BILL ANALYSIS �
AB 1602
Page 1
Date of Hearing: April 16, 2012
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Mike Eng, Chair
AB 1602 (Eng & Feuer) - As Amended: April 9, 2012
SUBJECT : Mortgages and deeds of trust: foreclosure.
SUMMARY : Establishes foreclosure guidelines and procedures for
mortgage loan servicers, and provides a framework for borrowers
seeking a modification of their mortgage loan. Specifically,
this bill :
1)Requires that a notice of default (NOD) must include a
declaration of the following (Section 1, all further
references in this summary refer to the section in which these
provisions appear in the bill):
a) The borrower is not a service member, or dependent of a
service member who is entitled to the benefits of the
Servicemembers Civil Relief Act (SCRA);
b) The mortgagee, beneficiary, or authorized agent is in
possession of the note and evidence of its right to
foreclose including documentation of any assignments and
endorsements of the mortgage note or deed of trust. If
proof is not attached, then a separate declaration is
required signed by an individual having personal knowledge
of the facts stated within the declaration;
c) Facts sufficient to demonstrate the foreclosing parties
right to enforce the note;
d) A statement that the person is unable obtain possession
of the note, if that is the case; and,
e) A description of the terms of the note and any riders
attached thereto, including the date of execution, parties
to the note, amount of the loan, term of the loan and
initial interest rate.
2)Provides for the following borrower notices:
a) At least 14 days prior to the recordation of a NOD, a
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mortgagee, beneficiary or authorized agent must provide a
written notice containing the following (Section 1):
i) A statement that provides the facts supporting the
right of the mortgagee, beneficiary or authorized agent
to foreclose;
ii) Notification that the borrower may receive, upon
written request:
(1) Copy of the most recent payment history;
(2) Copy of the borrower's loan note, and copies
of any assignments of the note and the name of the
investor that holds the borrower's loan note;
iii) An itemized account summary that includes:
(1) Total amount needed to bring the account
current;
(2) Date through which the loan obligation is paid
current;
(3) Date of last full payment;
(4) The current interest rate in effect for the
loan;
(5) The date on which the interest rate may adjust
or reset;
(6) The amount of any prepayment penalties;
(7) Description of any late payment fees.
(8) Contact information for any assigned single
point of contact;
(9) Statement concerning the borrower's rights if
they are a servicemember;
(10) A statement outlining the loss mitigation
efforts that have already been
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undertaken; and
(11) The toll-free telephone number for the Office
of Homeowner Protection (OHP).
b) Within five calendar days after recordation of a NOD,
the borrower shall receive written communication of the
following (Section 5):
i) The borrower can still be evaluated for alternatives
to foreclosure;
ii) Whether an application is required to be submitted
in order for the borrower to be considered for a
foreclosure prevention alternative;
iii) The process and steps by which a borrower may obtain
an application for a loan modification or any foreclosure
prevention alternative.
3)Provides that if a borrower has submitted an application for a
loan modification within 120 days of delinquency, a NOD shall
not be recorded while the loan modification application is
pending (Section 2). Under this scenario, the NOD may not be
filed until either:
a) The borrower has been determined not to be eligible for
a loan modification;
b) The borrower does not accept an offered modification; or
c) The borrower accepts the modification but later breaches
the modification agreement.
4)Specifies, in the situation in #3, that if the loan
modification is denied then the NOD may not be recorded until
30 days after the borrower is notified of the denial, or 15
days after the denial of an appeal.
5)Prohibits the recordation of a notice of sale (NOS) if a
borrower has submitted a loan modification application within
60 days of the recording of a NOD, and the loan modification
application is pending (Section 6). The NOS may not be
recorded until one of the following occur:
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a) It has been determined that the borrower is not eligible
for a loan modification; or
b) The borrower does not accept an offered modification; or
c) The borrower accepts the modification but later breaches
the modification agreement.
6)Specifies, in the situation in #5, that if the loan
modification is denied then the NOS may not be recorded until
30 days after the borrower is notified in writing of the
denial or if the denial is appealed, then 15 days after the
appeal.
7)Provides when a borrower submits an application for a loan
modification less than 15 days prior to the recordation of a
NOS, the NOS shall not be recorded until the borrower is
evaluated for a loan modification (Section 7). The NOS shall
not be recorded until one of the following occur:
a) It has been determined the borrower is not eligible for
a loan modification;
b) The borrower does not accept an offered modification; or
c) The borrower accepts the modification but later breaches
the modification agreement.
8)States that the requirement to consider a loan modification
application, and to delay the recording of a NOS shall not
apply if the servicer has previously denied the borrower for
modification and the new application does not reflect a
material change in circumstances.
9)Requires that when a borrower submits a loan modification
application or any document in connection with a loan
modification application the mortgagee, trustee, beneficiary
or authorized agent shall do the following (Section 8):
a) Provide written acknowledgement of the receipt of the
documentation within three business days of receipt. This
initial acknowledgement shall include a description of the
loan modification process, including deadlines and the
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toll-free number of the OHP.
b) Notify the borrower of any deficiency in the borrower's
loan modification application no later than five business
days after receipt.
10)Provides that if a loan modification application is denied,
the borrower shall have 30 days from the denial to appeal the
denial (Section 8).
11)Following the denial of a loan modification, the servicer
must send a denial notice to the borrower that includes
specified information.
12)Notwithstanding the previous provisions, prohibits the
recording of a NOS under the following circumstances (Section
9):
a) The borrower is in compliance with a trial or permanent
loan modification.
b) A short sale or deed-in-lieu of foreclosure has been
approved by all parties.
13)States that if a borrower has accepted a loan modification
offer, then the servicer shall provide a copy of the fully
executed loan modification agreement following the receipt of
the executed copy from the borrower. If the modification
offer was not made in writing, then the servicer shall provide
a summary of its terms as soon as possible after approval of
the modification (Section 9).
14)If a permanent loan modification has been executed the
servicer shall record a recision of the NOD (Section 9).
15)Requires servicers to make publicly available information on
their qualification processes, all required documentation and
information necessary for a complete loan modification
application and key eligibility factors for all proprietary
loan modifications (Section 9).
16)Requires servicers to track outcomes and maintain records
regarding characteristics of proprietary loan modifications.
Additionally, requires the posting of modification
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"waterfalls" eligibility criteria, and modification terms on
the servicers website (Section 9).
17)Prohibits a servicer from charging any application,
processing or other fee related to a proprietary loan
modification, as well as, any late fees while a loan
modification is under consideration (Section 9).
18)Provides for remedies if a servicer fails to comply with
following requirements(Section 10):
a) Section 2923.5-Pre-NOD due diligence and contact
requirements;
b) Section 2923.6-if borrower has submitted loan
modification application within 120 days after delinquency
and the notice has not be recorded then the servicer may
not record the NOD until specific conditions have been met.
c) Section 2924- Requirements for the proper filing of NOD.
d) 2924.9-Borrower notice within 5 days after filing of
NOD.
e) 2924.10- if borrower has submitted loan modification
application within 60 days after filing of NOD then the
servicer may not record the NOS until specific conditions
have been met.
f) 2924.11- if borrower has submitted a loan modification
application within 15 days before trustee sale, then the
sale may not go forward until specific conditions have been
met.
g) 2924.12- Requires written acknowledgement of the loan
modification and associated and subsequent documents.
Additionally, requires that a loan modification denial
notice must include specified information.
h) 2924.13-Provides prohibitions on when a NOS may be
filed.
i) 2924f-Specifes the conditions and terms of trustee
sales, including notice requirements.
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19)Provides for the following remedies:
a) A borrower may seek an injunction to prevent a trustee
sale if the borrower reasonably believes that the
requirements in #18a-I have not been met. The injunction
would remain in place until the provisions are complied
with.
b) If a trustee sale occurs and the borrower reasonably
believes that the mortgagee, trustee, beneficiary, or
authorized agent failed to comply with provisions in
#18a-i.
c) A court may award a borrower the greater of treble
damages or statutory damages of $50,000, plus attorney's
fees and costs if it finds a violation of the specific
provisions was intentional or reckless or resulted from
willful misconduct.
20)Clarifies that a borrower may not obtain relief for
violations that are technical or de minimis in a nature such
that it did not impact the borrower's ability to pursue
alternatives to foreclosure.
21)A violation shall not affect the validity of a sale to a bona
fide purchaser and any of its encumbrances.
22)Provides that a signatory to the Multi-State Mortgage
Settlement may use compliance with the consent judgment, while
it's in effect, as an affirmative defense to any liability for
violation of the provisions.
23)Establishes the OHP which will have the following
responsibilities (Section 12):
a) Responding to inquiries and complaints from individuals
regarding provisions of this bill;
b) Attempting to seek servicer compliance with the
provisions of this bill;
c) Maintain an internet website to receive inquires and
complaints;
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d) Provide an annual report to the Legislature, summarizing
its activities;
24)Specifies that funding for the OHP shall come from payments
made to the Attorney General via the Special Deposit Fund
created via the Multi-State Mortgage Settlement.
25)Requires that a borrower must be provided written notice
within five calendar days after the postponement of a
foreclosure sale and that the notice shall include the new
sale date and time.
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 NOS 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 NOS, 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 U.S. Department of Housing
and Urban Development (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,
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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,
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].
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9)Makes 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
workout plan exceeds the anticipated recovery through
foreclosure on a net present value basis. �Section 2923.6].
10)Requires that upon posting of a NOS, 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].
11)Provides that a NOS 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]
12)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 NOS. �Section
2924g]
FISCAL EFFECT : Unknown
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COMMENTS :
This bill would codify provisions of the National Mortgage
Settlement approved by the United States District Court of the
District of Columbia on April 5, 2012, for mortgage loan
servicers servicing mortgage loans in California.
On April 6th, a federal judge signed-off on the $25-billion
foreclosure settlement, first announced in February of 2012,
between banks (Citi, Wells Fargo, Bank of America, Chase and
Ally), federal agencies, and the state attorneys general from 49
states and the District of Columbia. The investigation began in
October of 2010 as media stories highlighted widespread
allegations regarding the use of "robo-signed" documents used in
foreclosure proceedings around the country. The attorneys
general formed working groups to investigate the widespread
allegations, however, further investigation led to a larger
discussion with the five largest mortgage loan servicers
regarding various facets of the foreclosure and loan
modification process. While conducting their investigation the
attorneys general identified deceptive practices regarding loan
modifications, foreclosures occurring due to the servicer's
failure to properly process paperwork, and the use of incomplete
paperwork to process foreclosures in both judicial and
non-judicial foreclosure cases.
The complaint filed by the attorneys general, provided a
detailed list of allegations concerning several key areas
related to foreclosure and servicing practices. The specific
allegations include:
Unfair, deceptive, and unlawful servicing process;
Unfair, deceptive, and unlawful loan modification and
loss mitigation processes;
Wrongful conduct related to foreclosures;
Unfair and deceptive origination practices; and
Violation of the Servicemembers Civil Relief Act.
In resolving the aforementioned claims, the settlement provides
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for relief for borrowers in the form of modifications, mortgage
loan servicing reforms, increased compliance monitoring and
enforcement.
The settlement requires a total of $17 billion to be allocated
to facilitate loan modifications to borrowers with the intent
and ability to stay in their homes. Of the $17 billion, 60%
must be allocated to principal reduction modifications.
Additionally, banks must offer refinance programs through the
use of $3 billion to assist borrowers with negative equity whom
otherwise would be unable to refinance. Additional settlement
monies are dedicated to borrowers who were wrongfully foreclosed
on after January 1, 2008 (Aprox $1.5 billion in relief), and
another $2.5 billion to the states for foreclosure relief and
housing programs.
The settlement also requires major changes concerning servicing
of the five banks party to the settlement. These changes
include:
Information in foreclosure affidavits must be personally
reviewed and based on competent evidence.
Holders of loans and their legal standing to foreclose
must be documented and disclosed to borrowers.
Borrowers must be sent a pre-foreclosure notice that
will include a summary of loss mitigation options offered,
an account summary, description of facts supporting
lender's right to foreclose, and a notice that the borrower
may request a copy of the loan note and the identity of the
investor holding the loan.
Borrowers must be thoroughly evaluated for all available
loss mitigation options before foreclosure referral, and
banks must act on loss mitigation applications before
referring loans to foreclosure; i.e. "dual tracking" will
be restricted.
Denials of loss mitigation relief must be automatically
reviewed, with a right to appeal for borrowers.
Banks must implement procedures to ensure accuracy of
accounts and default fees, including regular audits,
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detailed monthly billing statements and enhanced billing
dispute rights for borrowers.
Banks are required to adopt procedures to oversee
foreclosure firms, trustees and other agents.
Banks will have specific loss mitigation obligations,
including customer outreach and communications, time lines
to respond to loss mitigation applications, and e-portals
for borrowers to keep informed of loan modification status.
Banks are required to designate an employee as a
continuing single point of contact to assist borrowers
seeking loss mitigation assistance.
Military personnel who are covered by the SCRA will have
enhanced protections.
Banks must maintain adequate trained staff to handle the
demand for loss mitigation relief.
Application and qualification information for
proprietary loan modifications must be publicly available.
Servicers are required to expedite and facilitate short
sales of distressed properties.
Restrictions are imposed on default fees, late fees,
third-party fees, and force-placed insurance.
For a detailed look at the complaint and resulting settlement, a
full list of documents can be found at
http://www.nationalmortgagesettlement.com/ .
Background.
Foreclosures blight neighborhoods, put financial pressure on
families and drive down local real estate values. And consumers,
made more cautious by a crippled housing market, spend less
freely, curbing the economy's growth. Distressed borrowers are
certainly among the hardest hit. But as communities across the
country know all too well, families that lose their homes are
not the only victims of foreclosures. Even homeowners who have
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never missed a payment on their loans have suffered as
"spillover" costs extend throughout the neighborhood and the
larger community. By some estimates the foreclosure crisis will
strip neighboring homeowners of $1.9 trillion in equity as
foreclosures drain value from homes located near foreclosed
properties by 2012. As a result of depressed home values,
nearly one out of every four borrowers is "underwater," owing
more than the home is worth. Meanwhile, state and local
governments continue to be hit hard by declining tax revenues
coupled with increased demand for social services. In fact, the
Urban Institute estimates that a single foreclosure costs
$79,443 after aggregating the costs borne by financial
institutions, investors, the homeowner, their neighbors, and
local governments. However, even this number may understate the
true cost, since it does not reflect the impact of the
foreclosure epidemic on the nation's economy or the disparate
impact on lower-income and minority communities.
When a borrower is in danger of defaulting, a commonsense
approach under a traditional mortgage would be for the lender
and borrower to mutually agree to modify the terms of the loan,
or for the bank to agree to allow the borrower to sell the home
in a "short sale" for an amount that equals or approximates the
outstanding balance on the loan to save the lender the time and
costs of foreclosure. Moreover, in a declining real estate
market, the amount obtained by the lender in a foreclosure sale
may be less than the amount owed on the loan.
Despite the apparent mutual interest of loan holders and
borrowers, many distressed homeowners report obstacles when
trying to obtain a loan modification or short-sale approval.
(See e.g. "Loan Modifications Elude Local Homeowners,"
Sacramento Bee, January 17, 2011.) Part of the answer may be
that the mortgage industry has become more complex. Rarely does
a modern mortgage involve only two players, a lender and a
borrower, with a common interest in avoiding default and the
capacity to communicate directly. Instead, the modern mortgage
industry typically involves at least four players: (1) the
original lender (or originator); (2) a loan servicer (who may or
may not be affiliated with the originator) who collects from the
borrower and remits to the mortgage holder; (3) an investor who
has purchased an interest in the mortgage (or more likely an
interest in the stream of income from a pool of mortgages); and
(4) a borrower. Under this more complex arrangement, it is the
servicer - not the loan originator or the investor holding an
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interest in the mortgage - who collects payments and has the
power to either bring a foreclosure or approve a loan
modification or a short sale if the borrower fails to make
timely payments.
In some cases, difficulty obtaining investor approval is cited
as the primary obstacle. Critics contend, however, that
servicers' financial incentives are the true explanation.
Whatever the explanation, virtually all observers agree that
federal and state programs implemented to promote loan
modifications and short sales have, at best, failed to live up
to initial promises.
Some analysts and leading economists have cited a failure by
banks to provide loan modifications as a single reason that the
foreclosure crisis continues to drag on. Another obstacle to
loan modifications arises if borrowers have second liens, like
home equity loans, on their properties. These liens are often
held by lenders who are also servicers on the first mortgage.
They, too, have little interest in seeing any modification
because it would harm the value of their holdings and reduce
their income from fees. ("A Mortgage Nightmare's Happy Ending,"
New York Times (Dec. 25, 2010).)
Difficulties in achieving an equitable foreclosure and loan
modification process predate the multi-state settlement.
The nationwide mortgage settlement is not the beginning of this
story. Borrower frustration with the loan modification process
and their ability to communicate with their loan servicer dates
back to 2006-2007 as newspapers, magazines, blogs, and
television news broadcasts have all detailed borrower
difficulties concerning the loan modification and foreclosure
process. In 2010 the problems became highlighted due to reviews
of the various federal foreclosure relief programs.
A report released by the Congressional Oversight Panel in
December 2010 reviewing these programs, found
Although Treasury oversees servicers and encourages
compliance, there is little real accountability for
servicers that fail to adhere to program standards, lose
borrower submitted paperwork, unnecessarily delay the
process, or otherwise don't make modifications...The Panel
has previously noted that servicers need to face
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'meaningful monetary penalties' for noncompliance with
servicer participation agreements and denial of
modification for an unexplained reason, a breach of their
contractual obligations under HAMP servicer participation
agreements. However, Treasury has seemed reluctant to do
more than vaguely threaten the potential for clawbacks of
HAMP payments.
Then in April of 2011, Federal regulators (Office of Comptroller
of Currency, Office of Thrift Supervision, and Federal Reserve
System) issued enforcement orders against Ally Bank/GMAC, Aurora
Bank, Bank of America, Citibank, EverBank, HSBC, JPMChase,
MetLife, OneWest, PNC, Sovereign Bank, SunTrust, US Bank, and
Wells Fargo. These orders were based on a review conducted by
the regulators of the foreclosure policies and practices of
these servicers. In their report, Interagency Review of
Foreclosure Policies and Practices, April 2011 the federal
regulators found,
The reviews found critical weaknesses in servicers'
foreclosure governance processes, foreclosure document
preparation processes, and oversight and monitoring of
third-party vendors, including foreclosure attorneys. While
it is important to note that findings varied across
institutions, the weaknesses at each servicer, individually
or collectively, resulted in unsafe and unsound practices
and violations of applicable federal and state law and
requirements. The results elevated the agencies' concern
that widespread risks may be presented-to consumers,
communities, various market participants, and the overall
mortgage market. The servicers included in this review
represent more than two-thirds of the servicing market.
Thus, the agencies consider problems cited within this
report to have widespread consequences for the national
housing market and borrowers.
And,
Foreclosure governance processes of the servicers were
underdeveloped and insufficient to manage and control
operational, compliance, legal, and reputational risk
associated with an increasing volume of foreclosures.
Weaknesses included:
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inadequate policies, procedures, and
independent control infrastructure covering all
aspects of the foreclosure process;
inadequate monitoring and controls to
oversee foreclosure activities conducted on behalf
of servicers by external law firms or other
third-party vendors;
lack of sufficient audit trails to show
how information set out in the affidavits (amount of
indebtedness, fees, penalties, etc.) was linked to
the servicers' internal records at the time the
affidavits were executed;
inadequate quality control and audit
reviews to ensure compliance with legal
requirements, policies and procedures, as well as
the maintenance of sound operating environments; and
inadequate identification of financial,
reputational, and legal risks, and absence of
internal communication about those risks among
boards of directors and senior management.
And,
Weaknesses in foreclosure processes and controls present
the risk of foreclosing with inaccurate documentation, or
foreclosing when another intervening circumstance should
intercede. Even if a foreclosure action can be completed
properly, deficiencies can result (and have resulted) in
violations of state foreclosure laws designed to protect
consumers. Such weaknesses may also result in inaccurate
fees and charges assessed against the borrower or property,
which may make it more difficult for borrowers to bring
their loans current. In addition, borrowers can find their
loss-mitigation options curtailed because of dual-track
processes that result in foreclosures even when a borrower
has been approved for a loan modification. The risks
presented by weaknesses in foreclosure processes are more
acute when those processes are aimed at speed and quantity
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instead of quality and accuracy.
The consent order resulting from the investigations required the
creation of an independent foreclosure review process. This
process was created in order to allow borrowers who are denied
foreclosure mitigation to appeal that decision to a third party
for a review. A year after these enforcement orders, only 3% of
eligible borrowers have requested a review of their loan file,
and no servicer that was party to the enforcement order has
faced a penalty for actions uncovered during the investigation,
nor have any borrowers received compensation for wrongful acts
(Just 3% of Eligible Borrowers Apply for Foreclosure Review,
Wall Street Journal, April 3, 2012).
The arrival of the multi-state settlement must be viewed in
context. As demonstrated in this analysis, the issues and
concerns raised by the settlement are not new, and appear to
have not yet been resolved. At a national level, it seems that
these combined efforts demonstrate that borrowers with a
legitimate chance to stay in their home have fallen through the
cracks. The issues may even be more pronounced in California as
foreclosures are processed via a non-judicial foreclosure
process. California's foreclosure process relies on all parties
carrying out the foreclosure to meet their statutory deadlines
without independent oversight. This process also assumes that a
borrower facing foreclosure is aware of their rights, and has
the ability and knowledge to challenge their foreclosure in the
proper venue. Under normal circumstances, this process works
and can via its certainty benefit the overall housing and
lending markets. However, in the extraordinary circumstances
currently facing California, it is a system that places an
overwhelming amount of authority and judgment in the hands of
servicers, many of whom have admitted to being overwhelmed with
the volume of foreclosure activity since 2007.
Mortgage Settlement vs. AB 1602.
1)AB 1602 requires a pre-NOD notice to borrowers, as well as, a
declaration included with the NOD that includes facts that
demonstrate the right of the foreclosing party to foreclosure.
Additionally, these notices require certain account
information and rights and responsibilities should be
disclosed to the borrower. The settlement contains these
requirements located in Settlement Exhibits A, pages 4,6,
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7,8,24 (Future references will refer to exhibit A and the
associated pages).
2)AB 1602 requires pre-foreclosure contact with a borrower
outlining their loss mitigation options. The settlement also
requires this pre-foreclosure contact (A-16).
3)AB 1602 contains provisions applicable depending on stage of
foreclosure, that require the foreclosure process to halt
until the borrower can be evaluated for loss mitigation
options. If a borrower is denied, the foreclosure process may
not continue until 30 days have expired, or until 15 days
after an appeal of a denial. Settlement language provides
similar prohibitions on dual track and similar timelines
(A-17, A-18, A-20)
4)AB 1602 requires servicers to provide written acknowledgement
when they receive a loan modification application or
associated documents. The settlement includes this
requirement (A-25).
5)AB 1602 requires that loan modification denial letters contain
specific information informing the borrower of the reasons for
the denial. The requirement to issue a denial letter is
included in the settlement (A-27).
6)AB 1602 provides that if a borrower has previously sought out
a loan modification and is applying for additional
consideration, that the servicer does not have to delay the
foreclosure process unless the borrower's application contains
a material change in their financial circumstances. This
exception is included in the settlement (A-29).
7)AB1602 requires servicers to make publicly available
information on the qualification process necessary for a
proprietary loan modifications. The settlement includes this
requirement (A-29).
8)AB 1602 requires servicers to track outcomes and maintain
records concerning the characteristics of loan modifications.
The settlement includes this requirement (A-30).
9)AB 1602 prohibits the collection of late fees for periods when
a loan modification application is under consideration, or if
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the borrower is making timely payments under a trial
modification. The settlement prohibits these same fees
(A-36).
10)AB 1602 provides for individual remedies for aggrieved
borrowers, and OHP to assist with compliance. The settlement
creates a third party monitor, the Office of Mortgage
Settlement, created to ensure servicers who are party to the
settlement comply with its terms. Additionally, the
settlement requires ongoing compliance with various servicing
standard metrics. Ensuring compliance with the settlement is
vital but even the third party monitor, Joseph Smith has
admitted that individual borrower complaints will not the
focus of his oversight, "Smith said that his office will not
investigate those complaints - it will instead provide
homeowners with information about how to get help from other
organizations - but it will use the data it collects as part
of its job of monitoring compliance with the settlement." (Joe
Smith Lays Out Path Forward for Mortgage Settlement, American
Banker. April 9, 2012)
11)The provisions of AB 1602 will remain in effect indefinitely,
or until it is repealed by future legislation. The terms of
the settlement are in effect for three years.
Timelines .
The following is a simplified guide to the timelines in AB 1602
that require various actions to take place. This list is only
meant to be descriptive. The timelines are not cumulative, and
vary depending on stage of the foreclosure process and status of
loan modification request.
1)60 days prior to recording of NOD, written communication must
be sent to the borrower that outlines their loan modification
options.
2)60 days prior to the recordation of NOS, written communication
must be sent to the borrower that outlines their loan
modification options.
3)At least 14 days prior to recordation of NOD, borrower must be
notified of the facts supporting the basis for foreclosures,
an account summary, contact information for any assigned point
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of contact, the telephone number for the OHP, and a statement
outlining previous loss mitigation efforts.
4)If a borrower submits an application for loan modification
within 120 days of delinquency the NOD may not be recorded,
until the borrower has been evaluated for loss mitigation.
5)30 days-Time after borrower is notified of denied loan
modification that foreclosure process may resume.
6)15 days-time after denial of appeal of a denied loan
modification at which time foreclosure process may resume.
7)Within 5 days after NOD filing, borrower must receive notice
of any loss mitigations options that may be available.
8)15 days prior to NOS borrower may request a loan modification,
but borrower would not be able to appeal any denial so close
to NOS.
9)3 days-Length of time a servicer has to acknowledge receipt of
a loan modification request, and/or any other documents
relating to the request.
10)30 days- Time that a borrower has to appeal a denial of a
loan modification.
Consumer Financial Protection Bureau (CFPB) mortgage servicing
standards.
Earlier this year CFPB announced that they would be developing
national servicing standards later this year, with a draft of
the standards available in the summer of 2012. Specific
language of the proposal is not yet available, but CFPB did
release a summary of the issues they are considering. These
issues include:
1)Servicers would be required clear monthly mortgage statements.
2)Borrowers should receive a warning before interest rate
adjustments.
3)Borrowers should be aware of options to avoid force-placed
insurance.
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4)Servicers would be required to contact borrowers prior to
foreclosure to discuss loss mitigation options.
5)Payments should be immediately credited.
6)Servicer records should be up-to-date and accessible.
7)Servicers would be required to correct errors quickly.
8)Servicers should be required to maintain foreclosure
prevention teams.
It is unclear how the final version of these concepts will look.
As with any rule proposed by a federal regulatory body, the
final version can often differ from the initial press release.
However, if the final rules indeed reflect the initial summary,
will these rules interfere or otherwise upset California's
efforts to provide transparent rules for the loan modification
process. In short, it doesn't appear that the rules prevent or
otherwise frustrate current efforts. In fact, the creation of
the CFPB included language in the Dodd-Frank Act that
specifically provided the foundation for the interaction between
CFPB and state laws. Section 1041 of the Dodd-Frank Act
provides that in its administration of the federal laws
transferred to it, the CFPB may not preempt state laws that are
more protective than a federal consumer law counterpart.
Specifically, Section 1041 states that a state's law may only be
preempted if it is inconsistent with a federal consumer
protection law-but an inconsistency does not include providing
greater protection to a consumer.
Technical and Clean-up issues:
The bill under consideration is a product of ongoing discussions
between numerous stakeholders and the language currently under
consideration is not the final conclusion of these discussions.
While the general framework is clear, many provisions require
clarification and greater specificity. As this proposal moves
through the process the authors may want to clarify many of
these issues and provide greater clean-up to the language
overall.
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Foreclosure by the numbers.
The number of complete foreclosures from the 12 months
ending in February of 2012 was a 154,000 in California
(Corelogic). These are complete foreclosures and does not
denote the number of properties in some stage of the
foreclosure process.
48,422 California homes had a foreclosure filing during
February 2012, representing 1 out of every 283 homes
(RealtyTrac). If this trend continues half million
California homes will face a foreclosure filing.
Distressed property sales - the combination of
foreclosure resales and "short sales" - continued to make
up more than half of California's resale market (DQ News).
Of the existing homes sold last month, 34.3 percent were
properties that had been foreclosed on during the past
year. That was unchanged from January and down from 40.1
percent in February a year ago. The high point for the
current cycle was in February 2009 at 58.5 percent (DQ
News).
Short sales - transactions where the sale price fell
short of what was owed on the property - made up an
estimated 20.9 percent of the resale market last month.
That was down from 21.2 percent the month before and up
from 18.7 percent a year earlier. Two years ago short sales
made up an estimated 17.5 percent of the resale market (DQ
News).
Most of the loans going into default are still from the
2005-2007 period: The median origination quarter for
defaulted loans is still third-quarter 2006 (DQ News).
Foreclosures remain far more concentrated in the
California' most affordable neighborhoods. (DQ News).
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Previous Legislation.
SB 1137. California's principal legislative response to the
foreclosure crisis has been SB 1137 (Perata) of 2008. Until
January 2013, this measure requires every lender or servicer to
contact borrowers for certain mortgages (first loans on a
principal residence recorded between January 1, 2003 and January
1, 2008) in person or by telephone in order to assess the
borrower's financial situation and explore options for the
borrower to avoid foreclosure. During the initial contact, the
lender or servicer is to advise the borrower that he or she had
a right to request a meeting and that the meeting, if requested,
would have to occur within 14 days of the request. Failure to
comply with these requirements prevents filing a notice of
default (NOD) until 30 days after the lender or servicer
complies.
SB 1137 requires the lender or servicer to make a "diligent"
effort to contact covered borrowers, without expressly stating
what that might entail. The law does not require the lender or
servicer to actually offer the borrower a loan modification,
only to contact the borrower to discuss the borrower's options.
If the lender or servicer did not have a loan modification
program, or if the borrower did not meet the requirements for a
modification, the lender or servicer had no obligation to
negotiate with the borrower, much less reach an agreement on a
modification.
It is not known whether these requirements have been effective.
The law does not specify what should occur at the meeting or
provide any clear enforcement mechanism if the holder or
servicer does not offer any meaningful workout options or
negotiate in good faith. The law does not add any process for
court or some third-party review to the dominant non-judicial
foreclosure process in California if the borrower is
dissatisfied with the outcome.
In September of 2010, the Attorney General issued a letter to
all lenders and servicers operating in California asking them to
suspend foreclosures until they could confirm that they comply
with California's contact requirements under SB 1137. While
some lenders did temporarily suspend foreclosure actions at
about this time, these lenders have since resumed foreclosures,
and it is unclear whether or how any lenders and servicers
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responded to the Attorney General's request to provide evidence
of compliance with the requirements of SB 1137.
ABX2 7 (Lieu) of 2009. This bill also sought to encourage loan
modifications by requiring the lender or servicer to wait 90
days after a default before filing a notice of sale on a
foreclosed property; however, an exemption to this additional
90-day delay could be obtained for lenders and servicers who had
implemented a "comprehensive loan modification program." The
purpose of this legislation was to either encourage lenders or
servicers to develop loan modification programs (and thereby be
exempted from the additional 90-day delay) or, where no programs
had been developed, to give the borrower additional time to cure
the default or negotiate a modification.
AB 1639 (Nava, Bass, Lieu). This bill would have established a
foreclosure mediation program that would allow borrowers to
request a mediation session with their servicers in order to
reach an agreement on loss mitigation options. This bill failed
passage on the Assembly floor.
REGISTERED SUPPORT / OPPOSITION :
Support
Department of Justice Attorney General (Sponsor)
AFL-CIO
American Federation of State, County and Municipal Employees
(AFSCME)
Asian & Pacific Islanders California Action Network (APIsCAN)
Asian Law Caucus (ALC)
California Church IMPACT
California Council of the Service Employees International Union
(SEIU)
California Labor Federation
California Nurses Association
AB 1602
Page 26
California School Employees Association
Cambridge Credit Counseling
Center for Responsible Lending
ClearPoint Financial Services
Coalition for Quality Credit Counseling
Consumer Credit Counseling Service of Orange County
Consumer Credit Counseling Service of San Francisco
Consumer Credit Counseling Service of the North Coast
Consumer Credit Counseling Service of the Twin Cities
Contra Costa Interfaith Supporting Community Organization
(CCISCO)
East Los Angeles Community Corporation (ELACC)
Green Lining Institute
GreenPath
Home Strong USA
InCharge
International Federation of Professional & Technical Engineers
Local 21
Korean Churches for Community Development (KCCD)
Lutheran Office of Public Policy- California
Money Management International
Montebello Housing Development Corporation
National Asian American Coalition
National Chinese Welfare Council, Los Angeles Chapter
National council of La Raza - California
Novadebt
PICO - California
Service Employees International Union, (SEIU) Local 1000
Springboard Nonprofit Consumer Credit Management
State Building and Construction Trades
SurePath Financial Solutions
Thai Community Development Center (Thai CDC)
The County of Santa Cruz, Board of Supervisors
United Democratic Club of Monterey Park
Individuals - 1
Support if Amended
The California Reinvestment Coalition on behalf of 57
organizations writes that they will support the bill if the
private right of action provisions are strengthened and
clarified.
AB 1602
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Opposition
California Bankers Association
California Chamber of Commerce (CalChamber)
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