On July 8, 2008, Governor Schwarzenegger signed SB 1137 which adds new procedural steps that a lender must follow in California before conducting a non-judicial foreclosure sale under a deed of trust covering the principal residence of any person, when the deed of trust secures a loan made between January 1, 2003 and December 31, 2007 – regardless of whether the loan was consumer or commercial in nature and regardless of the purpose of the loan. It is not necessary that the person subject to the foreclosure be the borrower under the loan or have received the loan proceeds.1 The law remains in effect through January 1, 2013.
Certain provisions of SB 1137, which was categorized as an "urgency statute," are operative immediately, while other provisions become operative 60 days after the effective date (i.e., 60 days after July 8, 2008, which is September 6, 2008). Consequently, immediate attention is necessary either to ensure immediate compliance or to develop and implement additional procedural steps to comply with provisions that become operative in less than two months.
Contacting Borrower Prior To Filing Notice Of Default
SB 1137 adds additional procedural steps that a mortgagee, trustee, beneficiary, or authorized agent must follow before filing a notice of default pursuant to Cal. Civ. Code § 2924 for loans made from January 1, 2003, to December 31, 2007, inclusive, that are secured by residential real property and are owner-occupied residences.
At least 30 days prior to filing the notice of default, a mortgagee, trustee, beneficiary, or authorized agent must either make contact with the borrower or satisfy other due diligence requirements set forth in SB 1137.
Contact with the borrower must be in person or by telephone "in order to assess the borrower's financial situation and explore options for the borrower to avoid foreclosure." The borrower must be advised that he or she has the right to request a subsequent meeting, and if requested, the meeting must be scheduled to occur within 14 days. Whether the assessment of the borrower's financial situation occurs during the first contact, or at the subsequent meeting, the borrower must be provided with the toll-free telephone number made available by the United States Department of Housing and Urban Development to find a HUD-certified housing counseling agency.
If a mortgagee, beneficiary, or authorized agent has failed to contact the borrower as set forth above, the notice of default may be filed provided that the failure to contact the borrower occurred despite the "due diligence" of the mortgagee, beneficiary or authorized agent. Satisfaction of "due diligence" requires the performance of a number of specific, sequential tasks, which are identified in detail in SB 1137, and include, but are not limited to: (1) attempting contact via a first-class letter; (2) attempting contact via telephone, with at least three call attempts (at different hours and on different days); (3) attempting contact via a certified letter; and (4) providing a prominent link on the homepage of the Internet Web site of a mortgagee, beneficiary, or authorized agent, to certain information as set forth in SB 1137.
The provision discussed above becomes operative 60 days after the effective date of SB 1137 – on September 6, 2008.
Declaration In Notice Of Default Or Notice Of Sale
SB 1137 provides that the notice of default must include a declaration from the mortgagee, beneficiary, or authorized agent that it has contacted the borrower, that it has tried with due diligence to contact the borrower, or that the borrower has surrendered the property.
If a mortgagee, trustee, beneficiary, or authorized agent had already filed a notice of default prior to the enactment of SB 1137,2 and did not subsequently file a notice of rescission, then a notice of sale filed pursuant to Section 2924f (1) must include a declaration that the borrower was contacted "to assess the borrower's financial situation and to explore options for the borrower to avoid foreclosure" or, (2) in the event no contact was made, must list the efforts made to contact the borrower.
As such, detailed, contemporaneous records should be maintained in anticipation of preparing such declarations to be included in either the notice of default or the notice of sale. SB 1137 also requires an additional posting and mailing of foreclosure-related information upon the posting of a notice of sale. The post and mailing must contain specific language set forth in SB 1137.
The provisions discussed above become operative 60 days after the effective date of SB 1137 – on September 6, 2008.
Tenant Or Subtenant In Possession Of A Rental Housing Unit
SB 1137 provides that a tenant or subtenant in possession of a rental housing unit at the time the property is sold in foreclosure must be given 60 days' written notice to quit pursuant to Section 1162 before the tenant or subtenant may be removed from the property. This provision does not affect any local just-cause eviction ordinance.
The provision discussed above takes effect immediately.
Maintenance Of Property
Section 5 of SB 1137 provides that a legal owner must maintain vacant residential property purchased by that owner at a foreclosure sale, or acquired by that owner through foreclosure under a mortgage or a deed of trust, and may be fined up to $1,000 per day for failing to maintain the property. This section targets excessive foliage, failure to prevent trespassers and squatters, and other conditions of public nuisance, including standing water and mosquito issues.
The provision discussed above takes effect immediately.
Encouragement Of Servicer Loan Modifications
SB 1137 also recognizes the concerns that loan servicers have expressed that they may lack authority in modifying realestate secured loans, by stating that a servicer is deemed to act in the best interests of all parties in agreeing to or implementing a loan modification or workout plan if: (1) the loan is in payment default, or payment default is reasonably foreseeable; (2) anticipated recovery under the loan modification or workout plan exceeds the anticipated recovery through foreclosure on a net present value basis, and (3) the loan modification or workout plan is consistent with the servicer's contractual or other authority.
As is readily apparent, SB 1137 affects a lender in all stages of the foreclosure process, whether the foreclosure process is in its beginning or final stages. Foreclosure and property maintenance procedures should be reviewed, updated, and modified to comply with SB 1137.
Footnotes
1. The exact scope of the new law is ambiguous, but this appears to be what was intended. The ambiguity is in new Civil Code Section 2923.5(i), which says: "This section shall apply only to loans made from January 1, 2003, to December 31, 2007, inclusive, that are secured by residential real property and are for owner-occupied residences. For purposes of this subdivision, 'owner-occupied' means that the residence is the principal residence of the borrower." "Borrower" is defined in Section 2923.5(e) as including a mortgagor or trustor.
The ambiguity arises because of the phrase "and are for owner-occupied residences." That can be interpreted to mean that the loan proceeds must be used for some purpose related to or for the benefit of the property (e.g., to purchase the property or construct improvements on the property). The legislative committee reports do not expressly address this issue, but several people involved in the drafting of and negotiations relating to the bill say that the phrase actually was intended to do nothing more than clarify that the subject property must be the principal residence of the person who owns the property in order to be within the scope of the bill. According to this interpretation, the use of the loan proceeds is irrelevant in determining whether the bill applies. Thus, if a person pledges a deed of trust on his principal residence to secure a loan made to his business, that deed of trust is subject to this law. The bill does not, by its terms, address the situation in which an individual has provided a guaranty to support a loan and pledges his or her principal residence to secure the guaranty (as opposed to the loan, itself).
2. Although the bill uses the phrase "prior to the enactment of this section" (which would mean prior to July 8, 2008), the Legislature probably intended that this provision mean "prior to the operative date of this section" (which would mean prior to the 60th day after enactment). Otherwise, a non-judicial foreclosure commenced in the period after July 8, 2008 but before September 6, 2008 would not be covered by this section even though the actual foreclosure sale does not occur until after this section became operative. The glitch probably occurred because, at the time this provision was drafted, the author assumed that this section would become operative immediately upon enactment. The 60-day delay in the operative date was the result of negotiations among interested parties.
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