BILL ANALYSIS
------------------------------------------------------------
|SENATE RULES COMMITTEE | SB 1275|
|Office of Senate Floor Analyses | |
|1020 N Street, Suite 524 | |
|(916) 651-1520 Fax: (916) | |
|327-4478 | |
------------------------------------------------------------
THIRD READING
Bill No: SB 1275
Author: Leno (D), et al
Amended: 5/27/10
Vote: 21
SENATE BANKING, FINANCE, AND INS. COMMITTEE : 7-2, 4/7/10
AYES: Calderon, Florez, Kehoe, Liu, Lowenthal, Padilla,
Price
NOES: Cogdill, Runner
NO VOTE RECORDED: Correa, Cox, Vacancy
SENATE JUDICIARY COMMITTEE : 3-1, 4/20/10
AYES: Corbett, Hancock, Leno
NOES: Harman
NO VOTE RECORDED: Walters
SENATE APPROPRIATIONS COMMITTEE : 6-4, 5/24/10
AYES: Kehoe, Alquist, Corbett, Leno, Wolk, Yee
NOES: Cox, Denham, Walters, Wyland
NO VOTE RECORDED: Price
SUBJECT : Mortgage foreclosure relief
SOURCE : Author
DIGEST : This bill requires a mortgagee, trustee,
beneficiary, or authorized agent, before recording a Notice
of Default on a loan covered by the bill, to comply with
the bills provisions, as specified, which require (1)
written communication and statutory notice, (2) contact and
CONTINUED
SB 1275
Page
2
borrower outreach, (3) a declaration of compliance, and (4)
a denial explanation letter. This bill sunsets on January
1, 2013.
Senate Floor Amendments of 5/27/10 describe procedures that
must be followed by mortgage loan servicers before
proceeding to foreclosure.
ANALYSIS : Existing law regulates the nonjudicial
foreclosure of properties pursuant to the power of sale
contained within a mortgage contract. To commence the
process, existing law requires the trustee, mortgagee, or
beneficiary to record a Notice of Default (NOD) and allow
three months to lapse before setting a date for sale of the
property. Existing law requires a notice of nonjudicial
foreclosure sale to be officially noticed in a newspaper of
general circulation, posted on the property, and recorded
at least 20 days before the sale date.
Existing law, pursuant to SB 1137 (Perata, Corbett,
Machado), Chapter 69, Statutes of 2008, provides the
following:
1. A mortgagee, trustee, beneficiary, or authorized agent
may not file a NOD until 30 days after the mortgagee,
beneficiary, or authorized agent contacts the borrower
in person or by telephone to assess the borrower's
financial situation and explore options for the borrower
to avoid foreclosure or 30 days after the mortgagee,
beneficiary, or authorized agent has tried with due
diligence, as defined, to contact the borrower.
2. A NOD must include a declaration that the mortgagee,
beneficiary, or authorized agent has contacted the
borrower, has tried with due diligence to contact the
borrower, or that no contact was required because the
borrower has filed for bankruptcy, surrendered the
property, or contracted with an entity to extend the
foreclosure process.
3. "Due diligence" is defined to require that the
mortgagee, beneficiary, or authorized agent send a
first-class letter to the borrower and then call the
borrower at least three times at different hours and on
SB 1275
Page
3
different days. If the borrower does not respond within
two weeks after the phone calls have been made, the
mortgagee, beneficiary, or authorized agent must send a
certified letter, return receipt requested.
4. The above-described provisions sunset on January 1,
2013, and apply only to loans originated between January
1, 2003 and December 31, 2007, which are secured by
owner-occupied residential real property containing no
more than four dwelling units.
This bill, until January 1, 2013, extends the requirements
of SB 1137 for owner-occupied residential real property
containing no more than four dwelling units to mortgages or
deeds of trust recorded prior to January 1, 2009, if the
loans are required to be reviewed under federal Home
Affordable Modification Program (HAMP) guidelines, or
between
January 1, 2003, and January 1, 2009, if the loans are not
required to be reviewed under HAMP guidelines.
This bill:
1. Applies 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 HAMP ("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. Requires HAMP servicers to do the following four things,
in addition to what they are required to do pursuant to
HAMP guidelines and directives:
SB 1275
Page
4
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 Section
1632 of the Civil Code (Spanish, Tagalog, Korean,
Vietnamese, and Chinese).
B. Within 10 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, this bill's requirements
related to the denial explanation letter go beyond
HAMP in three ways:
(1) Several of the inputs used by the servicer
to calculate the net present value of modification
versus foreclosure must be automatically provided
to the borrower in the denial explanation letter,
rather than provided only upon request by the
borrower.
(2) Three additional items must be provided to
the borrower in the letter of denial: the name
and contact information for the holder of the
mortgage note, the date a completed application
was received from the borrower, and the date the
borrower's application for a loan modification was
denied.
(3) If the servicer's communications with the
borrower have been primarily in one of the five
foreign languages specified in Section 1632 of the
Civil Code, the denial explanation letter must be
translated into that foreign language.
C. Concurrent with recording a NOD on any type of
SB 1275
Page
5
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. Requires Non-HAMP servicers to do each of the things
described in #2A, 2B, 2C, and 2D above, and additionally
requires compliance with a series of requirements
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. Provides 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
SB 1275
Page
6
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 bona fide 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.
E. Not authorize a cause of action for any failure or
error that is technical or de minimis in nature.
5. Provides 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
SB 1275
Page
7
still before a court.
6. Sunsets on January 1, 2013.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
According to the Senate Appropriations Committee:
Fiscal Impact (in thousands)
Major Provisions 2010-11 2011-12
2012-13 Fund
DFI auditing/reviews $62 $121
$62Special*
DOC
----------------unknown-------------- Special**
DRE
------------------minor---------------- Special***
* Department of Financial Institutions Fund
** Department of Corporations Fund
***Department of Real Estate Fund
SUPPORT : (Verified 5/25/10)
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
Causa Justa: Just Cause
Center for Responsible Lending
City of Lakewood
Coalition for Quality Credit Counseling
Community Financial Resources
Community Housing Works, San Diego
SB 1275
Page
8
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
Engineers and Scientists of California, IFPTE Local 20
Housing and Economics Rights Advocates
Inland Fair Housing and Mediation Board
International Longshore and Warehouse Union
JOLT, Coalition for Responsible Investing
Law Foundation of Silicon Valley
National Council of La Raza
Neighborhood Housing Services of Orange County
Novadebt
Oakland Community Organizations
Opportunity Fund
Orange County Fair Housing Council, Inc.
Professional and Technical Engineers, IFPTE Local 21
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
OPPOSITION : (Verified 5/25/10)
American Council of Engineering Companies of California
California Bankers Association
California Building Industry Association
California Chamber of Commerce
California Credit Union League
California Financial Services Association
California Independent Bankers
California Land Title Association
California Mortgage Association
SB 1275
Page
9
California Mortgage Bankers Association
Civil Justice Association of California
Securities Industry and Financial Markets Association
United Trustees Association
ARGUMENTS IN SUPPORT : The author writes:
"? delinquencies and foreclosures in California continue
to increase - and appear likely to increase into the
foreseeable future. Meanwhile, data shows that the rate
of permanent loan modifications offered to borrowers has
lagged in comparison. The California non-governmental
agencies providing housing counseling services have seen
many cases in which foreclosures are initiated and/or
homes sold in foreclosure while a borrower is still under
review for a loan modification - or even while a borrower
is making payments on a trial modification plan. ?
"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
SB 1275
Page
10
for the denial. This lack of transparency makes it
nearly impossible for borrowers to figure out where they
are in the review process or to assess whether a denial
is erroneous and to seek reconsideration of a qualifying
application. Because borrowers often arrive at their
foreclosure sale date without receiving a decision on a
pending modification application, this lack of
transparency also denies borrowers the opportunity to
explore alternatives to foreclosure if they do not in
fact qualify for a modification."
ARGUMENTS IN OPPOSITION : Opponents of SB 1137 state:
"While we believe that SB 1137 was a sound product,
certain provisions have resulted in class action
litigation. Some of those provisions that are subject to
lawsuit are being amended by SB 1275, which we believe
would inappropriately intervene in pending litigation.
While we endeavor to understand the intricacies of this
measure and its impact, we argue that that the bill
exemplifies an overly complicated formula that will be
layered on to recently enacted borrower outreach efforts
to further frustrate and prolong existing foreclosure and
loss mitigation efforts. We believe the measure will
result in adding to the complexity of navigating these
processes for loan servicers to create a series of
procedural traps that will lead to ever increasing
litigation. How this measure interacts mechanically and
chronologically with recent state and federal regulatory
and statutory changes is unclear. This will result in
compliance hurdles and a detrimental distraction from our
efforts to assist our customers.
"Changes at the federal level are frequent and swift and
make this measure unnecessary. To further illustrate
this point, President Obama's and the United States
Treasury Department's Home Affordable Modification
Program (HAMP) has continued to evolve. In November
2009, Treasury released Supplemental Directive 09-08
requiring participating servicers to provide borrowers
with a non-approval notice if they are denied for a trial
period plan or official HAMP modification (effective on
January 1, 2010). This disclosure provides detailed
information as to why the borrower was not eligible for a
SB 1275
Page
11
HAMP modification.
"On March 24, 2010, Treasury released Supplemental
Directive 10-02. This directive precludes a servicer
from foreclosing on a borrower until the borrower has
been evaluated and eligibility has been determined under
HAMP. The directive also includes a foreclosure process
explanation letter to be sent to borrowers detailing the
HAMP eligibility consideration process and advising
borrowers to pay attention to foreclosure notices. This
directive is effective June 1, 2010. We understand that
additional changes to HAMP are forthcoming. Given recent
changes to HAMP, we believe that this measure is
unnecessary and may conflict with federal programs. At a
minimum, SB 1275 continues a trend of delaying or
stretching out the foreclosure process. This will delay
economic recovery, further frustrate local governments
struggling with properties in disrepair while continuing
the trend of reduced property tax revenue for local
governments, and will artificially sustain depressed
property values."
JJA:mw 6/2/10 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
**** END ****