BILL ANALYSIS
SB 1275
Page 1
Date of Hearing: June 21, 2010
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Mike Eng, Chair
SB 1275 (Leno & Steinberg) - As Amended: June 10, 2010
SENATE VOTE : 21-12
SUBJECT : Mortgages: foreclosures
SUMMARY : Creates a series of declarations and compliance
systems required of mortgage loan servicers for particular loans
before initiation of the foreclosure process. Specifically,
this bill :
1)Requires that after a loan becomes 16 days delinquent, but not
later than 10 days after the loan becomes 60 days delinquent,
the servicer must send the borrower written communication that
includes the following:
a) A copy of an informational notice, prepared by a state
government entity, that provides detail to the borrower on
their foreclosure rights and remedies.
b) A letter that includes the following, if applicable:
i) A description of the loan modification options
available to the borrower and a list of steps the
borrower must take to apply for the loan modification, if
the borrower is eligible.
ii) A statement that no loan modification option is
available to the borrower, if the servicer does not offer
loan modification programs or if the borrower is not
eligible.
iii) A toll-free telephone number that will provide
access to a live representative during business hours for
borrowers who wish to discuss options for avoiding
foreclosure.
iv) The Internet Web site address, if any, of the
servicer, where the borrower can find information
regarding their options to avoid foreclosure, documents a
borrower should provide if they wish to discuss loan
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modification options, and the toll free number that
provides access to Department of Housing and Urban
Development (HUD) certified housing counseling agencies.
2)Provides that the requirements under this bill only apply
under the following circumstances:
a) Mortgages or deeds of trust that are secured by owner
occupied residential real property containing no more than
four dwelling units;
b) With respect to loans required to be reviewed under Home
Affordable Modification Program (HAMP) guidelines, only
mortgages or deeds of trust recorded prior to January 1,
2009; and
c) With respect to loans not required to be reviewed under
HAMP guidelines, only mortgages or deeds of trust recorded
between January 1, 2003 and January 1, 2009.
3)Requires that when the Notice of Default (NOD) is recorded,
the servicer or authorized agent must additionally 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.
4)Provides that prior to initiating the foreclosure process, a
mortgage servicer shall do both of the following:
a) Compile in one place a record demonstrating that
reasonable borrower solicitation efforts have been met,
including dates, times, addresses and telephone numbers
used for the contact or attempted contact. The record
shall be made available to a borrower within 10 business
days if requested in writing by the borrower subsequent to
the filing of the NOD; and,
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b) Transmit to the foreclosure trustee or authorized agent
a declaration of compliance signed on behalf of the
servicer.
5)Provides that when a borrower initiates an application for a
loan modification, either in writing or verbally and the
modification is denied, the servicer shall send the borrower
by certified mail, no later than 10 days following the denial
decision, a denial explanation letter that clearly explains
the reasons for the denial. If the loan modification was
denied due to the failure of the borrower to provide specific
documents, then the denial letter must indicate which
documents or information were to be provided, as well as, the
list of documents or information that were not provided.
Additionally, specifies that if the loan modification was
denied for reasons other than a lack of documents or
information then the denial letter must include the following:
a) The date on which the last of the required materials
were received that were required to make a loan
modification decision;
b) The date on which a decision was made regarding the
borrower's application;
c) The final decision reached by the servicer;
d) If the servicer was required to consider the borrower
for a HAMP modification, the information described in the
federal Home Affordable Modification Guidelines
Supplemental Directive 09-08 concerning borrower notices;
and,
e) Information explaining the reasons the borrower did not
qualify for a loan modification, including, but not limited
to, the following:
i) An explanation of any investor guidelines or
restrictions on loan modifications that resulted in the
denial decision;
ii) If denial resulted from a decision based on the
borrower's income, any borrower income or expense figures
used in determining the borrowers qualification for the
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loan modification;
iii) A finding that the borrower previously was offered a
loan modification and failed to successfully make
payments under terms of the modified loan;
iv) Name and contact information of the holder of the
note for the borrower's loan.
v) A description of other foreclosure alternatives for
which the borrower may be eligible; or,
vi) Instructions on how to the contact the servicer
about the denial.
6)Prohibits the initiation of the foreclosure process unless
both #4 and #5 above have been satisfied.
7)Provides that if a borrower submits an initial application for
loan modification but does not include all the documentation
or information needed for a decision on the loan modification,
the servicer must provide the borrower with written notice
that clearly describes any supplemental documentation or
information needed in order to consider the borrower for a
modification. Additionally, the servicer must provide the
borrower with 25 calendar days from receipt of the notice, to
provide the information or documentation.
8)Specifies that nothing shall require a servicer to apply any
standards in determining a borrower's eligibility or
qualification for a loan modification separate from the
standards and requirements of the loan modification program or
programs utilized by the servicer, and nothing shall require
the servicer to offer a loan modification if the borrower does
not qualify under any loan modification programs.
9)Provides, that the requirements of this bill do not apply if
the servicer has no loan modification program available to the
borrower, and that information regarding the lack of program,
is provided in written communication required under the bill.
10)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
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for a bankruptcy that is still before a court.
11)Would provide the following remedies to borrowers whose
servicer fails to comply with the loan modification evaluation
and denial process, 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; and,
d) In addition to the remedies available under 11a, 11b, or
11c above, the borrower would be entitled to recover
between $1,500 and $10,000 in statutory damages, if the
servicer:
i) Fails to mail the translated notice informing
borrowers of their foreclosure-related rights or failed
to provide the letter described in #1b;
ii) Fails to record a completed declaration of
compliance; or,
iii) Submits a materially false declaration of
compliance.
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e) Would not authorize a cause of action for any failure or
error that is technical or de minimis in nature.
12)Sunsets on January 1, 2013.
EXISTING LAW
1)Regulates the non-judicial foreclosure process pursuant to the
power of sale contained within a mortgage contract, and
provides that in order to commence the process, a trustee,
mortgagee, or beneficiary must record a NOD and allow three
months to lapse before setting a notice of sale for the
property. [Civil Code Section 2924, all further references are
to the Civil Code].
2)Provides that the mortgagee, trustee or other person
authorized to make the sale must give notice of sale, and
requires notice of the sale to be made, as specified, at least
20 days prior to the date of sale. [Section 2924f].
3)Provides that a mortgage, trustee, beneficiary, or authorized
agent may not file a NOD until 30 days after contact has been
made with the borrower who is in default. [Section 2923.5a1].
4)Requires the mortgagee, trustee, beneficiary or authorized
agent to contact a borrower in default in person or by
telephone and inform them of their right to a subsequent
meeting, and telephone number of the HUD to find a HUD-
certified housing counselor. [Section 2923.5a2].
5)Allows a borrower to assign a HUD-certified counselor,
attorney or other advisor to discuss with the entities options
for the borrower to avoid foreclosure. [Section 2923f].
6)Provides that a NOD may be filed when the mortgagee, trustee,
beneficiary or authorized agent has not contacted the borrower
provided that the failure to contact the borrower occurred
despite reasonable due diligence on the part of the entity and
that "due diligence" means and requires the following:
a) The mortgagee, trustee, beneficiary or authorized agent
sends a first class letter that includes the toll-free
number available for the borrower to find a HUD-certified
housing counseling agency; and,
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b) Subsequent to the sending of the letter the mortgagee,
trustee, beneficiary or authorized agent attempts to
contact the borrower by telephone at least three times at
different hours and on different days. [Section 2923g].
7)Requires the mortgagee, trustee, beneficiary or authorized
agent to maintain a toll-free number for borrowers that will
provide access to a live representative during business hours
and requires the mortgagee, trustee, beneficiary or authorized
agent to maintain a link on the main page of its Internet Web
site containing the following information:
a) Options that may be available to borrowers who are
unable to afford their mortgage payments and who wish to
avoid foreclose, and instructions to borrowers advising
them on steps to take to explore these options; and,
b) A list of documents borrowers should collect and be
prepared to submit when discussing options to avoid
foreclosure. [Section 2923g (5)].
8)Specifies that the notice and contact requirements do not
apply in the following circumstances:
a) The borrower has surrendered the property as evidenced
via a letter or delivery of keys to the property to the
mortgagee, trustee, beneficiary or authorized agent ;
b) The borrower has contacted a person or organization
whose primary business is advising people who have decided
to leave their homes on how to extend the foreclosure
process and avoid the contractual obligations; or,
c) The borrower has filed for bankruptcy. [Section 2923h].
9)Makes a legislative findings and declarations that a loan
servicer acts in the best interest of all parties if it agrees
to, or implements a loan modification or workout plan in one
of the following circumstances:
a) The loan is in payment default, or payment default is
reasonably foreseeable; or,
b) Anticipated recovery under the loan modification or
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workout plan exceeds the anticipated recovery through
foreclosure on a net present value basis. [Section 2923.6].
10)Provides that a notice of sale may not be given for 90 days
in order for parties to pursue a loan modification. [Section
2923.52].
11)Specifies that a servicer can get an exemption from the
90-day foreclosure moratorium if they demonstrate proof of a
comprehensive modification program. [Section 2923.53]
12)Requires that upon posting of a notice of sale, the
mortgagee, trustee, beneficiary or authorized agent shall mail
to the borrower a notice in English and Spanish, Chinese,
Tagalog, Vietnamese, or Korean that states:
"Foreclosure process has begun on this property, which
may affect your right to continue to live in this
property. Twenty days or more after the date of this
notice, this property may be sold at foreclosure. If you
are renting this property, the new property owner may
either give you a new lease or rental agreement or
provide you with a 60-day eviction notice. However,
other laws may prohibit an eviction in this circumstance
or provide you with a longer notice before eviction. You
may wish to contact a lawyer or your local legal aid or
housing counseling agency to discuss any rights you may
have." [Section 2924.8].
13)Provides that a notice of sale postponement may occur at any
time prior to the completion of a sale for any period of time
not to exceed a total of 365 days from the date set in the
notice of sale. [Section 2924g]
14)Specifies that if sale proceedings are postponed for a period
totaling more than 365 days, the scheduling of any further
proceedings shall be preceded by giving a new notice of sale.
[Section 2924g]
FISCAL EFFECT : According to the Senate Appropriations
Committee, costs of $245,000 over the next three fiscal years to
the Department of Financial Institutions.
COMMENTS :
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Why is this bill necessary?
According to the author:
While the foreclosure crisis rages on in California, too
many California families are losing their homes
when they could have and should have qualified for a mortgage
modification that would have saved their home. From the time
the HAMP program was initiated in May of
2009 through April 2010, only 62,883 permanent loan
modifications had been completed in California through the HAMP
program. Nationwide, just 17.35% of eligible 60+ day
delinquent borrowers have been placed in permanent loan
modifications.
The stories about servicers mishandling borrower
applications, failing to properly
communicate with borrowers, and worst of all selling a
borrower's home when the borrower is still being considered for
a loan modification or is paying on a trial
modification plan, are seemingly endless. These problems are
not sporadic, but systemic.
Indeed, the federal government has recognized the systemic
nature of the problem, and
issued new rules requiring that servicers engage in specific
borrower outreach loans
covered by HAMP, and, if a borrower applies for a loan
modification, fully evaluate
whether the borrower qualifies before filing a NOD.
Due to understaffing, disorganization and other problems,
"comprehensive loan
modification programs" are not translating into across-the-board
loan modifications for
eligible homeowners. These are the problems requiring the
changes in this bill. SB 1275
will allow the existing programs to function sensibly and
fairly, and make sure that no
homes will be sold mistakenly if they can be saved from
foreclosure under existing
programs. No one benefits - not the servicer, not the
investors, not the homeowners, not the
community, and not the California economy - when a home that can
be saved through a
loan modification, is sold in foreclosure. Moreover, the bill
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would add transparency to the
process by requiring a servicer to send a letter detailing the
reasons for any denial of a
homeowner's request for a loan modification.
What does this bill do?
The following are major provisions of SB 1275 with an
explanation of their affects.
1)Uniform notice to delinquent borrowers: The first step in the
process created by SB 1275 is mandatory servicer notice to a
delinquent borrower (Meaning they are late with their mortgage
payment, but not yet in foreclosure) of their rights under the
foreclosure process. Additionally, this notice would inform
the borrower to find out more about loan modification options
by calling their servicer or visiting the Making Home
Affordable Website, and would provide some details regarding
the additional steps servicers must take before foreclosing.
Furthermore, a servicer must provide a letter to the borrower
that includes:
a) Description of loan modification options to the
borrower;
b) If loan a modification is not available, a statement
affirming that no modification is available;
c) A toll-free number that will give the borrower access to
live representative of the servicer; and,
d) The Internet Website address of the servicer that
discusses foreclosure mitigation options and requirements.
2)Borrower contact efforts: Existing law, as enacted by SB 1137
(Perata), Chapter 69, Statutes of 2008, contains a minimum
borrower contact requirements including the sending of a
letter via certified mail regarding HUD counseling and options
that may be available for the borrower. Additionally,
existing law provides for telephonic contact on the part of
the servicer to the borrower on separate days at separate
times. These provisions allow a servicer to proceed with
filing a NOD, even if borrower contact was not made, but the
servicer certifies that they fulfilled the contact
requirements but were unable to contact the borrower. SB
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1275 updates these requirements by specifying that if the
servicer participates in HAMP compliance with HAMP guidelines
on borrower solicitations are sufficient, so long as the
servicer provides the borrower with the notices outlined under
"Uniform notice?" above.
3)Loan modification pre-foreclosure filing qualification
process: This bill provides for a course of action where prior
to the initiation of the foreclosure process a borrower, if
eligible, would require a servicer to gather all of the
borrower's documents and determine if the borrower qualifies
for a loan modification. If the loan at issue is subject to
HAMP, a servicer would have to satisfy the HAMP requirements
for notice, standards and timelines prior to foreclosure.
4)Mandatory denial letter: If a borrower does not qualify for a
loan modification, or no loan modification exists for that
borrower, the servicer must provide a denial explanation
letter to the borrower that includes the reasons and evidence
for the modification denial.
5)Compliance declaration required to initiate foreclosure
process: In order to start the foreclosure process all
mortgage servicers must transmit a Declaration of Compliance
that the trustee files with the NOD. SB 1275 would codify
the following form that may be used to satisfy this
requirement:
DECLARATION OF COMPLIANCE
A. ? This loan is not subject to Cal. Civil Code Sec. 2923.5,
pursuant to (check all that apply):
-----------------------
|? Cal. Civil Code Sec. |
|2923.5(i). |
|-----------------------|
|? Cal. Civil Code Sec. |
|2923.5(j). |
-----------------------
If item (I)(A) is checked, no further information regarding
borrower solicitation efforts is required. If item (I)(A) is not
checked, complete item (I)(B).
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B. ? This loan is subject to Cal. Civil Code Sec. 2923.5, and
the mortgagee, beneficiary, or authorized agent has complied
with the requirements of Cal. Civil Code Sec. 2923.5 by
satisfying the applicable reasonable borrower solicitation
efforts described in Cal. Civil Code Sec. 2923.5(c). If checked,
insert the date that the reasonable borrower solicitation
efforts were completed here:
II. FORECLOSURE AVOIDANCE REVIEW
A. ? This loan is not subject to Cal. Civil Code Sec. 2923.73,
pursuant to (check all that apply):
------------------------
|? Cal. Civil Code Sec. |
|2923.73(e). |
|------------------------|
|? Cal. Civil Code Sec. |
|2923.73(f). |
|------------------------|
|? Cal. Civil Code Sec. |
|2923.73(g). |
| |
------------------------
If item (II)(A) is checked, no further information regarding
borrower solicitation efforts is required. If item (II)(A) is
not checked, complete item (II)(B).
B. ? This loan is subject to Cal. Civil Code Sec. 2923.73 and
(check only one):
-----------------------------------------------------------------
|? The borrower was evaluated for a loan modification but did not |
|qualify, and the mortgagee, beneficiary, or authorized agent |
|sent the borrower a denial explanation letter in compliance with |
|the requirements of Cal. Civil Code Sec. 2923.73(a)(2). |
|-----------------------------------------------------------------|
|? The borrower initiated an application for a loan modification |
|either verbally or in writing but did not submit all required |
|written application materials by the applicable deadline, and |
|the mortgagee, beneficiary, or authorized agent sent the |
|borrower a denial explanation letter in compliance with the |
|requirements of Cal. Civil Code Sec. 2923.73(a)(1). |
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|-----------------------------------------------------------------|
|? The borrower did not initiate an application for a loan |
|modification either verbally or in writing by the applicable |
|deadline. |
|-----------------------------------------------------------------|
|? The borrower was offered a HAMP trial period plan, but the |
|borrower did not accept the trial period plan or failed to |
|comply with the terms of the plan. |
|-----------------------------------------------------------------|
|? The borrower was offered a permanent loan modification, but |
|the borrower did not accept the modification offered. |
|-----------------------------------------------------------------|
|? The borrower was offered and accepted a permanent loan |
|modification, but the borrower failed to comply with the terms |
|of the modification. |
|-----------------------------------------------------------------|
|? The borrower communicated to the mortgagee, beneficiary, or |
|authorized agent that he or she is not interested in pursuing a |
|loan modification. |
| |
-----------------------------------------------------------------
6)Remedies: This bill provides for a private cause of action
under various circumstances only after the home is sold at a
foreclosure sale. Those circumstances and the penalties are
mentioned in "summary" section of this analysis under point
#11.
Foreclosure blues.
According to a report from the Office of the Inspector General
for the Troubled Asset Relief Program (SIGTARP) issued March 25,
2010, 2.8 million Americans received a foreclosure filing in
2009 and millions more are expected to receive a filing in 2010.
The first major legislative effort in California to tackle the
growing foreclosure crisis was the introduction of Senate Bill
1137 (Perata, Corbett, Machado) Chapter 69, Statutes of 2009.
The intent of SB 1137 was to ensure that servicers contact
borrowers prior to the first filing of the foreclosure process,
at least 30 days prior to filing a NOD, servicers must either
make contact to borrowers or satisfy due diligence requirements.
Contact with the borrower must be in person or by telephone "in
order to assess the borrower's financial situation and explore
options for the borrower to avoid foreclosure." The borrower
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must be advised that he or she has the right to request a
subsequent meeting, and if requested, the meeting must be
scheduled to occur within 14 days. The borrower must be provided
with the toll-free telephone number made available by the United
States Department of Housing and Urban Development to find a
HUD-certified housing counseling agency. Servicers could then
file a NOD if, with the filing, they certify that they have made
efforts to contact the borrower. Early, after the passage of SB
1137 the filing of NODs dropped significantly for a few months,
but eventually climbed back up as servicers started to
understand the steps needed for compliance. SB 1275, the bill
under consideration amends the sections imposed by SB 1137.
On February 20, 2009 the Governor signed the California
Foreclosure Prevention Act (CFPA) as an urgency statute.
Implementation of the CFPA occurred 90 days after the signing of
the bill and subsequent to California's three mortgage
regulators (DFI, DOC and DRE) drafting emergency regulations,
culminating on June 1, 2009. The CFPA modified the foreclosure
process by providing for a delay of 90-days to give borrowers an
opportunity to work with their servicers on a loan modification.
However, a 90-day delay in foreclosure proceedings does not
apply in those cases where a mortgage loan servicer has received
an exemption based on the existence of a comprehensive loan
modification program. In addition to the specific
characteristics a comprehensive program as outlined in the
legislation, HAMP was deemed sufficient to receive an exemption
from the moratorium. The majority of mortgage loan servicers
operating in the state have received an exemption` from the
90-day foreclosure moratorium (More information on those who
have received exemptions can be found at
http://www.corp.ca.gov/FSD/CFP/default.asp ). The CFPA does not
require an individual to receive a modification, only that a
servicer has a program in place.
On February 18th, 2009, President Obama announced a
multi-pronged approach to deal with the foreclosure crisis
through the use of mortgage refinancing and mortgage
modification.
The Making Home Affordable Program (MHAP) is part of the Obama
Administration's broad, comprehensive strategy to get the
economy and the housing market back on track. MHAP offers two
different potential solutions for borrowers: (1) refinancing
mortgage loans, through the Home Affordable Refinance Program
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(HARP), and (2) modifying mortgage loans, through HAMP. HAMP
is the tip of the spear in the government's attempt to mitigate
foreclosures.
How does HAMP work? In order to be eligible for HAMP, the
borrower must be in default (60 or more days late) or be at risk
of imminent default. The property must be owner-occupied and
have a maximum unpaid principal balance of $729,750 and the
mortgage must have been originated by January 1, 2009. Once the
mortgage meets the criteria the servicer undertakes a net
present value test (NPV) to determine whether modification,
foreclosure, or foreclosure alternatives are in the best
interest of the mortgage holder. If the model generates a
positive value for modification, meaning that loss to the owner
of the mortgage would be less than foreclosure then HAMP
participating servicers are required to offer a modification so
long as modification is not prohibited by investors. Once the
aforementioned criteria are met the servicer follows HAMP's
"waterfall" formula in order to design a modification that will
result in a front end (meaning costs of housing, property taxes,
property insurance and HOA dues) debt to income (DTI) ration of
31%. The "waterfall" is a series of steps that go in order
until the DTI is close to 31% as possible. The following are
the "waterfall" steps:
1)Capitalize all outstanding interest, escrow advances and third
party fees, and waive late fees for borrowers who meet trial
modification guidelines.
2)Reduce mortgage interest rate in increments of .125% with a
floor of 2%.
3)Extend term of mortgage up to 480 months (40 years) from the
modification date.
4)Provide non-interest bearing and non-amortizing principal
forbearance.
In order to encourage participation in the program, Treasury
pays incentives using Troubled Asset Relief Program (TARP)
funds. If a servicer makes modification to the get the
homeowner down to a 38% DTI, Treasury will provide 50% of the
costs of the modification to get the loan modified to the target
31% DTI. Payments are made only after the modification becomes
permanent and last for up to five years, or until the loan is
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paid off, whichever is earlier. HAMP also includes the
following incentive programs:
1)Servicers will receive an up-front incentive payment of $1000
for each permanent modification. They will also receive pay
for success payments as the borrower stays in the program, of
up to $1000 each year for up to three years.
2)Borrowers are eligible to receive a pay-for-performance
success payment that goes straight toward reducing the
principle balance on the mortgage loan of up to $1000 per
monthly payment for up to five years.
3)One-time bonus incentive payments of $1,500 to investors and
$500 to servicers will be provided for modifications made
while the borrower is still current on mortgage payments, but
in danger of imminent default.
Principle forgiveness is not required under HAMP, however recent
changes to HAMP address this issue.
A major change announced in April of 2010 is the requirement of
income verification at the time of starting the trial
modification. Prior to this change, servicers were allowed to
use undocumented income declarations from the borrower to make a
determination for a trial modification. During the three month
trial period servicers attempt to verify income through proper
documentation. This process may have been a contributing factor
to the low permanent loan modification numbers thus far.
A report, "Factors Affecting Implementation of the Home
Affordable Modification Program", issued March 25, 2010 by
SIGTARP reveals several obstacles and difficulties that plague
HAMP even a year after its inception. Since HAMP started, it
has undergone 11 program changes and updated directives and an
additional 9 changes to its NPV model. The following are a
few of the issues identified by SIGTARP:
1)Five of the HAMP servicers visited by SIGTARP for the audit
covered in the report, mentioned that they lacked guidance on
identifying and determining eligibility for borrowers at
imminent risk of default on privately owned mortgages
(Non-GSE).
2)Some servicers have told borrowers that they must be in
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default to be considered for a modification even though HAMP
provides help for those facing default.
3)Servicers are still undergoing challenges in maintaining and
training staff to handle modifications.
4)Marketing of the availability of HAMP as an option has been
limited by a lack of guidance from Treasury and servicer
specific delays.
5)Treasury informed SIGTARP that potentially only 50-66% of
estimated three million trial modifications will convert to
permanent status.
In testimony before the U.S. House Committee on Oversight and
Government Reform (March 25, 2010), the Acting Comptroller
General of the United States, Gene L. Dodaro testified to the
difficulties faced by the HAMP program based on findings from
the Government Accountability Office (GAO). The following are
some of the HAMP issues highlighted by the GAO:
1)Treasury has not year finalized remedies or penalties for
servicers who are not in compliance with HAMP guidelines.
2)Each major program change has required servicers to update
computer systems, adjust business practices and retrain
servicing staff.
3)Ten servicers contacted by GAO had seven different sets of
criteria for determining whether borrowers who were not yet 60
days delinquent qualified for HAMP.
4)Although Treasury guidelines state that servicers must provide
borrowers with information designed to help them understand
the modification process and must respond to HAMP inquires in
a timely manner, the HAMP servicers contacted by GAO varied
widely in the timeliness and content of their initial
communications with borrows about HAMP. Some servicers
contacted borrowers about HAMP as soon as payment was 30 day
delinquent, and other servicers did not inform borrowers until
they were at least 60 days delinquent.
5)Treasury has not developed standards to evaluate servicers'
performance in communicating with borrowers or penalties for
servicers that do not meet Treasury's requirements.
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6)Servicers do not have a systematic process for tracking HAMP
complaints.
The GAO also reported that the numerous program changes to HAMP
and often, a lack of clarity on certain provisions have made the
program less effective than it could be.
Servicer guidance on the implementation of HAMP is governed by
Supplemental Directives issued by the Treasury Department.
These directives can be found at
https://www.hmpadmin.com/portal/programs/directives.html .
A change to HAMP, announced on March 26th, 2010 changes intended
to address unemployed borrowers, negative equity and the
concurrent pursuant of a foreclosure while a loan is being
reviewed for modification. According the limited details
released, the new enhancements will require servicers to provide
3-6 months of temporary forbearance for eligible unemployed
borrowers, after which they will be evaluated for a HAMP
modification. Second, servicers will be encouraged through
various incentives to consider principle reductions for loans
that are over 115% of current value of the property. Finally,
guidance will be forthcoming on the issue of borrowers who
continue to face the foreclosure process while under evaluation
for a HAMP modification. These guidelines will provide
clarification on protections for borrowers from foreclosure
actions who are under consideration for a modification.
HAMP is not the only foreclosure prevention effort. Several
large servers with the most market share also have proprietary
modification programs in place for borrowers who may not qualify
for HAMP. Proprietary mortgage modification programs vary by
servicer and range in ways in which they attempt to modify
loans. While HAMP has a formulaic structure used to accomplish
a modification, servicers can use their own judgment and
flexibility to perform proprietary loan modifications. HOPE
NOW a coalition of servicers, counselors and investors
collections and releases data specific to non-HAMP
modifications. HOPE NOW released data regarding January loan
modifications and found that proprietary modifications outpaced
HAMP modifications 2-1 and that 74% of modifications conducted
in January involved reduction of principle and interest.
Arguments in Support :
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The Center for Responsible Lending writes in support:
While the foreclosure crisis rages on in California, too
many California families are
losing their homes when they could have and should have
qualified for a mortgage
modification that would have saved their home. The stories
about servicers mishandling
borrower applications, failing to properly communicate with
borrowers, and worst of all
selling a borrower's home when the borrower is still being
considered for a loan
modification or is paying on a trial modification plan, are
seemingly endless. These
problems are not sporadic, but systemic.
Indeed, the federal government has recognized the systemic
nature of the problem, and
issued new rules requiring that servicers engage in specific
borrower outreach loans
covered by HAMP, and, if a borrower applies for a loan
modification, fully evaluate
whether the borrower qualifies before filing a Notice of
Default.
The bill authors and proponents have engaged in significant
discussions with industry
representatives and committee consultants. Substantial
amendments have been made - and
continue to do so - to address concerns, remove potential
ambiguities, clarify the
intent of the bill (and what is not intended), and to clarify
the remedy provisions. More
specifically, the remedy provisions in the bill have been
significantly amended to narrow
their scope, to more precisely set forth and define the major
violations that trigger the
remedy, and to clarify that technical errors or listing a wrong
date do not trigger any
remedy.
It is no secret that despite best efforts, the servicers'
ability or capacity to address the
growing demand for loan modifications has continued to be
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problematic. Stories abound of
borrowers put on hold for hours and then disconnected, lost
paperwork, incorrect or lack
of communication, failure to explain to borrowers why they were
denied a loan
modification, and foreclosure sales despite the lack of a loan
modification review or
where a borrower is making trial plan payments?
?Despite the industry's admissions that they are failing
borrowers, they continue to oppose
allowing borrowers to have an avenue of recourse for those
failures. Rod Brown, president
and CEO of the California Bankers Association suggests that
borrowers "should be a combination of tenacious and patient
to get through the process." This advice
rings hollow, however, when, under the current system, the clock
is quickly ticking towards
foreclosure, regardless of the borrower's patience and tenacity,
and the borrower has no individual remedy available when
the banks fail and borrowers
unnecessarily lose their home because of it. This needs to
change.
Neither California law nor federal guidelines under HAMP
provide recourse for borrowers who
wrongfully lose their homes due to a servicer's errors or
failure to comply with legal or program requirements. Under
current law, homeowners are the only ones who
suffer the consequences when a servicer breaks the rules or
makes a mistake, and the consequences can be devastating. If
notwithstanding the checks and requirements
of SB 1275, a servicer fails to follow the rules, and a borrower
wrongfully loses her
home, SB 1275 provides a sorely needed remedy, albeit a limited
one?
?Only through a private right of action - even limited as
it is - can families? have a
chance to take the kind of quick and direct action necessary to
challenge an improper
eviction, and potentially secure the kind of sustainable loan
modification that they would have
received in the first place had their servicer played by the
rules. Neither regulator
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enforcement nor public prosecution can afford this kind of
redress to harmed
California families.
Arguments in Opposition :
A coalition of 11 industry groups writes in opposition:
While we endeavor to understand the intricacies of this
measure and its impact, the bill
exemplifies an overly complicated formula that will be layered
on to the recently enacted
borrower outreach efforts to further frustrate and prolong
existing foreclosure and loss
mitigation efforts. The measure will result in adding to the
complexity of navigating
these processes for loan servicers creating a series of
procedural traps that will lead to ever
increasing litigation.
SB 1275 fails to narrowly target at-risk borrowers and
applies broadly including the
increasing population of borrowers that strategically default.
In these circumstances, the borrower
has the ability to pay their mortgage but because their property
has lost value, the
borrower ceases payments and uses the existing foreclosure
process and its timeline as a
means to build savings. It is unknown by the measure and its
proponents would extend
aid to these borrowers and divert resources from borrowers who
truly wish to avoid
foreclosure.
The measure fails to require borrowers to tender any
portion of their monthly mortgage
payment or arrears as a good faith effort demonstrating their
desire to remain in the
property and will result in borrowers seeking to take advantage
of the convoluted process SB
1275 creates. For those borrowers who strategically default and
have no intent to
remain in their homes, SB 1275 will be used as a delay and a
leveraging tactic?.
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?SB 1275 grants a private right of action and awards
damages to borrowers irrespective of
whether they have experienced real harm. The remedies extended
to borrowers under the measure are not narrowly focused on
circumstances where the lender has ignored
or failed to respond to the borrower but grants remedies for
failing to adequately complete
documents in the very precise manner proscribed by the bill.
SB 1275 amends existing law Civil Code Section 2923.5 which
has been the subject of several legal claims and class action
litigation. The measure inappropriately intervenes in pending
litigation and attempts to change outcomes associated with those
cases?
?Proponents have attempted to codify President Obama's and
the United State Treasury Department's Home
Affordable Modification Program (HAMP) but admits that their
codification exceeds HAMP requirements. Since HAMP is a
nationwide program, California-specific
variations to the program will result in compliance hurdles and
a detrimental distraction from our efforts to assist our
customers. HAMP has been successful showing
improvements in the number of trial and permanent loan
modifications month-to-month. Notwithstanding, federal data
indicates that unemployment and
underemployment are the predominant reason why borrows seek a
loan modification?
Given recent and continual 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?
Issues for Discussion .
The following are issues, questions and comments that the
author's should consider.
1)This bill requires a denial letter to be sent via certified
mail. Should other mail options be allowed that are quicker
and more likely to be answered by the borrower? The U.S.
Postal Service has recently considered eliminating Saturday
delivery which causes needless delay in mailing important
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notices. Furthermore, under the remedies provision no
allocation is provided if the lender has proof that they sent
the required documentation and letters but the borrower claims
they did not. The authors should consider clarifying whether
proof of sending a denial letter etc. should be considered
when examining equitable relief.
2)Jumbo loans. Among the conditions effecting eligibility for
HAMP is a requirement that the unpaid principle balance on the
property may not exceed $729,750. SB 1275 does not contain
such a test, so it may serve in the interest of public policy
and consistency to include this test in the bill.
3)The bill requires that a borrower receive a notice, to be
created by a state government entity, regarding all of the
rights and remedies avalible to a borrower facing
foreclosures. This form once printed in English (SB 1275
requires translation into other non-English languages) in 12
pt font as required is a page and half. Committee staff is
concerned that the form is so long as to be rendered useless.
The authors and sponsors should consider revisiting this form
and determine what is the most vital information that will
provide benefit to the borrower without creating greater
confusion.
4)Should language be added, either via legislative intent, or
under the remedies, to clarify that the bill is not intended
to convey a substantive right to a loan modification?
5)Under this bill a borrower who has already received the
required disclosures and documentation, and has been approved
for a modification, could be afforded the same rights all over
again if they subsequently default. Committee staff
recommends clarifying language to ensure that borrowers who
have already received the required documents and
considerations are not afforded a new round of consideration
if they default on a loan modification.
6)Under the provisions requiring denial notice, it requires
various information that must be included in the letter. In
this provision (Page 14, starting at line 20) the language
"including, but no limited to" exists, implying that
potentially some other disclosure should be required that are
not listed. Considering that a failure to provide a complete
notice is subject to the penalty provisions, subsequent to
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foreclosure sale, it may provide more clarity to change the
minimum notice requires to say "Information explaining the
reason the borrower did not qualify for a loan modification ,
including but not limited to , which at a minimum shall include
the following:"
7)The private remedies available to the borrower are only
available once the foreclosure sale has occurred and the
borrower is out of their home. This may provide cold comfort
to the borrower who is now without a home. The author's
should consider adding a cure provision that would allow the
servicer to avoid the private right of action if the
foreclosure sale is reversed and the borrower, who qualified
for a modification, is provided that modification. This of
course is a substantive issue and will require further
discussion. Committee staff offers this only as a point of
discuss and potential addition to the bill.
8)Should more description be provided for those items that are
considered de minimis and technical in nature.
REGISTERED SUPPORT / OPPOSITION :
Support
Affordable Housing Services
California Alliance for Retired Americans
California Capital Financial Development Corporation
California Coalition for Rural Housing
California Human Development Corporation
California Labor Federation
California Reinvestment Coalition (CRC)
California Rural Legal Assistance Foundation
Causa Justa :: Just Cause
Center for Responsible Lending
Community Financial Resources
Community HousingWorks, San Diego
Consumer Federation of California
Consumer Legal Services in East Palo Alto
Council on Aging Silicon Valley
East LA Community Corporation
East Palo Alto Council of Tenants Education Fund
Housing and Economic Rights Advocates (HERA)
Inland Fair Housing and Mediation Board
JOLT, Coalition for Responsible Investing
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Law Foundation of Silicon Valley
Neighborhood Housing Services of Orange County
Novadebt
Oakland Community Organizations
Opportunity Fund
Orange County Fair Housing Council, Inc.
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
Vallejo Neighborhood Housing Services, Inc.
Vermont Slauson Economic Development Corp.
Western Center on Law and Poverty
Yolo Mutual Housing Association
Opposition
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
California Mortgage Bankers Association
Securities Industry and Financial Markets Association
United Trustees Association
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081