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Homeowners Bill of Rights

Homeowner Bill of Rights

On February 29, 2012 California Attorney General Kamala Harris announced new sweeping legislation designed to protect homeowners in financial distress.  The bills comprising the Homeowner Bill of Rights were vetted in committees and passed by both the Assembly and the Senate with few modifications in a very short period of time.  On July 11, 2012, Governor Brown signed the Homeowner Bill of Rights into law.  Because of the speed at which this legislation was introduced and passed, many Californians are just beginning to learn of its passage and few know the details.  Nonetheless, the Homeowner Bill of Rights may prove to be the most important legislation protecting homeowners in California since anti-deficiency legislation was first enacted during the Great Depression.  In this article we are going to examine some of the key provisions of the Homeowner Bill of Rights.

 

APPLICABILITY:

Effective Date:  The Homeowner Bill of Rights becomes effective on January 1, 2013.  Civil Code §2924.15(b)

Instruments Affected:  The Homeowner Bill of Rights applies only to first deeds of trust secured by owner occupied residential properties, consisting of one to four dwelling units, unless otherwise indicated.  Civil Code §2924.15(a)

Eligibility Requirements:   To be eligible for protection under the Homeowners Bill of Rights, the borrower must be a natural person eligible for a foreclosure prevention alternative program offered by a servicer of residential loans.  Excluded are individuals who have filed for bankruptcy, surrendered the property, or who have entered into a contract with a third party who is in the business of advising persons how to avoid or delay foreclosure.  Civil Code §2920.5(c)

Applicability to Financial Institutions:  The Homeowners Bill of Rights applies to “mortgage servicers” who are defined as any person or entity who services a loan, or interacts directly with a borrower, and who manages a loan account, manages an escrow account, or enforces or security instrument.  This definition includes the owner of the note or an agent of the owner of the note.  The definition of a mortgage servicer does not include a trustee or a trustee’s agent acting under a power of sale, unless that trustee is otherwise a mortgage servicer within this definition.  Civil Code §2920.5(a)  

Exempt Financial Institutions:  Banks that have foreclosed on 175 or fewer residential properties, consisting of one to four dwelling units, in the preceding twelve month reporting period, are exempt from certain provisions of the Bill of Rights. Civil Code §2924.18(b)

Foreclosure Prevention Alternative:  The term “foreclosure prevention alternative” refers to any type of loss mitigation, including short sales and loan modifications, that would prevent the property from foreclosing.   Civil Code §2920.5(b)

 

PROHIBITED/REQUIRED ACTIONS:

Single Point of Contact Required:  A mortgage servicer must now provide a direct means of communication, with a single point of contact, to a borrower seeking a loan foreclosure alternative.   The single point of contact must have access to individuals who have the authority to stop the foreclosure, and will remain that contact until all options are exhausted or the borrower becomes current on the loan.  Banks that have foreclosed on 175 or fewer residential properties, consisting of one to four dwelling units, in the preceding twelve month reporting period are exempt.  Civil Code §2923.7

Required Acknowledgement of Receipt of Loan Modification Application:  A mortgage servicer is required to provide acknowledgement of receipt of any application for a loan modification or supporting documentation within five business days of receipt.  The acknowledgement must identify any defects in the application or supporting documentation and must inform the borrower of the length of time anticipated for a decision on the application.  The acknowledgement must provide certain information concerning the modification process.  This provision sunsets on January 1, 2018 and does not apply to banks that have foreclosed on 175 or fewer residential properties, consisting of one to four dwelling units, in the preceding twelve month reporting period.  Civil Code §2924.10

Notification of Reasons for Denial of Application:   Under current law, a lender must notify the borrower of the reason for denial of an application for first lien loan modification within 30 days of the denial. These provisions sunset on January 1, 2018.  At that time, the mortgage servicer will be prohibited from recording a notice of sale, or conducting a trustee sale, while the application for a foreclosure alternative is pending.  Banks that have foreclosed on 175 or fewer residential properties, consisting of one to four dwelling units, in the preceding twelve month reporting period are exempt. Civil Code §2923.6 and Civil Code §2924.11

Dual Tracking Prohibited during Loan Modification:  A mortgage server is prohibited from recording a notice of default, a notice of sale or conducting a trustee sale while a loan modification is pending, or while the borrower is in a trial phase of a loan modification.  The borrower has 30 days in which to appeal a denial of a loan modification.  The mortgage servicer is prohibited from initiating any of the above foreclosure actions, during an appeal of a denial, or if no appeal is filed, until 31 days after denial of the loan modification.    The post denial prohibition on the institution of foreclosure actions will sunset on January 1, 2018 and thereafter the mortgage servicer is only prohibited from instituting the foreclosure actions while the modification is pending.   Caveat:  A mortgage servicer is not required to consider a loan modification of a person who has been provided a fair opportunity for consideration for a modification or short sale prior to January 1, 2013, unless that person submits documentation of a material change in his or her financial circumstances. The prohibition on foreclosure activities during the appeal time does not apply to banks that have foreclosed on 175 or fewer residential properties, consisting of one to four dwelling units, in the preceding 12 month reporting period.  Civil Code 2923.6 and Civil Code 2924.11

No Dual Tracking after Approval of Foreclosure Alternative:  Once a short sale has been approved by all interested parties, and proof of funds has been provided, the mortgage servicer is prohibited from recorded a notice of default or a notice of trustee sale and is required to cancel any pending trustee sales.  One of the most common complaints in the past five years has been that mortgage servicers would foreclose on property after a short sale had been approved and agreed upon by the parties.  This provision is intended to prevent this from occurring. A lender is required to rescind a notice of default or cancel a trustee sale in all situations where the lender and borrower have agreed to a foreclosure alternative.  These provisions will sunset on January 1, 2018 and do not apply to banks that have foreclosed on less than 175 residential properties, consisting of one to four dwelling units,  in the preceding 12 month reporting period.  Civil Code §2924.11

Prohibition on Unauthorized Foreclosure:  A common complaint in recent years has been the lenders have instituted foreclosure proceedings without proper authority or have signed documents attesting to authority without thoroughly reviewing those documents.   The Homeowner Bill of Rights prohibits lenders from recording a notice of default, or otherwise instituting foreclosure proceedings, unless that entity is a holder of beneficial interest by a deed of trust, a lawfully designated agent of the holder of the deed of trust, or the original substituted trustee under the deed of trust.  A mortgage servicer is required to verify the accuracy and completeness of foreclosure documents including a declaration of contact with borrower, notice of default, notice of sale, assignment of deed of trust, substitution of trustee and declarations and affidavits in a foreclosure or in any judicial proceeding pertaining to a foreclosure.  A recurring and uncorrected failure to comply with these provisions subjects the mortgage servicer to a penalty of $7500.00 per trust deed in an action brought by the Attorney General, the District Attorney or a city attorney or in an administrative proceeding brought by the Department of Real Estate, the Department of Corporations or the Department of Financial Institutions.  These provisions apply to all trust deeds regardless of owner occupancy or number of units and will sunset on January 1, 2018.  Civil Code §2924(a)(6) and Civil Code §2924.17

Prohibition on Late Fees and Application Fees:  During the time that a completed application for a foreclosure alternative is pending, a denial is being appealed or the borrower is making timely payments under a loan modification program, the mortgage servicer is prohibited from collecting late fees on the loan.  A mortgage servicer is also precluded from collecting an application or processing fee for a loan modification or other foreclosure alternative.  A bank that has completed 175 or fewer foreclosures on residential properties, consisting of one to four dwelling units, within the preceding 12 month reporting period, is exempt from this provision.  Civil Code §2924.11(e)and (f)     

Approval of Foreclosure Alternative Binding on Subsequent Loan Purchasers:  Where a mortgage servicer has provided written approval of a foreclosure alternative, that approval is binding on subsequent purchasers of the loan.  This provision will sunset on January 1, 2018 and is not binding on mortgage servicers who have foreclosed on 175 or fewer residential properties, consisting of one to four dwelling units, in the preceding twelve month reporting period.  Civil Code §2924.11

Initial Contact Requirement:  Current California law requiring that a mortgage servicer contact the borrower, either in person or by telephone, 30 days prior to recording a notice of default to discuss foreclosure alternatives, will sunset on January 1, 2013.  The Homeowner Bill of Rights extends this requirement with no new sunset date.  During this initial contact the mortgage servicer must inform the borrower of the right to request a meeting within 14 days and must provide the borrower with a toll free telephone number to locate a HUD certified counseling agency.  If the mortgage servicer is unable to make contact with the borrower then a due diligence declaration, or a statement of exemption, must be recorded with the notice of default.  The current requirement that such declaration be recorded with a notice of sale is eliminated.  Effective January 1, 2013, this provision will apply to all first trust deeds recorded on owner occupied residential properties consisting of one to four dwelling units.  Civil Code §2923.5 and Civil Code §2923.55

Required Disclosure before Recording Notice of Default:  Mortgage servicers are prohibited from recording a notice of default unless the servicer first informs the borrower of the right to request copies of documents proving the right to foreclose including the promissory note, deed of trust, payment history and any assignment of the loan.  In addition, certain rights are provided under the Servicemen’s Relief Act if the borrower is a serviceman.  Banks that have completed 175 or fewer foreclosures on residential properties, consisting in one to four dwelling units, within the preceding 12 month reporting period are exempt from these requirements.  Sunsets on January 1, 2018.  Civil Code 2923.55

Required Disclosure after Recording Notice of Default:  Within five days after recording a notice of default a mortgage servicer is required to send written notice to the borrower informing the borrower how to apply for foreclosure alternatives.  This notification is not required if the borrower has previously exhausted loan modification opportunities offered by the lender.  Banks that within the previous twelve month reporting period have foreclosed on 175 or fewer residential properties, consisting of one to four dwelling units, are exempt from this provision.  This provision sunsets on January 1, 2018.  Civil Code 2924.11

Postponement of Trustee Sale:  A mortgage servicer must provide written notice of a new sale date within five business days whenever a trustee sale is postponed for longer than ten days.   This provision applies to all trust deeds, regardless of whether the property is owner occupied and regardless of the number of units.  Failure of the mortgage servicer to comply with this requirement will not invalidate the trustee sale.  This provision sunsets on January 1, 2018.  Civil Code §2924

 

ENFORCEMENT/PRIVATE RIGHT OF ACTION: 

Private Right of Action:  Where the mortgage servicer has failed to comply with the requirements of the Homeowner Bill of Rights, the borrower may have a private right of action to enjoin material violations.  The injunction will remain in place, and the trustee sale will be postponed, until the court has an opportunity to determine if there is a material violation.  If the trustee sale has already occurred, the mortgage servicer may be liable for actual damages.  Where the trustee sale has already occurred and the violation is shown to have been intentional or reckless, the mortgage servicer may be liable to the greater of treble actual damages or $50,000.00.  Civil Code §2924.12

Enforcement by Public Entity:  As set forth above, repeated unauthorized foreclosure may subject the mortgage servicer to penalties of $7500.00 per trust deed in an action brought by the Attorney General, the District Attorney or a city attorney or an administrative action brought by the Department of Real Estate, the Department of Corporations or the Department of Financial Institutions.   Civil Code §2924(a)(6) and Civil Code §2924.17

 

The Homeowner Bill of Rights is broad sweeping legislation that will significantly change the climate of residential foreclosures in California.  Until this legislation was passed, the California appellate courts were offering little hope to homeowners who alleged wrongful foreclosure, promissory estoppel or breach of contract arising from actions of the mortgage servicer.  After the Homeowner Bill of Rights goes into effect, on January 1, 2013, the consequences of engaging in unfair practices will be severe for the mortgage servicer.  The private right of action and the penalties for violation will make it difficult for many mortgage servicers to foreclose on properties, particularly where the mortgage servicer is unable to demonstrate that it possesses the right and the authority to foreclose.