California Is Poised to Enact Foreclosure Legislation
As California goes, so goes the nation? Let’s hope not, at least as to legislation that will make California the first state in the nation to codify provisions of the national mortgage settlement.
The new provisions will affect all entities that conduct more than 175 foreclosures a year in California. The Assembly and the Senate passed identical bills, and Gov. Brown is expected to sign the measure into law today.
Underlying these requirements is a fundamental shift in the obligations of the mortgage servicer, which will include providing a “meaningful opportunity” for borrowers to be considered for loan modifications and other “foreclosure prevention alternatives.”
The law imposes additional notice requirements, prohibits dual tracking and robo-signing and regulates the loan modification process. It also exposes servicers, foreclosure trustees and beneficiaries to very large penalties and payment of attorney’s fees for material violations of the new provisions.
The law will become effective on Jan. 1, 2013 and includes sunset provisions as of Jan. 1, 2018. However, many of the obligations will continue beyond that date due to separate, mirror-image provisions included in the law that take effect when the prior provisions expire.
Impact on Mortgage Servicers
• Longer, more complicated foreclosure process. By adding significant new procedures to the nonjudicial foreclosure process, the legislation will only further delay nonjudicial foreclosures in California, which took about a year on average in 2011.
• Bounty for trial lawyers. The private right of action and possibility of recovering attorney’s fees creates a win/win for trial lawyers. Lenders do have good lines of defense. Although materiality is not defined in the statute, it should be interpreted in the context of the purpose of the statute, which is to ensure borrowers have an opportunity to pursue foreclosure alternatives before the foreclosure sale. As long as the servicer remedies the violation before the foreclosure sale, then, the borrower should not be able to obtain an injunction. The private right of action states this expressly, providing that servicers that correct any material violation before the property has been sold at a foreclosure sale “shall not be liable.” However, servicers may have to litigate the case through summary judgment to defeat the borrower’s allegations of a material violation or prove any material violation has been corrected.
• Enhanced opportunity for strategic behavior. By creating numerous new technical obligations, the legislation will only expand what we have seen so far in California—borrowers filing suit based on bare-bones allegations of a “material” violation without any obligation to identify in the complaint the nature of the violation or how that violation impacted their access to foreclosure alternatives. We also expect borrowers will attempt to capitalize on the robo-signing provisions to try to breathe new life into the “hold the note” and MERS theories that the California Court of Appeal already rejected. Clogged court dockets will greatly delay the resolution of these cases, even for frivolous claims or those that are remedied after the litigation is filed.
• Possible defense for signatories of national mortgage settlement. Signatories will not be liable for any violation of these provisions if they are in compliance with the relevant terms of the settlement. Although “relevant” is not defined, it would seem to refer to the terms of the consent order that address the material violation alleged by a particular borrower. Signatories will have to consider how they can meet this compliance standard and may have to move for summary judgment to rely on this defense.
• Significant state-law conditions on lending activity by federally chartered institutions. Federally chartered servicers can, and likely will, argue that these new obligations are preempted by federal law. As many federal district courts have recognized with respect to current Civil Code section 2923.5, the right to foreclose in the event of default is an integral function of a bank’s federally authorized lending activities. Servicers will argue Congress did not indicate any intent to authorize state-law conditions on that right, so these new Civil Code provisions are preempted by the National Bank Act. Servicers also likely will argue that the law is expressly preempted by federal regulations as it creates state-law conditions on the exercise of several specified lending activities, including loan “servicing,” “disclosures” and “terms of credit,” areas expressly preempted by both OCC and OTS regulations.
The provisions in the proposed legislation apply only to first liens secured by the borrower’s principal residence. Many of the obligations apply only to entities that conduct more than 175 foreclosures a year. We will limit our discussion below to those provisions.
The stated purpose of the legislation is to ensure borrowers “are considered for, and have a meaningful opportunity to obtain, available loss mitigation options” offered by the servicer. The legislation also states expressly that the obligations imposed on servicers do not require a particular result from the servicer’s consideration of a borrower’s eligibility for any foreclosure prevention alternative and nothing in the statute obviates or supersedes the obligations of the signatories to the national mortgage settlement.
• Mortgage servicer: any entity that services a loan or is responsible for managing the account and enforcing the note and security instrument.
• Foreclosure prevention alternative: a first-lien loan modification or other available loss mitigation option.
• Borrower: a natural person potentially eligible for any federal, state, or proprietary foreclosure prevention alternative program offered by the mortgage servicer; excludes any borrower who has surrendered the property, contracted with an entity whose primary business purpose is to assist strategic defaulters in staying in their homes, or is in bankruptcy.
Additional Nonjudicial Foreclosure Requirements
Adds Civil Code section 2923.55, which augments existing obligations to contact borrower to explore foreclosure alternatives and file declaration of compliance.