Less than six months ago, the federal government and 49 states announced a $25 billion settlement with the country’s five largest loan servicers, which, among other things, involves nationwide reforms to mortgage servicing standards and foreclosure practices. This, however, appears to be only the tip of the iceberg, as servicers are still subject to regulation by individual states. Numerous states are proposing a range of new foreclosure regulations that build upon and extend reforms in the national mortgage settlement. Earlier this month, California became the first state to actually enact such legislation.
On July 11, California Governor Jerry Brown signed into law the California Foreclosure Reduction Act, which is just one component of a broader Homeowner Bill of Rights that California Attorney General Kamala Harris first proposed three years ago. The act, which takes effect Jan. 1, 2013, creates new hurdles and procedural requirements for lenders and servicers in completing non-judicial foreclosures on residential properties.
The act has four main components.
1. It imposes significant procedural requirements regarding a servicer’s review of loan modification applications and specifically prohibits the practice of “dual tracking,” meaning a servicer may not institute or continue foreclosure proceedings while a borrower’s complete application for a first lien loan modification is pending. Within five business days of receiving a borrower’s application, a servicer must provide written acknowledgement of receipt that includes a description of the loan modification process, any applicable deadlines and any deficiencies in the borrower’s application. If the borrower’s request is ultimately denied, a servicer must provide the specific reasons for denial, such as investor disallowance or insufficient income, and instructions for appealing. A borrower then has at least 30 days to appeal and provide evidence that the servicer’s determination was in error. The foreclosing party cannot proceed with foreclosure until exhaustion of the appeals process or 31 days after written notification of the denial, whichever occurs later. This portion of the act may result in significant delays to the foreclosure process, especially if borrowers do not submit complete loan modification applications. The act is unclear as to the borrower’s opportunities to cure an incomplete application, the number of times a borrower may request a loan modification and the scope of the appeal process.
2. The act stipulates that if a borrower requests a foreclosure prevention alternative, a servicer must create a “single point of contact” for the duration of the negotiation with the borrower and provide one or more direct means of communication with that contact. The “single point of contact” must be an individual or team of personnel that has knowledge of the borrower’s loss mitigation situation and access to decision makers with the ability and authority to stop foreclosure proceedings.
3. The act aims to prevent the practice of “robo-signing” by requiring a servicer to “ensure that it has reviewed competent and reliable evidence to substantiate the borrower’s default and the right to foreclose” before recording or filing any document in connection with a foreclosure proceeding. The act further subjects servicers to civil penalties of up to $7,500 per loan for “multiple and repeated uncorrected” violations of this section.
4. The act creates a private right of action for any “material violation” of the act. A borrower may seek injunctive relief at any time prior to consummation of the foreclosure sale and actual damages at any time thereafter. In the case of an intentional, reckless or willful violation of the act, a borrower may seek statutory damages of $50,000 or triple actual damages. The act also allows a court to award reasonable attorneys’ fees and costs to a prevailing borrower. However, any party to the national mortgage settlement is excluded from liability for certain violations of the act while the consent judgment is in effect, so long as the servicer is in compliance with the settlement terms with respect to the borrower seeking relief under the act.
California’s Foreclosure Reduction Act may serve as a catalyst for similar legislation in other states. In fact, 25 states are currently considering foreclosure reform legislation, ranging from loan modification practices to robo-signing penalties. Accordingly, it is important that lenders and servicers ensure that they are taking significant steps to comply not only with California’s new detailed requirements, but also with potential changes in other jurisdictions as individual states seek to impose tougher foreclosure laws.