BILL ANALYSIS
SB 1275
Page 1
REPLACE - 08/19/10 Changes per consultant.
SENATE THIRD READING
SB 1275 (Leno and Steinberg)
As Amended August 16, 2010
Majority vote
SENATE VOTE :21-12
BANKING & FINANCE 7-4 JUDICIARY 7-3
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|Ayes:|Eng, Evans, Fong, |Ayes:|Feuer, Brownley, Evans, |
| |Fuentes, Nava, Ruskin, | |Huffman, Jones, Monning, |
| |Torres | |Saldana |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|Niello, Gaines, Harkey, |Nays:|Tran, Hagman, Knight |
| |Tran | | |
| | | | |
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APPROPRIATIONS 9-7
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|Ayes:|Fuentes, Bradford, |
| |Huffman, Coto, Davis, De |
| |Leon, Gatto, Skinner, |
| |Torlakson |
| | |
|-----+--------------------------|
|Nays:|Conway, Harkey, Miller, |
| |Nielsen, Norby, Solorio, |
| |Torrico |
| | |
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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 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:
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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; and,
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
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.
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3)Requires that when the Notice of Default (NOD) is recorded,
the servicer or authorized agent must additionally record a
Declaration of Compliance (DC). The DC 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 DC 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,
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, 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 list 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
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modification decision;
b) The date on which a decision was made regarding the
borrower's application;
c) 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,
d) Information explaining the reasons the borrower did not
qualify for a loan modification, including, but not limited
to, the following:
i) An description 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
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 lists any supplemental documentation or information
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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)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 still before a court.
11)Provides the following remedies to borrowers whose servicer
records a notice of default without completing a loan
modification application and other duties as prescribed. 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
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$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, as well as,
seek an injunction to compel the foreclosing institution to
comply with loan modification application and notice
requirements, at least 30 days before issuing a new notice
of 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.
e) Would not authorize a cause of action for any failure or
error that is technical or de minimis in nature.
12)Specifies that a servicer shall have no civil liability, if
prior to legal action by the borrower, and no later than 180
days after the trustee sale:
a) The servicer rescinds the foreclosure sale prior to
filing unlawful detainer against the borrower; and,
b) Within three days of the rescission, send the borrower a
written communication informing them of the rescission and
providing information the steps the servicer will teak
prior to filing a new notice of sale.
13)Provides that the servicer may not file an unlawful detainer
action against the borrower until the borrower is informed of
the steps required for the servicer to file the action and
that the servicer has completed all of the required loan
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modification steps.
14)Exempts credit unions from the provisions required, and
recasts current law requirements regarding borrower notice and
contact prior to filing an NOD to a new section for credit
unions.
15)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
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sends a first class letter that includes the toll-free
number available for the borrower to find a HUD-certified
housing counseling agency; and,
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
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reasonably foreseeable; or,
b) Anticipated recovery under the loan modification or
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 Assembly Appropriations
Committee, annual costs in the range of $150,000 to administer
and enforce new requirements imposed by this bill. The
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Department of Corporations estimates it would incur annual costs
of $112,000 for an additional examiner, while the DFI indicates
it would incur unknown, probably modest workload-related costs
related to increased questions and complaints under the new law.
COMMENTS :
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
would add transparency to the process by requiring a servicer to
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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
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
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"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 a
form that may be used to satisfy this requirement.
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.
Analysis Prepared by : Mark Farouk / B. & F. / (916) 319-3081
FN: 0006366