Earlier this year, the state attorneys general from California and 48 other states, the District of Columbia, and federal agencies entered into the $25 billion National Mortgage Settlement (NMS) with the five largest mortgage loan servicers (Citi, Wells Fargo, Bank of America, Chase and Ally). Mortgage loan servicers collect from the borrower and remit to the mortgage holder. If the borrower does not make timely payments, the mortgage servicer has the power to bring a foreclosure or approve a loan modification or a short sale. In addition to the monetary provisions, the NMS focused on robosigning-the practice of routinely signing foreclosure affidavits outside the presence of a notary public and without reviewing the validity or accuracy of the sworn statements-and other mortgage servicing misconduct, including deceptive practices in offering loan modifications. The NMS is applicable for 3 years to loans serviced by the settling banks. For details of the settlement, see http://nationalmortgagesettlement.com/.
On July 11, 2012, California became the first state to enact legislation (stats 2012, ch 86) to codify provisions of the NMS. The legislation is intended to change California's nonjudicial foreclosure process to ensure that borrowers have a meaningful opportunity to obtain foreclosure prevention options offered by the borrower's mortgage servicer, such as loan modifications or other alternatives to foreclosure. The legislation applies to first liens-the most senior mortgage or deed of trust-secured by the borrower's primary residence. See CC §2924.15. In general, its obligations apply to mortgage servicers that conduct more than 175 foreclosures a year. Its key provisions are as follows:
- Prohibits robosigning and imposes civil penalties. The California law does not use the term robosigning; instead, it requires a mortgage loan servicer to ensure that it has reviewed competent and reliable evidence to substantiate the borrower's default and the right to foreclose before recording any foreclosure documents. An entity that engages in "multiple and repeated" violations of this requirement is subject to a civil penalty of up to $7,500 per loan in an action brought by a public prosecutor or in an administrative proceeding brought by the Department of Corporations, Department of Real Estate, or Department of Financial Institutions against one of its licensees. CC §2924.17.
- Requires a single point of contact (SPOC). The new legislation codifies the NMS SPOC provisions, which require servicers to establish an individual or team of personnel knowledgeable about the borrower's financial situation and current status in the foreclosure prevention process and provide a means of communication with the SPOC. The SPOC must ensure that the borrower is considered for all foreclosure prevention alternatives offered by the servicer, communicate the application process and the deadline for any required submissions, coordinate receipt of all documents and notify the borrower of any missing documents. CC 2923.7.
- Bars dual tracking. If a borrower applies for a first lien loan modification, the loan servicer must render a decision on the loan modification application and allow time for appeal before filing a notice of default or notice of sale, or conducting a trustee's sale. Amended CC §2923.6. In addition, if a borrower's application has been approved and the borrower is in compliance with the foreclosure prevention alternative or proof of funds or financing has been provided to the servicer, the servicer may not proceed with foreclosure. CC §2924.11.
- Provides a private right of action. The legislation provides a private right of action for material violations of key provisions related to the prohibitions against dual tracking, SPOC, and false or incomplete documents. A borrower may seek to enjoin a substantial violation of the specified sections, along with any trustee's sale. After the trustee's deed is recorded following a foreclosure sale, the borrower may pursue an action for money damages consisting of actual economic damages sustained and treble damages or a statutory minimum when a violation is committed intentionally, recklessly or willfully. Attorney fees and costs may be awarded to a prevailing borrower. CC §2924.12.
The legislation becomes effective January 1, 2013, and sunsets various provisions as of January 1, 2018. For many of its obligations, there are mirror-image provisions that become effective on the expiration of the prior provisions.
This legislation is part of the Homeowner Bill of Rights package. Among the other components are pending bills to protect tenants in foreclosed properties. AB 2610 (2012), SB 1473 (2012).
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