The foreclosure of residential properties in California, and the rights and obligations of mortgage lenders and homeowners undergoing that process, will be subject to a new and dramatically different legal structure, beginning January 1, 2013.
In response to the economic, political, and practical effect of over 900,000 foreclosures in the state between 2007 and 2011, the Legislature enacted an omnibus legislative package named the Homeowner Bill of Rights (HOBR) in 2012. The HOBR significantly changes the rights and remedies available to “mortgage servicers” for nonjudicial foreclosures while creating potential liability to and remedies for borrowers.
The HOBR requires a “mortgage servicer” to provide qualified borrowers with a specifically defined and legally protected opportunity to seek a “foreclosure prevention alternative” before they or a trustee can proceed to record a notice of default (NOD) or conduct a trustee’s sale.
KEY HOBR TERMS
A “foreclosure prevention alternative” is a loan modification or other loss mitigation measure. Apart from referencing federal, state, or private loan modification programs, the HOBR is vague as to what qualifies as such a program.
A “mortgage servicer” includes any person or entity who directly services a loan; is responsible for interacting with a borrower; manages a loan account; or is the current owner of the promissory note or is the owner’s authorized agent. A trustee or its agent does not fall within the definition of a “mortgage servicer.”
A “borrower” is any natural person who may potentially qualify for any of loan modification program. Borrowers who have filed for bankruptcy, left their home or surrendered the keys voluntarily, or contracted with a business who provides advice on avoiding legal obligations to lenders are ineligible to seek the benefits of the HOBR.
The HOBR mandates the following:
- NOD Recording Restrictions. A servicer is prevented from recording a NOD under Civil Code Section 2924 until 30 days have lapsed after the servicer contacts a borrower to assess their financial situation and explore options with them to avoid foreclosure. On the other hand, a servicer can record a NOD without contacting a borrower, provided it first satisfies certain due diligence requirements related to trying to reach the borrower and inform them on actions that can be taken to avoid foreclosure.
- Borrower Loan Documentation. Servicers must inform borrowers that they are entitled to receive a copy of their loan documents; a copy of any document related to an assignment of their loan; and the borrower’s payment history since the borrower was last less than 60 days past due.
- Notice to Military Personnel and Their Dependents. A servicer cannot record a NOD until it not only complies with the above requirements but also notifies the member of the military or their dependents of their rights under the Servicemembers Civil Relief Act and the availability of counseling.
- “Dual Tracking” Banned. Servicers are prohibited from engaging in “dual tracking;” that is, proceeding with the foreclosure of a property while also concurrently processing a borrower’s “completed” loan modification application. A “completed” application is one where the servicer has received all required documents from the borrower within reasonably set deadlines.
Once an application has been processed, a servicer or trustee cannot go ahead with a foreclosure unless the borrower fails to qualify for a loan modification, accept an offer to modify a loan within 14 days, or comply with the terms of the loan modification. A borrower who is denied a modification must receive a notice describing the reasons for the servicer’s decision and is entitled to appeal that decision within 30 days.
A servicer or trustee can record a NOD or conduct a trustee’s sale after:
- 31 days have passed after the borrower receives written notification that the borrower does not qualify for a loan modification; or
- the later of 15 days after an appeal is denied or 14 days after an appeal is granted but the borrower does not accept a loan modification granted after a successful appeal or the borrower does not make the first loan payment on time.
To avoid borrowers submitting multiple applications to delay foreclosure, servicers are not required to consider applications from borrowers who applied for loan modifications before January 1, 2013, and who were evaluated, or were afforded a “fair opportunity” to be evaluated, for a modification. The same standard applies to applications submitted after that date unless there has been a “material change” in the borrower’s financial circumstances and the borrower submits documentation supporting that change.
KEY ISSUES FOR SERVICERS – The HOBR is unclear as to when a servicer provides a “fair opportunity” to be evaluated for a loan modification. The law is also equally vague as to when there is a “material” change in the borrower’s financial situation.
- “Single Point Of Contact.” Servicers must provide a borrower with a “single point of contact” who can communicate with that borrower directly after they request a loan modification or other foreclosure prevention measure. A “single point of contact” is defined as an individual or personnel team who has the ability and authority to:
- explain the process for applying for foreclosure relief;
- coordinate receipt of documents and notify the borrower of missing documents;
- keep the borrower informed of the status of their application; and
- have access to individuals who can stop a foreclosure when needed.
- Borrower Notice After A NOD Is Recorded. As long as a borrower has not exhausted their right to obtain a loan modification, a servicer must provide a borrower with written notice within five days of recording a NOD of the opportunity to be evaluated for such a modification or other similar alternative and the process by which that can be accomplished.
- Servicer Obligations After Loan Modification Approval. Once a loan modification is approved in writing, a servicer or trustee is barred from recording a NOD or conducting a trustee’s sale if the borrower is in compliance with a loan modification or forbearance agreement and all parties have agreed to that modification, including the first lien investor and any junior lienholders.
- Borrower Enforcement Rights.
- Injunctive Relief Prior To Trustee’s Sale. Borrowers may seek to enjoin a trustee’s sale for a material violation of any of the above servicer obligations. If granted, the injunction will only be dissolved after the servicer shows that the violation has been remedied.
- Monetary Damages After Trustee’s Sale. Borrowers may recover actual economic damages after a trustee’s deed upon sale has been recorded for any of these violations. If the court finds that the violation was intentional or reckless or resulted from willful misconduct, the servicer can be liable for damages in an amount equal to the greater of treble actual damages or $50,000. However, servicers will not have liability if the alleged violations are corrected before recordation of the Trustee’s Deed Upon Sale.
- Attorneys’ Fees. A court may award reasonable attorneys’ fees and costs to a borrower who obtains an injunction or recovers damages.
- National Mortgage Settlement. Lenders in compliance with the settlement terms reached in the case entitled United States of America v. Bank of America Corporation are not liable for violations of HOBR requirements.
KEY ISSUE FOR SERVICERS – The HOBR does not define the term “material violation.” Litigation is likely to ensue as to what violations by a servicer are actually “material.”
- “Robo-signing” Prohibition. Responding to the claimed practice of certain bank employees signing foreclosure documents without reviewing them or verifying the accuracy of information contained within those documents, servicers will now have to ensure that they have reviewed “competent and reliable evidence” to substantiate the borrower’s default and its right to foreclose, including the borrower’s loan status and loan information. Failure to comply with this requirement can subject a servicer to a civil penalty of up to $7,500 per mortgage or deed of trust in an action brought by civil prosecutors or an administrative proceeding filed by certain governmental agencies.
- Agent And Trustee Authority To Initiate Foreclosure Proceedings. No agent of the holder of the beneficial interest of a deed of trust or mortgage or trustee may start a foreclosure proceeding unless acting within the “scope of authority” given by that holder of the beneficial interest in that security.
The HOBR requirements apply to any “owner-occupied” residential property with no more than four dwelling units. In addition, servicers who foreclose on 175 residential properties or less annually are subject to less stringent requirements under the HOBR. Finally, the HOBR is scheduled to sunset as of January 1, 2018.
As is often said, “the best offense is a good “defense” and nowhere is that more true than with the HOBR. Lenders and other servicers who establish the proper loan modification procedures required by the HOBR and train their employees to follow these procedures religiously will likely be successful in avoiding liability to borrowers.
This document is intended to provide you with information about business solutions law related developments. The contents of this document are not intended to provide specific legal advice. This communication may be considered advertising in some jurisdictions.