BILL ANALYSIS �
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Juan Vargas, Chair
SB 1471 (DeSaulnier and Pavley) Hearing Date: April 18, 2012
As Amended: April 10, 2012
Fiscal: Yes
Urgency: No
SUMMARY Would require servicers, as defined, to offer
borrowers a single point of contact with whom those borrowers
may communicate regarding options that may be available to avoid
foreclosure, would prohibit any robosigned document, as defined,
from being recorded or filed with any court, and would enact
rules relating to the ability of an entity to exercise the power
of sale in a mortgage or deed of trust.
DESCRIPTION
1. Would define "mortgage servicer" as a person or entity
responsible for the day-to-day management of a mortgage loan
account, including collecting and crediting periodic loan
payments, managing any escrow account, or enforcing mortgage
loan terms, either as the holder of the loan note or on
behalf of the holder of the loan note.
(This differs from the federal Real Estate Settlement
Procedures Act �RESPA] definition of a servicer. Under
RESPA, servicing is defined as "receiving any scheduled
periodic payments from a borrower pursuant to the terms of
any mortgage loan, including amounts for escrow accounts,
and making the payments to the owner of the loan or other
third parties of principal and interest and such other
payments with respect to the amounts received from the
borrower as may be required pursuant to the terms of the
mortgage servicing loan documents or servicing contract").
2. Effective July 1, 2013, would provide that, if a borrower
is 60 days or more delinquent, the mortgage servicer must
inform that borrower that if the borrower wishes to pursue
an alternative to foreclosure, the servicer will establish a
single point of contact (SPOC) for the borrower. Servicers
must provide the identity of and contact information for a
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1471 (DeSaulnier and Pavley), Page 2
SPOC, within 10 business days of written or telephonic
request for loss mitigation assistance from a borrower who
is 60 or more days delinquent. Servicers must provide
updated contact information for a SPOC, within five business
days of a change in the SPOC.
This provision differs from the SPOC requirements of the
mortgage settlement (page A-21). The settlement requires
servicers to promptly establish an easily accessible and
reliable SPOC for each potentially-eligible first lien
mortgage borrower who requests loss mitigation assistance.
Servicers are also required to provide updated contact
information to the borrower if the designated SPOC is
reassigned, no longer employed by the servicer, or otherwise
unable to act as the primary point of contact. Although the
settlement does not expressly define potentially-eligible
borrowers in the section covering SPOCs, page A-1 of the
settlement states that its provisions are generally intended
to apply to loans secured by owner-occupied properties that
serve as the primary residence of the borrower.
The key difference between the SPOC provisions of this bill and
the settlement relate to which party (the borrower or the
servicer) has the responsibility to initiate contact
regarding a SPOC. This bill requires servicers to reach out
to borrowers and offer them a SPOC. The settlement requires
borrowers to reach out to servicers and request a SPOC.
This bill and the settlement also differ in their coverage
of borrowers (as drafted, this bill would offer a SPOC to
any type of borrower who is at least 60 days delinquent on
any type of loan, while the settlement restricts SPOCs to
potentially-eligible first lien borrowers). Finally, this
bill is silent on specific situations that could lead to the
need for a new SPOC (these situations are detailed in the
settlement). Other differences exist ("promptly" in the
settlement, versus either 10 or 5 days, depending on the
situation, in the bill) but are less significant.
3. Would require the SPOC to be responsible for all of the
following:
a. Communicating the options available to the borrower,
the actions the borrower must take to be considered for
those options, and the status of the mortgage servicer's
evaluation of the borrower for those options (language
taken directly from the settlement; page A-21).
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1471 (DeSaulnier and Pavley), Page 3
b. Coordinating receipt of all documents associated
with loan modification or loss mitigation activities and
notifying the borrower of any missing documents (language
taken directly from the settlement; page A-21).
c. Maintaining and providing accurate information about
the borrower's situation and current status in the loss
mitigation process (language based on, but slightly
different than language in the settlement; the settlement
requires the SPOC to be knowledgeable about these issues,
not to maintain and provide accurate information about
them; page A-21).
d. Ensuring that a borrower, who is not eligible for a
federal Making Home Affordable (MHA) Program, is
considered for proprietary or other investor loss
mitigation options (language based on, but slightly
different than language in the settlement; the settlement
refers to MHA programs (plural), not to a single MHA
program; page A-22).
e. Having access to individuals with the ability to
stop foreclosure proceedings when necessary to comply
with the MHA program or California law (language taken
directly from the settlement; page A-22).
4. Would require a SPOC to remain assigned to a borrower's
account until the mortgage servicer determines that all loss
mitigation options have been exhausted, the borrower's
account becomes current, or, in the case of a borrower in
bankruptcy, the borrower has exhausted all loss mitigation
options for which the borrower is potentially eligible and
has applied (taken directly from the settlement; page A-22).
5. Would require a mortgage servicer to ensure that a SPOC
refers and transfers a borrower to an appropriate supervisor
upon request of the borrower (based on language in the
settlement; page A-23).
6. Would prohibit an entity from recording or causing a notice
of default to be recorded, or otherwise initiating the
foreclosure process, unless it is the holder of the
beneficial interest under the deed of trust. Would provide
that an agent shall not record a notice of default or
otherwise commence the foreclosure process without the
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1471 (DeSaulnier and Pavley), Page 4
specific direction of the actual owner of the beneficial
interest under the deed of trust. (This language is not
based on the settlement).
7. Would define a "robosigned document" as any document that
contains factual assertions that are not accurate, are
incomplete, or are unsupported by competent, reliable
evidence, and would provide that a "robosigned document"
also means any document that has not been reviewed by its
signer to substantiate the factual assertions contained in
the document. Would clarify that for purposes of the
definition, multiple people may verify the document or
statement, as long as the document or statement specifies
the portions verified by each signer.
(The settlement handles the issue of document accuracy very
differently. It does not contain a definition of robosigned
document. Instead (pages A-1 and A-2), it requires that
notices of default, notices of sale, and similar notices
submitted by or on behalf of servicers in non-judicial
foreclosures are accurate and complete, and are supported by
competent and reliable evidence. Before referring a loan to
nonjudicial foreclosure, the settlement requires servicers
to ensure that they have reviewed competent and reliable
evidence to substantiate the borrower's default and the
right to foreclose. Affidavits, sworn statements, and
declarations may not contain information that is false or
unsubstantiated).
8. Would provide that, where a power to sell real property is
given to a mortgagee, trustee, beneficiary of a deed of
trust, or other encumbrancer, in an instrument intended to
secure the payment of money, the power of sale is part of
the security and vests in any person who by assignment
becomes entitled to payment of the money secured by the
instrument. Would further provide that the power of sale
may be exercised by the assignee, only if the assignment is
duly acknowledged and recorded. (This language is not based
on the settlement. Existing law already contains this
provision, but does not include the word "only" where
italicized above, nor does it refer to trustees or
beneficiaries of deeds of trust, where italicized).
REMEDIES
9. Would provide that any entity which records a robosigned
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1471 (DeSaulnier and Pavley), Page 5
document or files a robosigned document in any court,
relative to a foreclosure proceeding, is liable for a civil
penalty of $10,000 per robosigned document, and would
authorize any governmental entity identified in Section
17204 of the Business and Professions Code (Attorney
General, district attorneys, county counsel, and city
attorneys), as well as the Department of Real Estate,
Department of Corporations, and Department of Financial
Institutions, to bring a civil action seeking those
penalties (the Departments would only be authorized to bring
actions against their licensees). The civil penalties
provided for in the bill would be separate from and
exclusive of any other remedies or liabilities that might
apply.
10. Would authorize a borrower, who reasonably believes that a
mortgagee, trustee, beneficiary, or authorized agent has
failed to comply with the requirements of the bill, to seek
an order to enjoin any pending trustee's sale in any court
having jurisdiction, if a notice of sale has been recorded.
Would entitle borrowers who obtain injunctions to reasonable
attorneys' fees and costs, and would provide that any
injunction must remain in place until the mortgagee,
trustee, beneficiary, or authorized agent has complied with
the provisions of the bill. Would not allow a borrower to
obtain relief for any violation that is technical or de
minimis in nature, such that it did not impact the
borrower's ability to pursue an alternative to foreclosure.
11. Following a trustee's sale, would authorize a borrower, who
reasonably believes that a mortgagee, trustee, beneficiary,
or authorized agent has failed to comply with the
requirements of the bill, to seek to recover the greater of
actual damages or $10,000, plus reasonable attorneys' fees
and costs, in any court of competent jurisdiction. Would
authorize a court to award a borrower the greater of treble
actual damages or statutory damages of $50,000, plus
attorneys' fees and costs, if it finds that a violation of
the bill was intentional, reckless, or resulted from willful
misconduct by a mortgagee, trustee, beneficiary, or
authorized agent. Would not allow a borrower to obtain
relief for any violation that is technical or de minimis in
nature, such that it did not impact the borrower's ability
to pursue an alternative to foreclosure.
12. Would provide that a violation of the provisions of the
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1471 (DeSaulnier and Pavley), Page 6
bill shall not affect the validity of a sale in favor of a
bona fide purchaser and any of its encumbrancers for value
without notice (i.e., that arms' length sales of foreclosed
properties to third party purchasers will not be deemed
invalid as a result of any violation of the bill, and that
the interests of parties who hold liens secured by those
properties, following the sales of those properties to bona
fide third party purchasers, will not be invalidated).
13. Would provide an affirmative defense to liability for
violations of the bill to signatories to the settlement
agreement, which are in compliance with that agreement, as
specified.
EXISTING LAW Discussed in the body of the analysis, where
relevant.
COMMENTS
1. Purpose: The author states, "California is the midst of
a major crisis in homeownership. It is estimated that
500,000 more homes will be subject to foreclosure in the
next year to eighteen months. According to the Attorney
General, there is a need for reforms to California's
non-judicial foreclosure process to ensure fairness for
homeowners. This bill would address two widespread
problems.
Distressed homeowners seeking a loan modification or other
form of loss mitigation complain that they cannot
effectively communicate with their banks. They are required
to speak to multiple people, none of whom are familiar with
their circumstances. They are required to submit the same
documents repeatedly, and the conversation takes months,
often resulting in foreclosure when a successful loan
modification process might have been possible if the
communications were more effective.
This bill requires banks to designate a single point of
contact, who would be responsible for guiding the homeowner
through the loss-mitigation process, and for receiving
documentation and handling other communications with the
borrower. The single point of contact is a concept that has
been agreed to by the signatory banks to the National
Mortgage Settlement, and should be made available to all
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1471 (DeSaulnier and Pavley), Page 7
Californians.
Another significant problem in California has been the
"robosigning" of documents in the foreclosure process. The
Attorney General reports that in particular the declaration
required to be recorded with the notice of default to
demonstrate that the lender has communicated with the
borrower and apprised them to their right to pursue a loan
modification or other loss mitigation measure with their
lender, has been widely robosigned. This means that it
either contained false factual statements, or was signed by
an individual without knowledge of the documents contents or
veracity. When this document has been robosigned, we cannot
have assurance that the borrower have been apprised of all
their rights under California law. This undermines the
foreclosure process, which in California is not supervised
by the courts."
2. Background: On March 12, 2012, the United States
Department of Justice, U.S. Department of Housing and Urban
Development, and 49 state Attorneys General, including
California's Attorney General Kamala Harris, announced the
filing of a settlement agreement with the nation's five
largest mortgage servicers (Ally/GMAC, Bank of America,
Citi, JPMorgan Chase, and Wells Fargo). As part of the
settlement, six documents were filed with the court: a
complaint, which details the bad acts alleged by the
plaintiffs to have been committed by the servicers, and five
separate consent judgments (one for each of the servicers),
in which the terms of the agreement between each servicer
and the plaintiffs is detailed. All of these documents can
be downloaded from www.nationalmortgagesettlement.com .
Although the terms of each of the five consent judgments are
slightly different, each of the judgments shares many
similarities. Three elements of the judgments which are
identical, and which are relevant for purposes of this
analysis, include the settlement term sheet (referenced in
each of the settlements as Exhibit A), the enforcement
provisions (Exhibits E and E-1), and the releases from
prosecution that were granted to the servicers (Exhibits F
and G). Other key elements of the judgments, which will not
be discussed further in this analysis, include discussions
of how much money each of the servicers must pay in
connection with the settlement, how that money is allocated
among states, how credit toward servicers' monetary
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obligations is calculated under the settlement (different
types of consumer relief count differently toward servicers'
monetary obligations), and how servicemembers and their
dependents are covered by the settlement.
The settlement term sheet formed the basis for many of the
provisions of this bill and its companion, SB 1470, and is
widely expected to form the basis for national servicing
standards that the federal Consumer Financial Protection
Bureau is expected to propose sometime this summer.
3. How will the settlement be enforced/How does the
settlement handle private rights of action? Responsibility
for enforcing the terms of the settlement agreement rests
with a federal enforcement monitor (Joseph Smith, former
banking commissioner of North Carolina) and a Monitoring
Committee, which consists of state attorneys general, state
financial regulators, the U.S. Department of Justice, and
the U.S. Department of Housing and Urban Development. This
Monitoring Committee or any party to the consent judgments
are the only entities that may bring actions to enforce the
judgments. All actions must be brought in the U.S. District
Court for the District of Columbia. Actions may only be
brought if the time to cure a potential violation (see
discussion below) has expired.
When people assert that the settlement preserves private
rights of action, they are not referring to private rights
to enforce the provisions of the settlement. Instead, they
are referring to the fact that the state and federal
releases in the settlement preserve individuals' ability to
file suit for violations of residential mortgage loan
origination and servicing laws, and for violations of
residential foreclosure practices. The releases from
prosecution contained in the settlement prohibit any of the
49 state attorneys general, any other state government
entities in any of the 49 states signing the agreement, or
the federal government from prosecuting civil claims related
to the residential mortgage loan servicing, residential
mortgage loan origination practices, and residential
foreclosure practices of the signatories prior to the date
of the settlement. Because these releases did not cover
individual claims, individuals may continue to sue the
signatories for violating state or federal law governing
residential mortgage loan servicing, residential mortgage
loan origination practices, or residential foreclosure
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practices. It is these private rights of action that the
settlement preserved, not private rights of action to
enforce the terms of the settlement.
If individuals can't enforce the provisions of the settlement
agreement, how will it be enforced? As noted immediately
above, the terms of the settlement are enforced by the
federal enforcement monitor and the Monitoring Committee.
Attorney General Harris has also appointed Irvine Law School
Professor Katherine Porter to assist her in monitoring
servicers' commitments to California.
Under the terms of the settlement, only two types of relief
may be granted by the court (page E-15):
a. Non-monetary equitable relief, which may
include injunctive relief, direct certain specific
actions be taken under the terms of the consent
judgment, or comprise other non-monetary corrective
action; and
b. Civil penalties of not more than $1 million
per uncured violation ($5 million in the event of a
second uncured violation, when the first uncured
violation involves widespread noncompliance). Civil
penalties are distributed either to the United States,
the state that prosecuted the violation, or to all
states in proportion to their payouts under the terms
of the settlement, depending on the nature of the
violation.
Identifying Potential Violations: Each servicer is required
to establish an internal quality control (QC) group that is
independent from the line of business whose performance is
being measured under the terms of the consent judgment. The
settlement contains a series of metrics, each of which must
be measured by these internal QC groups and reported upon
quarterly to the monitor (page E-3).
These metrics cover all stages of the loss mitigation and
foreclosure process, from initial contact through loan
modification review, decision, and appeal, through
foreclosure sale, as well as other topics of the consent
judgment outside of the foreclosure process, such as the
calculation of fees and imposition of force-placed
insurance. Generally speaking, the metrics are designed to
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numerically evaluate servicers' performance across all
aspects of the consent judgment. Small error rates require
remediation, but do not trigger official violations. Error
rates in excess of the threshold error rates identified in
the consent judgment trigger official violations (what the
settlement defines as potential violations; Exhibit E-1).
Servicer Right to Cure: Whenever a potential violation
occurs (i.e., whenever a servicer exceeds the threshold
error rate for a given metric in a given quarter), the
servicer must meet and confer with the Monitoring Committee
within 15 days of the submission of a report showing the
violation. Servicers have a right to cure any potential
violation. Potential violations are deemed cured if: a) a
corrective action plan approved by the monitor is determined
by the monitor to have been successfully completed, b) a
quarterly report covering the cure period shows that the
threshold error rate has not been exceeded for that same
metric during that period, and c) the monitor confirms the
accuracy of that quarterly report (pages E-11 and E-12).
In addition to a servicer's obligation to cure a potential
violation via a corrective action plan, servicers must
remediate any material harm to particular borrowers
identified through work performed by the servicer.
Furthermore, if a servicer has a potential violation so far
in excess of the threshold error rate that the monitor
concludes the error is widespread, the servicer must
identify other borrowers who may have been harmed by such
noncompliance and remediate all such harms (page E-12).
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4. Summary of Arguments in Support:
a. Attorney General Kamala Harris is sponsoring SB
1471, and sees the bill as an important part of her
Homeowner Bill of Rights legislative package. Together
with other bills in the Attorney General's legislative
package, the provisions of SB 1471 will help preserve
homeownership for thousands of Californians who are able
to make payments under modified loan terms over the long
term, if given a chance. Eliminating unnecessary
foreclosures will stabilize families, preserve
communities, reduce blight, and allow California's
housing market to recover sooner. Ms. Harris'
investigations have revealed that the foreclosure process
has been undermined by opaque industry practices that
have caused chaos in the loan modification process. This
has prejudiced homeowners' ability to prevent
foreclosures and has, in some cases, resulted in wrongful
foreclosures. Under some circumstances, homeowners have
little recourse to challenge foreclosures that may have
been completed unlawfully.
The SPOC provision of SB 1471 was included in the bill, as
a response to homeowners' frustration regarding their
inability to contact a bank representative who knows the
status of their loan modification application. The
robosigning provision was included, based on the Attorney
General's observation of robosigning involving the
declaration required by Civil Code Section 2923.5.
b. Consumers' Union (CU) asserts that preventing
unnecessary foreclosures in California at the earliest
stage possible is in everyone's best interest. CU cites
the findings of an audit commissioned by San Francisco
Assessor-Recorder Phil Ting, which found significant
improprieties in the nonjudicial foreclosures conducted
in the City and County of San Francisco. CU believes
that the San Francisco experience is just the tip of the
iceberg of a much larger problem plaguing California. SB
1471 would prevent the types of improprieties documented
in the San Francisco audit and would bring much-needed
relief to homeowners navigating the complex foreclosure
process, by requiring that servicers provide homeowners
with a specific person to talk to at their lending
institution.
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1471 (DeSaulnier and Pavley), Page 12
The Center for Responsible Lending (CRL) is supportive of
SB 1471 for the same reasons as CU. CRL adds, "SB 1471
will enhance fairness in the foreclosure and modification
processes by requiring that banks use accurate and
reliable documents when pursuing foreclosure, and by
improving the quality of information provided to
homeowners who are subject to foreclosure."
Similar expressions of support were submitted by San
Francisco Assessor-Recorder Phil Ting, PICO California,
the California Professional Firefighters, SEIU, AFSCME,
and the Lutheran Office of Public Policy-California.
5. Summary of Arguments in Opposition:
a. A coalition of trade associations representing the
financial services industry and the secondary mortgage
market raised several concerns in their letter of
opposition. Well-intentioned efforts to help distressed
borrowers may further restrict access to credit in the
future and have a real impact on viable new homebuyers
seeking to achieve the American Dream. Advancing
legislation that creates additional procedural hurdles or
conflicting layers of bureaucracy for loan servicers,
without addressing the borrower's underlying financial
condition, may ultimately miss the mark of resolving core
economic issues, and will ultimately prove unsuccessful
at solving this complex problem. A few of the specific
comments from the coalition's letter are summarized
below.
i. Robosigning was a criticism in judicial
foreclosure states. While the proponents have stated
that declarations filed under the borrower outreach
provisions of Civil Code Section 2923.5 were
robo-signed, those assertions are contrary to the
findings of the appellate court decision in Mabry v.
Aurora Loan Services. In that decision, the court
found that the declaration required pursuant to
Section 2923.5 need not be signed under penalty of
perjury, and further stated that the way Section
2923.5 is set up, too many people are necessarily
involved in the process for any one person to likely
be in the position where he or she could swear that
all the requirements of the declaration were met.
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ii. A temporary situation does not require
a permanent solution. SB 1471 proposes permanent
changes to law that are extraordinarily restrictive
and draconian. The nationwide mortgage settlement
has a sunset date, and SB 1471 should, as well.
iii. SB 1471 fails to narrowly target
at-risk borrowers, and applies too broadly. It
promotes strategic defaults, allows investors and
speculators to crowd out borrowers with financial
hardship, applies to commercial property, and fails
to require tender by borrowers as a symbol of good
faith. For borrowers who strategically default and
have no intention of remaining in their homes, the
bill will be used as a delay and a leveraging tactic.
iv. SB 1471 will invite litigation through
the inclusion of private rights of action. Exposing
entities and individuals to excessive litigation risk
will not attract and encourage creditors and
investors to inject the capital necessary to revive
California's residential housing marketplace.
a. The California Land Title Association (CLTA)
acknowledges that the inclusion of language intended to
protect bona fide purchasers and bona fide encumbrancers
will provide them with an affirmative defense against
claims asserting the invalidity of title transfer. CLTA
notes, however, that this defense must be asserted by a
new homebuyer/BFP after he or she is sued, and will do
nothing to dissuade delinquent borrowers and their
attorneys from naming BFPs in litigation that is likely
to flow from the enactment of SB 1471. These new
homebuyers will be saddled with legal costs in the
thousands of dollars, simply to hire attorneys to file
motions to dismiss based on the BFP protections in the
bill. Homebuyers fortunate enough to have purchased a
homeowner's title policy following a foreclosure sale
will be able to have their title insurer defend them, but
they will have to pay a significant premium to obtain
their new title policies for that reason.
CLTA observes that SB 1471 will have a negative impact on
California's real estate economy and the secondary
market. Currently, lender's title policies (i.e.,
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policies to protect the lender's security interest in a
home) attach to a borrower's loan and follow that loan,
if it is sold into the secondary market. SB 1471 will
introduce several new risks to title and will likely
cause the title industry to reevaluate what coverage it
will be able to offer to lenders. The likelihood that
lenders will be unable to obtain title policies that
limit their potential for risk and loss will translate to
diminished secondary market interest in the loans these
lenders make. Secondary market buyers seeking to
assemble securitized pools of loans will look less
favorably on loans that carry a potential for risk and
loss due to title challenges.
b. The California Association of Realtors characterizes
SB 1471 as excessive and premature. It will reduce the
availability of mortgage credit and increase the cost of
funds for legitimate, qualified borrowers attempting to
participate in the emerging recovery of the California
real estate market. It is premature to lock into
California statute some version of the settlement before
it has been proven in the market.
Furthermore, codifying a robosigning offense in California
law is an inappropriate borrowing from the judicial
foreclosure process, and blurs the distinction between
judicial and nonjudicial foreclosure. Pushing lenders
and servicers toward the use of judicial foreclosure
would dramatically increase the cost to the state of
enforcing legitimate security claims, and doubtless
increase the costs of funds to homeowners. Preliminary
reports from Nevada suggest that its experiment with a
similar certification rule has had a dramatically
negative effect on the ability to utilize legitimate
nonjudicial foreclosure processes.
c. The California Chamber of Commerce labels SB 1471 a
job-killer bill, because it will impede California's
housing market recovery by allowing all borrowers,
including strategic defaulters and investors, to
interrupt the foreclosure process to forestall legitimate
foreclosures. The enforcement provisions of SB 1471 will
incent litigation by imposing strict liability with no
right to cure, and inflicting statutory, actual, treble,
and punitive damages. The measure will likely limit
future access to credit, discourage investment capital
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for the purposes of residential mortgage lending, or
impose a significant risk-based premium, resulting in
higher costs for consumers. Forestalling the foreclosure
process will further frustrate local governments
struggling with properties in disrepair during the
foreclosure process, continue in the trend of reduced
property tax revenue for local governments, and
artificially sustain depressed property values.
d. The Civil Justice Association of California believes
that SB 1471 will force nonjudicial foreclosures into
court. The bill creates expansive, new obligations that
are enforceable with lucrative penalties, statutory
damages, and attorney's fees. The bill's requirements
and prohibitions are ambiguous and are outside of the
carefully negotiated national mortgage settlement.
California's foreclosure process is already highly
regulated. There is no need to insert lawyers and
lawsuits into the process.
6. Amendments:
a. Should this bill's definition of a mortgage servicer
be amended to match the RESPA definition? RESPA is the
federal law that regulates servicing activities, and
seems relevant to the discussion, particularly if the
nationwide servicing standards anticipated to be released
by the CFPB utilize the RESPA definition of servicer and
servicing.
b. Amendments are necessary to clarify the scope of the
bill (i.e., to clarify what types of mortgages and deeds
of trust are intended to be covered by the provisions of
the bill). As drafted, the bill would apply to all
mortgages and deeds of trust on which nonjudicial
foreclosures are initiated, including single-family
residential (both owner-occupied and non owner-occupied),
multi-family residential, and commercial properties. The
settlement generally applies to owner-occupied properties
that serve as the primary residence of the borrower. SB
1137 (Chapter 69, Statutes of 2008) also applied only to
owner-occupied principal residences.
Staff suggests the following amendments to clarify this
bill's scope. They amendments are drafted in a manner
intended to conform the bill to the owner-occupied,
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1471 (DeSaulnier and Pavley), Page 16
residential real property scope of SB 1137 and the
settlement. If the authors and sponsor wish to select a
different scope, they need only substitute different
language for the following:
Insert the following on page 5, between lines 5 and 6; page
8, between lines 20 and 21: "This section shall apply
only to mortgages and deeds of trust that are secured by
owner-occupied residential real property containing no
more than four dwelling units. For purposes of this
section, "owner-occupied" means that the residence is the
principal residence of the borrower as indicated to the
lender in loan documents."
c. As noted above, this bill differs from the
settlement regarding the manner in which servicers are
required to assign a SPOC. Under the settlement,
servicers are required to promptly establish an easily
accessible and reliable SPOC for each
potentially-eligible first lien mortgage borrower who
requests loss mitigation assistance. Borrowers need not
be at least 60 days delinquent before requesting a SPOC.
Under the bill, servicers are required to contact every
borrower who is at least 60 days delinquent and inform
them that they may request a SPOC.
If the authors and sponsor wish to more closely conform the
SPOC assignment language of the bill to similar language
in the settlement, the following amendments are
suggested:
Page 3, strike lines 10 through 19, page 4, strike lines 1
through 5, and page 5, strike "within 10 business days"
and insert: (a) A mortgagee, beneficiary, or authorized
agent shall establish an easily accessible and reliable
single point of contact (SPOC) for each
potentially-eligible first lien mortgage borrower who
requests loss mitigation assistance, within 10 business
days of receiving a borrower's request. For purposes of
this section, a potentially-eligible borrower is one who
owns and occupies as their principal residence the
property that secures the loan for which the borrower is
requesting loss mitigation assistance. Requests for a
SPOC may be made in writing or telephonically."
d. This bill includes a provision (page 6, lines 19
SB
1471 (DeSaulnier and Pavley), Page 17
through 25) that would prohibit an entity from recording
or causing a notice of default to be recorded, or
otherwise initiating the foreclosure process, unless it
is the holder of the beneficial interest under the deed
of trust. The second sentence of this provision provides
that an agent shall not record a notice of default or
otherwise commence the foreclosure process without the
specific direction of the actual owner of the beneficial
interest under the deed of trust. This language is not
based on the settlement and is unclear, as drafted.
At a minimum, this provision requires technical amendments.
The first sentence refers only to deeds of trust, and
should probably refer to mortgages and deeds of trust.
The second sentence refers to "an agent," but fails to
identify which agent. Presumably, the second sentence is
intended to refer to an agent acting on behalf of the
holder of the beneficial interest, but this requires
clarification. Finally, the two sentences refer
differently to the party with authority to initiate a
foreclosure; the first sentence refers to the "holder" of
the beneficial interest, while the second sentence refers
to the "actual owner" of the interest. The two sentences
should be conformed.
More generally, it might also be helpful if the logic
behind the inclusion of this provision were clarified.
This bill's sponsor has indicated that the language is
intended to codify the so-called "Gomes" decision (Jose
Gomes v. Countrywide Home Loans, Inc., 192 Cal. App. 4th
1149, February 18, 2011). In that decision, the Fourth
Appellate District of the California Court of Appeal
ruled against the plaintiff, and found that the borrower
had not identified a legal basis on which to challenge
his foreclosure. Because the Gomes court did not find
the existence of a problem with California law, it is
unclear from a reading of this provision what problem it
is trying to address. This clarity would be extremely
useful, given the likelihood that the meaning of this
section will be litigated.
e. The provision of this bill, which attempts to
provide protections to bona fide purchasers of foreclosed
properties, and to those who hold liens secured by the
properties purchased by these bona fide purchasers,
appears to be broader than intended (page 9, lines 5
SB
1471 (DeSaulnier and Pavley), Page 18
through 7). As drafted, the bill states that a violation
of "this article" shall not affect the validity of sales
to so-called BFPs, where article refers to an article of
the Civil Code governing Mortgages in General. Staff
understands that the authors and sponsors intended to
provide BFP protections for violations of "this act," not
"this article."
Page 9, line 5, strike "article" and insert: act
f. The private rights of action authorized by this
bill would benefit from clarification (page 8, lines 22
through 40 and page 9, lines 1 through 4). As drafted,
they allow a borrower to seek an order to enjoin a
trustee sale, or an order seeking damages, if the
borrower has a reasonable belief that a mortgagee,
trustee, beneficiary, or authorized agent failed to
comply with specified provisions of the bill. The bill
implies, but does not expressly direct the court to find
that a violation has occurred, before issuing an
injunction or awarding damages. The bill also contains
language intended to protect servicers from lawsuits over
violations of the bill that were technical or de minimis
in nature, and which did not impact a borrower's ability
to pursue an alternative to foreclosure, but this
language appears in a separate subdivision as the private
rights, and is unclear regarding what constitutes an
"ability to pursue an alternative to foreclosure."
The following language is suggested, in lieu of the
existing language of 2924.18(a) (page 8, lines 22 through
31), to ensure that: i) an injunction or awarding of
damages only occurs after a court finds that a violation
has occurred, and ii) a borrower is only entitled to
relief, if that violation resulted in that borrower being
denied approval for a foreclosure avoidance alternative
for which he or she applied:
"A court of competent jurisdiction may enjoin a pending
trustee's sale, if a notice of sale has been recorded,
and a borrower presents evidence satisfactory to the
court, regarding the existence of a violation of Section
2923.7, 2924, 2924.9, or 2923.5 by a mortgagee, trustee,
beneficiary, or authorized agent, which resulted in the
borrower being denied approval for a foreclosure
avoidance alternative for which that borrower applied.
SB
1471 (DeSaulnier and Pavley), Page 19
Any injunction shall remain in place until the mortgagee,
trustee, beneficiary, or authorized agent has complied
with the requirements of the section or sections that
were violated. A borrower who obtains an injunction
shall be entitled to reasonable attorneys' fees and
costs."
The following is suggested in lieu of the existing language
of 2924.18(b) (page 8, lines 32 through 38): "A court of
competent jurisdiction may award a borrower the greater
of actual damages or ten thousand dollars ($10,000), plus
reasonable attorney's fees and costs, if a trustee's sale
has been concluded, and a borrower presents evidence
satisfactory to the court regarding the existence of a
violation of Section 2923.7, 2924, 2924.9, or 2923.5 by a
mortgagee, trustee, beneficiary, or authorized agent,
which resulted in the borrower being denied approval for
a foreclosure avoidance alternative for which that
borrower applied."
If these amendments are accepted, the text on page 9, lines
8 through 12, should be deleted.
g. If the amendments described in "f" immediately above
are not accepted by the authors and sponsor, the
subdivision of Section 2924.18, which refers to
violations that are technical or de minimis in nature,
requires technical amendment to add a few words that are
missing from SB 1471, but which appear in a virtually
identical section of SB 1470.
Page 9, line 10, strike "that" and insert: "such that it"
h. This bill is silent on whether it intends to
authorize class action lawsuits to enforce its
provisions. Staff understands that neither the sponsor
nor this bill's authors intend class actions. The
following language is suggested as an addition to Section
6 of the bill (Civil Code Section 2924.18) to clarify
this intent:
Page 9, between lines 4 and 5, insert: (c) The provisions
of this act shall not be enforceable through a class
action lawsuit. No court shall have authority to certify
a class of plaintiffs in a class action lawsuit brought
to enforce the provisions of this bill.
SB
1471 (DeSaulnier and Pavley), Page 20
a. The provision which provides signatories to the
settlement with an affirmative defense to liability for
violations of the bill under certain circumstances is
unclear as to its intent and its effect (page 9, lines 13
through 19). It also incorrectly refers to the
settlement agreement (it only references the agreement
reached with Bank of America, and not the agreements
reached with the other four signatories). Substitute
language is not suggested at this time, because
discussions between the signatories and the authors and
sponsor on this topic are still preliminary.
Staff observes, however, that while a compromise on this
language is currently unclear, the existing disagreement
on this issue is quite clear. The signatories favor
language that would exempt them from the provisions of
the bill that are based on the settlement, during the
pendency of the settlement. Their argument is based on
the fact that the settlement already contains enforcement
mechanisms. The settlement does not authorize
individuals to bring suit against the signatories for
violations of the settlement, and they do not believe it
is appropriate for California law to authorize such
suits.
Those who would like to see the signatories subject to
private rights of action for violations of this bill
believe that signatories and non-signatories alike should
be answerable for their compliance (or noncompliance)
with this bill. They are concerned that individuals do
not have redress against servicers who violate the
settlement, and view this bill as a way to provide such
redress.
a. Should this bill have a sunset date? Virtually
all of the problems it is trying to address occurred as a
result of the foreclosure crisis, a lengthy period of
economic stagnation which will eventually end. Will the
requirements of this bill still be appropriate, after
California's housing market has returned to the position
of strength it has traditionally held within California's
economy, and once foreclosures occur most frequently on
properties that hold more value than is owed to the
foreclosing beneficiary?
SB
1471 (DeSaulnier and Pavley), Page 21
b. Both this bill and SB 1470 amend Section 2924 of the
Civil Code, but do so in different ways. The sponsor of
both this bill and SB 1470 also envision having the
Office of Homeowner Protection handle borrower questions
and complaints regarding the provisions of both bills.
Double-jointing amendments will be necessary, and
contingent enactment may be advisable, once the bills are
closer to their final forms.
7. Related Legislation:
a. SB 1470 (Leno et al) and AB 1602 (Eng and Feuer),
2011-12 Legislative Session: Would enact several changes
to the rules governing the nonjudicial foreclosure
process for residential real property, establish an
Office of Homeowner Protection to help respond to
borrower inquiries about and complaints regarding
compliance with the new rules, and provide for
enforcement mechanisms, as specified. SB 1470 is pending
a hearing in this Committee. AB 1602 is pending a
hearing in the Assembly Banking and Finance Committee.
b. AB 2425 (Mitchell): Identical to this bill.
Pending a hearing in the Assembly Banking and Finance
Committee.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
Attorney General Kamala Harris (sponsor)
AFSCME
California Professional Firefighters
Center for Responsible Lending
Consumers Union
Lutheran Office of Public Policy-California
PICO California
San Francisco Office of the Assessor-Recorder
SEIU
Opposition
California Association of Realtors
California Bankers Association
California Chamber of Commerce
SB
1471 (DeSaulnier and Pavley), Page 22
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
Civil Justice Association of California
Securities Industry and Financial Markets Association
United Trustees Association
Consultant: Eileen Newhall (916) 651-4102