreclosures conducted while a
modification application is pending (or while a trial plan
is in effect) because the servicer failed to instruct the
foreclosure trustee to postpone the sale; and unnecessary
foreclosures conducted after an erroneous denial.
"In the vast majority of cases, borrowers and their advocates
are confronted with an overwhelming lack of information and
communication from the servicer - about the status of their
applications, the documentation they need to provide, and,
in the event a borrower is notified that an application has
been denied, about the reasons for the denial. This lack of
transparency makes it nearly impossible for borrowers to
figure out where they are in the review process or assess
whether a denial is erroneous."
Consumers Union (CU) writes, "By requiring servicers to screen
borrower's for eligibility for a federal HAMP loan
modification, or it's own modification program, before
filing a notice of default, eligible borrowers have an early
opportunity to enter into a loan modification to stay on
track with their mortgage payments before falling further
SB 1275 (Leno), Page 10
behind and entering the foreclosure pipeline."
The Center for Responsible Lending (CRL) believes that SB 1275
"provides the right policy to ensure that borrowers are not
harmed while the banks are trying to 'do better.'" The bill
"ensures that homeowners who are willing and able to stay in
their homes through an appropriate mortgage modification
would not lose that opportunity because the shortcomings of
their servicer and California's foreclosure process worked
against them."
CRL strongly supports the remedies contained in the bill, and
observes that neither California law nor HAMP guidelines
provide recourse for borrowers who wrongfully lose their
homes due to a servicer's errors or failure to comply with
legal or program requirements. "Having a carefully crafted
private enforcement action is essential to ensuring that
servicers uphold the law's requirements and provide
meaningful remedies to harmed families."
Several housing counseling and consumer advocacy
organizations, including the California Reinvestment
Coalition, CALPIRG, Alliance of Californians for Community
Empowerment, Coalition for Quality Credit Counseling,
Consumer Credit Counseling Service of the North Coast,
Neighborhood Housing Services of Silicon Valley, Contra
Costa Interfaith Supporting Community, and many others, sent
very similar letters, in which they assert that existing law
has failed to prevent avoidable foreclosures in significant
numbers. Stories abound regarding lost paperwork,
miscalculations of income leading to mistaken denials,
unclear, irrelevant, or inconsistent grounds for denials,
foreclosures occurring even while borrowers are under
consideration for a loan modification, and foreclosures
occurring even after borrowers have successfully completed a
trial modification. "No one benefits - not the servicer,
not the investors, not the homeowners, not the community,
and not the economy -- when a home is sold in foreclosure
that was previously being saved through a loan
modification."
5. Opposition A coalition of financial services and
building industry trade groups, together with the California
Chamber of Commerce, sent a joint letter of opposition to SB
1275. "While we endeavor to understand the intricacies of
this measure and its impact, we argue that the bill
SB 1275 (Leno), Page 11
exemplifies an overly complicated formula that will be
layered onto recently enacted borrower outreach efforts to
further frustrate and prolong existing foreclosure and loss
mitigation efforts." The coalition believes that SB 1275
will add to the complexity of the loss mitigation process
for servicers and create a series of procedural traps that
will lead to ever-increasing litigation. In addition, they
observe that SB 1275 would inappropriately intervene in
pending litigation that has resulted from enactment of SB
1137.
The coalition also observes that, given recent changes to
HAMP, and given the likelihood of new changes to the program
in the near future, SB 1275 is unnecessary and may conflict
with federal programs. At a minimum, the bill continues a
trend of delaying or stretching out the foreclosure process,
which will delay economic recovery, further frustrate local
governments struggling with properties in disrepair, and
artificially sustain depressed property values.
The California Credit Union League is also opposed, noting
that credit unions have modified 80% of delinquent credit
union real estate loans. SB 1275 is likely to add
additional time to the foreclosure process, threatening
economic recovery and causing local governments to deal with
blighted properties. This additional delay will also result
in many credit union borrowers living in homes without
paying their mortgages, which, in turn, will place a strain
on credit unions and their members. Unfortunately, the push
to modify every mortgage loan is often at odds with
regulators who monitor financial institutions' capital
levels, in order to protect all depositors.
The Civil Justice Association of California (CJAC) opposes SB
1275, on the basis that the bill imposes a host of detailed
new requirements on lenders, creating new obligations for
them to fulfill before they foreclose. Violations are
enforceable by a lawsuit. Forcing nonjudicial foreclosures
into court will only help lawyers and clog our
already-overburdened courts. CJAC notes that California's
nonjudicial foreclosure process is already highly regulated.
There is no need to insert lawyers and lawsuits into the
process.
SB 1275 (Leno), Page 12
6. Prior and Related Legislation:
a. Key prior legislation, including SB 1137
(Perata), Chapter 69, Statutes of 2008, SB 7
(Corbett), Chapter 4, 2009-2010 Second Extraordinary
Session, and AB 7 (Lieu), Chapter 5, 2009-2010 Second
Extraordinary Session are described in the Existing
Law section of this analysis. Related, pending
legislation is summarized below;
b. AB 1639 (Nava), 2009-2010 Legislative Session:
Would establish the Mediated Mortgage Workout
Program, subject to the availability of federal
funding, as specified. Pending on the Assembly Floor.
POSITIONS
Support
Affordable Housing Services
Alliance of Californians for Community Empowerment
California Alliance for Retired Americans
California Capital Financial Development Corporation
California Coalition for Rural Housing
California Conference Board of the Amalgamated Transit Union
California Conference of Machinists
California Human Development Corporation
California Labor Federation
California Reinvestment Coalition
CALPIRG
Causa Justa:Just Cause
Center for Responsible Lending
City of Martinez
City of Porterville
Coalition for Quality Credit Counseling
Community Financial Resources
Community Housing Works, San Diego
Consumer Credit Counseling Service of the North Coast
Consumer Federation of California
Consumer Legal Services in East Palo Alto
Consumers Union
Contra Costa Interfaith Supporting Community Organization
Council on Aging Silicon Valley
East LA Community Corporation
East Palo Alto Council of Tenants Education Fund
SB 1275 (Leno), Page 13
Housing and Economic Rights Advocates
Inland Fair housing and Mediation Board
International Longshore and Warehouse Union
JOLT, Coalition for Responsible Investing
Law Foundation of Silicon Valley
Neighborhood Housing Services of Orange County
Neighborhood Housing Services of Silicon Valley
Novadebt
Oakland Community Organizations
Opportunity Fund
Orange County Fair Housing Council, Inc.
Professional and Technical Engineers, IFPTE Local 20
Public Counsel
Rural Community Assistance Corporation
Sacramento Gray Panthers
Sacramento Housing Alliance
Sacramento Mutual Housing Association
Southern California housing Rights Center
The Mission Economic Development Agency
United Food & Commercial Workers Western States Council
UNITE-HERE
Vallejo Neighborhood Housing Services, Inc.
Vermont Slauson Economic Development Corp.
Yolo Mutual Housing Association
Oppose
California Bankers Association
California Building Industry Association
California Chamber of Commerce
California Council of Engineering Companies of California
California Credit Union League
California Financial Services Association
California Independent Bankers
California Land Title Association
California Mortgage Association
California Mortgage Bankers Association
Civil Justice Association of California
Securities Industry and Financial Markets Association
United Trustees Association
Consultant: Eileen Newhall (916) 651-4102