United States: California Homeowner Bill Of Rights: A New Mortgage Law For The New Year

The California Homeowner Bill of Rights ("HBR") goes into effect on January 1, 2013. The HBR revamps California's non-judicial foreclosure statutes granting borrowers additional rights. It was designed to correct perceived abuses by lenders and servicers.

The HBR applies only to first lien mortgages or deeds of trust that are secured by owner-occupied residential real property. It does not protect: (i) entity borrowers; (ii) borrowers who purchased investment property; (iii) borrowers who are already in bankruptcy; (iv) borrowers who have already surrendered their property ; or (v) borrowers who have contracted with someone whose primary business is advising on how to delay or prevent foreclosure.

The HBR imposes the following requirements on all lenders and servicers:

• Ban on "Dual-Tracking": Upon receipt of a "complete application" for a loan modification, a lender/servicer must halt any foreclosure activity until it renders a decision on the application. A "complete application" means that the borrower has provided all of the documents requested. Cal. Civ. Code §§ 2923.6 and 2924.18.
• Ban On "Robo-Signing": Before filing or recording any declaration or notice relating to a foreclosure, the lender/servicer must review competent and reliable evidence to substantiate the borrower's default and the right to foreclose. Cal. Civ. Code § 2924.17.
• New Notice Requirements: Within five days of recording a notice of default, a lender must send the borrower a notice regarding foreclosure prevention alternatives (such as loan modification or short-sale), whether an application is required, and how to obtain an application. Also, whenever a trustee's sale is postponed for a period of at least 10 business days, the borrower must receive written notice of the new sale date and time within five business days of the date of the postponement. A failure to provide the notice of postponement does not invalidate an otherwise proper non-judicial foreclosure. Cal Civ. Code § 2924(a)(5).

If a lender conducted more than 175 residential foreclosures in California the previous year, then it is subject to the following additional requirements.

• Single Point Of Contact: For borrowers eligible for a loan modification (or other "foreclosure prevention alternatives"), lenders must designate a "single point of contact" – a person or team – with knowledge of the borrower's status and foreclosure prevention alternatives, and access to decision makers. The contact person or team is assigned to the borrower's account until all loss mitigation options have been exhausted or the loan is brought current. Cal. Civ. Code § 2923.7.
• Additional Notices Prior To Recording A Notice Of Default: In addition to existing requirements, the HBR prevents a lender/servicer from recording a notice of default until it sends the borrower: (i) a notice that service members may be entitled to certain additional specific legal protections and (ii) a written statement informing the borrower that he or she may request copies of the promissory note, deed of trust, any assignment, and the borrower's payment history. Cal. Civ. Code § 2923.55.
• Additional Notice To Borrower After Recording A Notice Of Default: Within five days of the recording of a notice of default, the lender/servicer must send a written notice informing the borrower: (i) that the borrower may be eligible for foreclosure prevention alternatives; (ii) whether an application is required to be considered for any foreclosure prevention alternatives; and (iii) the method by which a borrower may obtain an application for any foreclosure prevention alternatives. Cal. Civ. Code § 2924.5.
• Written Acknowledgement Of Receipt Of Complete Loan Modification Package: Within five business days of receiving a complete loan modification application or any document in connection with a loan modification, the lender/servicer must provide written acknowledgement of its receipt, including: (i) a description of the loan modification process; (ii) any deadlines that would affect the processing of the application; (iii) any expiration dates for submitted documents; and (iv) any deficiency in the borrower's loan modification application. Cal. Civ. Code § 2924.10.
• Lender/Servicer Must Halt The Foreclosure Process Once A Modification Is Approved: A notice of default may not be filed after a loan modification is approved. Any foreclosure notices recorded prior to an executed modification agreement must be rescinded. Cal. Civ. Code § 2924.11.
• Lender/Servicer May Not Charge Any Fees In Connection With A Loan Modification: A lender may not charge any fees in connection with the loan modification process. Cal. Civ. Code § 2924.11.

Enforcement

Except for the Robo-Signing provision, a borrower may sue for "material" violations of the HBR. Prior to foreclosure, a borrower may only obtain injunctive relief to prevent the foreclosure. After the foreclosure, the borrower can seek actual damages caused by the violation. If the violation is found to be willful or reckless, a borrower may obtain treble the actual damages or $50,000, whichever is greater. Cal. Civ. Code § 2924.12(b).

Only the government may enforce the Robo-Signing provision. Failure to comply with this provision may result in a civil penalty of up to $7,500 per loan. Cal. Civ. Code § 2924.17

A lender/servicer may avoid liability for any violation it has corrected prior to the date the trustee's deed upon sale is recorded. Cal. Civ. Code §§ 2924.12(c) and 2924.19(c).

The HBR also allows the borrowers, but not lenders or servicers, to recover their attorneys' fees if they prevail based on a violation of the act. A borrower "prevails" if he or she "obtained injunctive relief or was awarded damages" for a violation of the HBR. Cal. Civ. Code § 2924.12(i).

The HBR is expected to generate a new wave of mortgage litigation in California. Sheppard Mullin has a deep bench of experienced mortgage litigators ready to defend against these new claims.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.