The statutory procedures for California non-judicial foreclosures have dramatically changed in recent years, caused in part by the Great Economic Recession and related efforts to slow the tide of California residential foreclosures. California lawmakers have made several attempts to address the increasing volume of loan defaults, the overwhelming number of non-judicial foreclosures, the loss of hundreds of thousands of California homes, and the countless borrower claims about bank and lender abuses.
In addition to 2008-2009 revisions to the Civil Code (relating to timing, phone calls and notice requirements for foreclosures),California was also one of the largest recipients of benefits from the National Mortgage Settlement of 2012. That multistate settlement, involving five major banks (Citibank, JP Morgan Chase, Bank of America, Wells Fargo, Ally), resulted in payments of over $25 billion from the banks to several states for various loan, homeowner and foreclosure claim purposes. The stated goals of the settlement, which gave the participating lenders nearly unlimited releases from all borrower and foreclosure related claims, estimated to be in potential excess of $1 trillion, included: more and simpler modifications of residential loans, more borrowers being allowed to stay in their homes and, in some cases, even new loans with reductions of principal.
The California, and claims submission, portions of the settlement have not yet been made active. See settlement website, www.nationalmortgagesettlement.com, and the California Attorney General’s site, https://oag.ca.gov/nationalmortgagesettment.com. (As predicted by some, the settlement will be slowed down and burdened by its administrative aspects, which will result in costs and expenses which reduce the net funds available to individual borrowers.)
California Attorney General Kamala Harris, one of the principal negotiators, was not satisfied with the settlement. She is concerned about ongoing lender abuses and broad releases of liability, and the continued loss of California residential properties. As a result, Harris promoted the California “Homeowner Bill of Rights” (“HBOR”) package of laws which was introduced in the Legislature in 2011 (SB 900 and AB 278) to correct some of those lender homeowner problems, and to continue the reform of California foreclosure laws. These new HBOR laws (primarily for residential property owners and borrowers) consist primarily of changes to the California Civil Code. Signed into law by Governor Jerry Brown on July 11, the legislation will go into effect on January 1, 2013.
Considered by some as “California Foreclosure Reform 2.0,” the new HBOR package of laws would, among other things:
• Emphasize that California foreclosures have had “a devastating economic impact on state and local governments;”
• Distinguish between “smaller” and “larger” residential mortgage lenders, with more detailed procedures for the larger lenders (Civ. Code, §§2923.4, 2923.5, 2923.55);
• Place legal compliance burdens on the “mortgage servicer,” not the lender (Civ. Code, §2920.5);
• Prohibit “dual-tracking” (where loan modification negotiations are ongoing, the lender may not record foreclosure documents or conduct a nonjudicial foreclosure sale) (Civ. Code, §§2923.5, 2923.55, 2923.6, 2924.11, 2924.18);
• On a borrower’s request for a “foreclosure prevention alternative,” a larger lender must establish a “single point of contact” (individual or team) for each borrower with a “direct means of communication.”
(Civ. Code, §2923.7) [Note: the new laws do NOT specify any requirement that a borrower actually receive a “foreclosure prevention alternative,” like modification. They simply give a borrower “the opportunity” to discuss any available alternatives with its lender before foreclosure. But, that does NOT mean that an alternative has to be given by the lender.];
• Prohibit “robo-doc” signing of ALL foreclosure-related notices or declarations, and provides penalties of $7,500 per loan for “multiple and repeated uncorrected violations” (Civ. Code, §2924.17);
• Provide for a “private right of action” for borrowers to seek a court injunction and attorneys fees for “material violations” of the new laws, “up until a foreclosure sale is completed” (Civ. Code, §§2924.12, 2924.19), or to sue “after sale” for actual damages resulting from a material violation that was not corrected, including attorneys fees and civil penalties or treble damages (Civ. Code §§2924.12, 2924.19);
• Allow violations of the HBOR to be deemed violations of California charters or licenses and subject to California administrative agency enforcement and cessation of “continued engagement in California lending or servicing business (Civ. Cod,e §§2924.12, 2924.19).
Some attorneys have queried whether providing California homeowners with new rights to sue will be effective in a California court system that is facing massive budget cuts, layoffs, closures and delays. Putting troubled homeowners and borrowers into a judicial system facing its own current and future challenges and problems does not seem like the wisest of solutions. Why wasn’t a foreclosure court created, as in other states? The 2013 effective date for HBOR makes it too late for the more than 1 million
Californiahomeowners who have already lost their homes through foreclosure or illegal lender practices. Who is HBOR actually going to help? Its provisions for maximum $7,500 penalties for lender violations, per loan, seem extremely deficient. [Practice Note: Some analysts have also suggested, in light of HBOR language and its effective date, that most borrowers should avoid applying for, or making, a modification decision until after December 2012, so that some of the HBOR protections might be applicable and available to them.]
Other proposed California legislation would also work with the new HBOR laws to:
• Reduce, and provide measures to combat, crime in foreclosure-caused areas of blight (a problem in several California cities, including Stockton which has recently been forced to file bankruptcy) [AB 2314; SB 1472].
• Provide further protections for tenants living in foreclosed, or to-be-foreclosed, properties [AB 2610; SB 1473].
• Strengthen law enforcement tools to response to mortgage and foreclosure fraud [AB1950].
• Enhance grand jury processes to deal with complex, multi-jurisdictional fraud and crimes [AB 1763; SB 1474].
There may also be some remedies available, under federal law, to California homeowners who have lost their homes through, or dealt with, improper foreclosure. One soon-to-expire option is a claims and foreclosure review process that was created by the U.S. Office of the Comptroller of the Currency and the Federal Reserve Bank. It has recently been extended until Dec. 31. Under that agency-imposed process, 14 major residential loan servicers must now employ “independent consultants” to review borrower claims about foreclosure actions and proceedings that took place as to “primary residences” from Jan. 1, 2009 to Dec. 31, 2010. The foreclosure reviews are free and could result in payments of $500- $125,000 per loan for lost homes or damages. There are also other possible remedies, including loan modification, credit report corrections or readjustment of deficiency balances. Information about requesting a foreclosure review, which servicers are participating, and required forms, can be obtained at independentforeclosurereview.com and (888) 952-9105.
Recent federal laws regarding foreclosures, and to assist homeowners, include the 2009 “Economic Stabilization,” “Troubled Assets Relief Program (TARP),” and the “Helping Families Save Their Homes Act.” Some protections for tenants and renters were set forth in the federal “Protecting Tenants From Foreclosure Act of 2009,” 12 U.S.C. §5220, Note: Sections 701-704. (That law primarily gives additional time to tenants in foreclosed-on homes and allows for the remaining terms of their existing leases, and requires written 90-day notices before eviction proceedings can be commenced.) Those rare non-state law tenant protections are set to expire on Dec. 31, along with many other federal foreclosure-related protections, like the IRS exemption for foreclosure sale and short sale income taxes, unless Congress sees fit to extend them. Unfortunately, those needed legislative changes or extensions are not likely to be approved during the 2012 election year.
Few things are certain, but it is fairly predictable that there will continue to be a significant number of foreclosures in California. It is uncertain, however, whether the new HBOR or other laws will actually help stem the foreclosures, or help people stay in homes, or provide any relief to the millions of California“homeowners” who have been affected during the recession. With the continued loss of California residential properties, there will assuredly continue to be problems, and additional legislative and administrative efforts to fix or avoid them. More California foreclosure reform is as certain as the future large number of more California foreclosures, but will those future and additional changes in laws be any more successful, in keeping California property owners in their homes, than the past and recent changes of California Foreclosure Reform 1.0 and 2.0?
Michael R. Sment is a member of the CITATIONS Editorial Board, and practices Real Estate and Bankruptcy Law inVentura. He specializes in CA Foreclosure matters and issues.