Copyright © 2012 by K&L Gates LLP. All rights reserved. HOMEOWNER BILL OF RIGHTS Ready for the January 1 Hangover? Jonathan D. Jaffe Laurence E. Platt.

Copyright © 2012 by K&L Gates LLP. All rights reserved.

HOMEOWNER BILL OF RIGHTSReady for the January 1 Hangover?

Jonathan D. JaffeLaurence E. Platt

K&L Gates LLP

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Prelude to Homeowner Bill of Rights

On February 9, 2012, five of the largest banks entered into a $26 Billion National Mortgage Servicing Settlement Agreement (“NMS”) with 49 state attorneys general (including California) and a number of federal regulatory agencies

Less than 2 weeks later, Attorney General Kamala Harris and some senior legislators announced the “California Homeowner Bill of Rights,” designed to make permanent in California many of the aspects of the NMS

The bills were moved from the regular legislative process to a conference committee, resulting in a very expedited process with limited input from the industry

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Five Bills

The Foreclosure Reduction Act Of 2012 - AB 278 / SB 900

Blight Prevention - AB 2314

Tenant Protection - AB 2610

Enhancement Of Attorney General Enforcement Act - AB 1950

Attorney General Special Grand Jury Act - SB 1474

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The Foreclosure Reduction Act (“FRA”) – General SB 1137 - Amends and supplements 2008 emergency

legislation that implemented three categories of borrower and tenant protections

Imposed mandatory notification, meeting and consultation process that foreclosing lenders/servicers were required to make available to borrowers prior to filing a notice of default (“NOD”)

Also required REO owners to give tenants of foreclosed residential property a minimum of 60 days’ written notice to quit, before evicting them

Authorized local governments to impose civil fines of up to $1,000 per day for failure of a lender or other purchaser in foreclosure to maintain vacant residential property in good condition and repair

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The Foreclosure Reduction Act (“FRA”) – General (cont’d) Who’s Covered - Places burden of compliance on the

“mortgage servicer” - the person who directly services the loan or is responsible for interacting with the borrower, managing any escrow account, or enforcing the loan, either as the current owner of the note or as the owner’s agent

Covers master servicers, owners/servicers, subservicers Terminology in bills not always consistent - sometimes

“mortgage servicer,” sometimes “mortgagee, trustee, beneficiary, or authorized agent,” and sometimes combinations

Doesn’t cover trustees, or authorized agent of a trustee, acting under “deed of trust” (“DOT”)

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The Foreclosure Reduction Act (“FRA”) – General (cont’d) Large and Small Servicers - The FRA distinguishes between

(a) regulated/licensed lenders/servicers that conduct 175 or fewer California residential mortgage foreclosures during immediately preceding annual reporting period as established by its primary regulator (“Smaller Servicers”), and (b) other lenders/servicers (“Larger Servicers”)

Procedures applicable to Larger Servicers are much more detailed

SB 900 limits application of following to Larger Servicers: contacting the borrower prior to default, dual tracking, single point of contact, and some private right of action provisions

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The Foreclosure Reduction Act (“FRA”) – General (cont’d)

Loans Covered - First lien, consumer purpose residential mortgage loans secured by a one-to-four family residence, owner occupied, with borrow who is natural person and the trustor (subject to very limited exceptions)

Unlike SB 1137, not limited to loans made between 2003-2007

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The Foreclosure Reduction Act (“FRA”) – General (cont’d)

Initiating Foreclosure – Only holder of a beneficial interest under the DOT, the holder's designated agent, or the trustee under the DOT may initiate nonjudicial foreclosure

No agent of the holder of the beneficial interest or trustee may record an NOD or otherwise commence foreclosure proceedings unless they are acting within the scope of authority designated by the holder of the beneficial interest

This requirement applies to all loans, not just residential mortgage loans

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The Foreclosure Reduction Act (“FRA”) – General (cont’d)

Sunset – In numerous places HOBR contains alternative sections

One version in effect from 1/1/2013 through 1/1/2018, and another on and after 1/1/2018

Where to Find – HOBR is found in 16 sections of the Civil Code, with the same subject sometimes addressed in multiple sections

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The Foreclosure Reduction Act – Notices

Mortgage servicer, mortgagee, trustee, beneficiary or authorized agent may not record an NOD until 30 days after:

Initial contact, following existing SB 1137 protocols - e.g., assessing borrower’s financial situation and exploring options for foreclosure avoidance, or

Servicer satisfies due diligence requirements to attempt to locate borrower with no borrower response, again following SB 1137 protocols

A new declaration of compliance must be attached to the NOD

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The Foreclosure Reduction Act – Notices (cont’d) Upon borrower request for foreclosure prevention alternative,

servicer must establish a single point of contact (“SPOC”) and provide borrower with one or more direct means of communication with the SPOC

Larger Servicers must also inform the borrower in a pre-NOD outreach package:

Of any applicable protections provided under the SCRA That borrower may request copies of the note, deed of

trust, assignments of the deed of trust, and a payment history as of the date the borrower was last less than 60 days delinquent

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The Foreclosure Reduction Act – Loan Mods and Dual Tracking Larger Servicers subject to loan mod provisions in Sections

2923.55, 2923.6, 2923.7, 2924.9, 2924.10 and 2924.11 There’s some overlap and internal inconsistencies

Restricts dual tracking (i.e., servicer forecloses while application for a loan modification is pending)

In some places HOBR refers to “first lien loan modifications,” while in others to “foreclosure prevention alternatives” (defined in Section 2920.5(b) as a “first lien loan modification or another available loss mitigation option”)

Unclear whether the Legislature intended different meanings

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The Foreclosure Reduction Act – Loan Mods and Dual Tracking (cont’d) HOBR says no particular result required under loss mit

process Keeps SB 1137 requirements, but requires more of servicer in

handling borrower loan mod requests, including appeal process if denial

Unless borrower previously exhausted the loan mod process, servicer that offers one or more foreclosure prevention alternatives must, within 5 business days after recording an NOD, send borrower written communication informing that borrower may be evaluated for a foreclosure prevention alternative and describing the application process

Upon borrower request for a foreclosure prevention alternative, mortgage servicer must promptly establish an SPOC

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The Foreclosure Reduction Act – Loan Mods and Dual Tracking (cont’d)

When borrower submits a “complete” first lien modification application - or any document in connection with a first lien modification application - mortgage servicer must: provide written acknowledgment of receipt within 5 business days, describe loan mod process, state any deadlines, and identify any deficiencies in the documents submitted by the borrower.

Question whether this acknowledgement applies after receipt of any document received after receipt of initial application.

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The Foreclosure Reduction Act – Loan Mods and Dual Tracking (cont’d)

Servicer may not record an NOD or Notice of Sale (“NOS”) or conduct a trustee’s sale while the application is pending, or until any of the following occurs: (1) servicer makes a written determination that the borrower is not eligible for the mod, and the applicable appeal period has expired; (2) the borrower does not accept an offered mod within 14 days of the offer; or (3) the borrower accepts an offered mod but breaches his obligations under the mod

Application deemed “complete” when a borrower has supplied servicer with all required documents within reasonable timeframes specified by the servicer

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The Foreclosure Reduction Act – Loan Mods and Dual Tracking (cont’d)

Servicer must send borrower written notice of denial of loan mod, including information on: (1) the reasons for denial; (2) borrower’s appeal rights; and (3) if applicable, a description of other foreclosure prevention alternatives “for which the borrower may be eligible,” and steps borrower must take to be considered for those options

Convoluted, unclear language that is likely to result in questions as to how many times a servicer must consider an application for a foreclosure prevention alternative

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The Foreclosure Reduction Act – Loan Mods and Dual Tracking (cont’d)

If the borrower’s application is approved, the lender may not record an NOD or NOS while the borrower is in compliance with its terms

Servicer must record a rescission of an NOD or cancel a pending trustee’s sale upon the borrower executing a permanent foreclosure prevention alternative

If short sale, rescission/cancellation must occur when sale has been approved by all parties and lender has received proof of funds or financing

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The Foreclosure Reduction Act – Loan Mods and Dual Tracking (cont’d)

Servicer may not charge any application, processing, or other fee for a first lien loan modification or other foreclosure prevention alternative

While a foreclosure prevention alternative is being considered, or denial is being appealed, servicer may not collect late fees

Within 5 business days following a postponement of a foreclosure sale for 10 or more business days, the mortgagee must provide written notice to the borrower regarding the new sale date and time

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The Foreclosure Reduction Act – Single Point of Contact

Mandates that Larger Servicers provide an SPOC for the borrower if the borrower applies for a foreclosure prevention alternative, and must provide borrower with one or more direct means of communication with their SPOC

Likely that servicers will build this in at time of initial contact and throughout default process

SPOC is satisfied by an individual or team of individuals, provided each team member has knowledge of the borrower’s status and remains with the borrower throughout the pre-foreclosure process

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The Foreclosure Reduction Act – Robosigning All documents filed in support of a foreclosure must

be verified for accuracy, complete, and supported by competent and reliable evidence

Includes NODs, supporting declarations (including declarations recorded pursuant to Civil Code §§ 2923.5 or 2923.55), NOSs, assignments of DOTs, and Substitutions of Trustee recorded in connection with a nonjudicial foreclosure, as well as declarations filed in court with respect to any foreclosure proceeding

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The Foreclosure Reduction Act – Robosigning (cont’d)

Mortgage servicers that engage in multiple and repeated unverified signings of foreclosure documents - “robosigning” – are subject to a $7,500 civil money penalty per DOT

May be levied by a government entity, including the primary California regulator or licensing agency

No private right of action

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The Foreclosure Reduction Act – Private Right of Action

Provides a private right of action (“PRA”) for “material” violations, e.g., failing to provide a SPOC, processing a dual-track foreclosure, etc.

PRA available against Smaller Servicers for material violations of Sections 2923.5, 2924.17 or 2924.18, and against Larger Servicers for material violations of Sections 2923.55, 2923.6, 2923.7, 2924.9, 2924.10, 2924.11, or 2924.17

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The Foreclosure Reduction Act – Private Right of Action (cont’d)

If the property has not been sold, the borrower may sue to enjoin the sale and seek attorney fees for material violations

Servicer may seek to dissolve the injunction if it corrects and remedies material violation

Servicer, mortgagee, trustee, beneficiary, or authorized agent can avoid liability for any violation corrected and remedied prior to recordation of a trustee's deed upon sale

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The Foreclosure Reduction Act – Private Right of Action (cont’d) If the property has been sold, the borrower may sue in civil

court for actual economic damages resulting from material violation, plus attorney fees

If the violation was willful, intentional or reckless, the court may award the borrower the higher of $50,000 or treble actual damages

This is in addition to any other rights, remedies, or procedures available under any other law

A violation is deemed a violation of the servicer’s charter or license, so subject to agency administrative enforcement

In theory, could include loss of license

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National Mortgage Settlement

National Servicing Standards Foreclosure Information and Documentation Third-Party Provider Oversight Dual Track Foreclosures Single Point of Contact Online Loan Portal Loan Mod Timelines Independent Evaluation of Mod Denials Transfer of Servicing Protections for Military Personnel Servicing Fees

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National Mortgage Settlement (cont’d)

Loan Modification Requirements, Foreclosure Information and Documentation

Consumer Relief Requirements Principal Reduction First-Lien Mods Second-Lien Portfolio Mods Actions by Subservicers

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National Mortgage Settlement (cont’d)

Refinance and Other Loss Mitigation Requirements Short Sales Deficiency Waivers Forbearance for Unemployed Borrowers

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National Mortgage Settlement (cont’d)

Enforcement Settlement Monitor Internal Review Group Quarterly Reports Potential Violations and Right to Cure Releases from Liability Implementation by Servicers

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Tenant Protection – AB 2610

Expands state law to protect tenants in a foreclosed property from eviction for 90 days following a sale of the home

Also requires purchasers of a rental property in a foreclosure sale to honor tenant’s existing fixed lease, unless the new owner plans to make the property her principal residence or the tenant is the original mortgagor

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Blight Prevention - AB 2314

Removes the sunset provision from laws allowing local governments to fine owners of blighted property by up to $1,000 per day

The law also extends the grace period for owners to correct the problem to 60 days for those who purchased a foreclosed home after 2008

Also gives receivers the ability to seek a court order ordering the blighted property’s owner to pay these unrecovered costs

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Enhancement Of Attorney General Enforcement Act - AB 1950

Permanently prohibits businesses from charging an up-front fee for mortgage renegotiation services

Also expands the state statute of limitations to three years for the prosecution of these provisions

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Attorney General Special Grand Jury Act – SB 1474

Authorizes California AG to convene a special grand jury to investigate and indict perpetrators of financial crimes involving victims in multiple jurisdictions

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Introducing our Blog

For news and developments related to consumer financial products and services, please visit our blog at www.consumerfinancialserviceswatch.com and subscribe to receive updates.

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Thank you

Jonathan D. Jaffe415 [email protected]

Laurence Platt202 [email protected]

www.klgates.com