With foreclosures in the United States rising to over 3.9 million since 2008, the residential mortgage industry has come under public scrutiny.1 New legislative and regulatory enactments have followed, and mortgage servicing practices are undergoing significant changes. Under the National Mortgage Settlement (NMS) negotiated by a coalition of state attorneys general and federal agencies, five major mortgage servicers agreed to abide by new servicing standards of conduct and allocate significant financial resources to loan modifications.
Building on the settlement, California enacted the Homeowner's Bill of Rights (HOBR), which imposes many of the same servicing standards on other residential mortgage servicers.2 At the federal level, the Consumer Financial Protection Bureau, an agency created by the Dodd–Frank Wall Street Reform and Consumer Protection Act, recently proposed new regulations that would require compliance with many of the same standards. Collectively, the result will be a host of changes in mortgage servicing and foreclosure practices in California, which will have a significant effect on homeowners and those in the residential mortgage industry.
In 2010, a joint federal and state investigation was initiated after major mortgage servicers were alleged to have filed false affidavits in judicial foreclosure proceedings, a practice dubbed robo-signing.3 As later articulated in the complaint that resulted from the investigation, bank employees were accused of repeatedly "preparing, executing, or filing affidavits in foreclosure proceedings without personal knowledge of the assertions in the affidavits and without review of any information or documentation to verify the assertions in such affidavits."4
Although robo-signing was the initial focus, the investigation quickly expanded into other servicing practices.5 In 2012, the United States, the state attorneys general of every state except Oklahoma, and the District of Columbia filed a complaint in the U.S. District Court for the District of Columbia against five major mortgage servicers: Citibank, JP Morgan Chase/Washington Mutual, Bank of America/Countrywide, Wells Fargo/Wachovia, and Ally Financial/GMAC Mortgage, LLC.6 In addition to robo-signing, the complaint included allegations of dual-tracking, which is the process of continuing to pursue foreclosure while concurrently communicating with the borrower about loan modification options.7 To settle the complaint, the five major servicers agreed to enter into consent judgments, collectively referred to as the NMS.
The nonmonetary terms of the NMS are broad, imposing numerous new mortgage servicing requirements on the settling servicers. In order to prevent robo-signing, the NMS mandates that a servicer take appropriate actions to verify its right to foreclose. For example, a servicer must review "competent and reliable evidence" to substantiate the borrower's default and the right to foreclose before a loan is referred to nonjudicial foreclosure.8 Further, in all states, a servicer has to send the borrower a "statement setting forth facts supporting Servicer's or holder's right to foreclose" no later than 14 days before the loan is referred to a foreclosure attorney or trustee. The statement must also include such additional information as an "itemized plain language account summary" and a "statement to the borrower outlining loss mitigation efforts undertaken with respect to the borrower prior to foreclosure referral."9
The NMS imposes specific obligations on each servicer in handling a borrower's loan modification request. Potentially eligible borrowers must be notified of "currently available loss mitigation options prior to foreclosure referral" and upon timely receipt of a completed application, a servicer has to evaluate the borrower's qualification for "all available loan modification options...."10
All "initial denials of an eligible borrower's request for first lien loan modification" are required to be evaluated by an independent entity or an employee who was not involved with the particular loan modification.11 When a first mortgage loan modification is denied after independent review, the servicer is required to send a written nonapproval notice to the borrower explaining the reasons for denial and what factual information was considered.12 The borrower has a right to appeal and obtain an independent review of the denial.13 If the servicer denies the borrower's appeal, the servicer's appeal denial letter "shall include a description of other available loss mitigation, including short sales and deeds in lieu of foreclosure."14
The NMS also restricts dual-tracking by prohibiting a servicer from referring a loan to foreclosure while a completed loan modification application is pending. A servicer must obey time limits before foreclosing if the borrower, for example, filed an incomplete application, accepted a loan modification but failed to perform, appealed a loan modification request that was denied, or submitted an application after the loan was referred for foreclosure.15
To improve communication between servicers and homeowners, a servicer is required under the NMS to establish an "easily accessible and reliable single point of contact (SPOC) for each potentially-eligible first lien mortgage borrower."16 Servicers must also initiate "outreach efforts to communicate loss mitigation options for first lien mortgage loans to all potentially eligible delinquent borrowers."17 However, the use of "nothing more than prerecorded automatic messages...shall not be sufficient" if the messages fail to result in contact between the borrower and the servicer.18
The nonmonetary provisions extend to imposing measures to deter community blight caused by neglected real-estate-owned properties; requiring regular quality assurance reviews of documents submitted in judicial and nonjudicial foreclosure proceedings to ensure accuracy and compliance with applicable law and the NMS; establishing oversight and management of third-party providers such as foreclosure firms, law firms, foreclosure trustees, and subservicers; addressing second lien loan modifications, short sales, and bankruptcy; and protecting military personnel.
The official NMS Web site states that from a monetary standpoint, the settlement is "the largest consumer financial protection settlement in US history."19 The settling servicers agreed to collectively dedicate $20 billion in financial relief for borrowers. The agreement earmarks at least $10 billion to reducing principal balances for borrowers who owe more than the current value of their homes; at least $3 billion to a refinancing program for borrowers who are current on their mortgages but under water; and up to $7 billion for other forms of relief, including forbearance of principal payments by unemployed borrowers, antiblight programs, short sales and transitional assistance, and benefits for military service members.20
Servicers agreed under the NMS to pay a total of $5 billion to the federal government and various states, including California.21 Of this amount, approximately $1.5 billion will be used to establish a Borrower Payment Fund to provide cash payments to borrowers whose homes were foreclosed between and including January 1, 2008, and December 31, 2011. Borrowers will have to file a claim online or by mail by no later than January 18, 2013. They must show that they were not offered loss mitigation or were otherwise improperly foreclosed on and that they meet other criteria.22
The NMS has significant enforcement provisions. For example, it has created a monitor whose duty is to oversee the servicers and ensure compliance with the consent judgments.23 Each participating servicer must file regular reports with the monitor, detailing compliance. Based on these reports and independent oversight, the monitor must communicate its findings to the servicers, the U.S. District Court, and a monitoring committee of state attorneys general and federal officials. According to the monitor's first status report, which covers March 1, 2012, through June 30, 2012, the settling servicers provided nearly 140,000 homeowners with a total of $10.6 billion in relief.24 If a servicer fails to comply with the NMS, a party to the applicable consent judgment or the monitoring committee can file an enforcement action and seek injunctive relief and/or civil penalties.25
While the NMS contains broad provisions releasing each servicer from any claim brought by any state attorney general or banking regulator based on past misconduct involving mortgage loan servicing, foreclosure preparation, and mortgage loan origination services, many other potential claims are not addressed.26 Notably, the releases cover only the named servicers. They do not extend to third parties that may have provided default or foreclosure services for the settling parties--for example, Mortgage Electronic Registration Systems, Inc.27 In addition, securitization claims are not addressed, including any claims of state and local pension funds related to the formation, marketing or offering of mortgage-backed securities.28 Other claims that are not released include violations of state fair lending laws, criminal law enforcement, claims of state agencies having independent regulatory jurisdiction, claims of county recorders for fees, and actions to quiet title to foreclosed properties.29 The releases also do not preclude individuals or business entities from pursuing their own claims.30
Lastly, the NMS contains a sunset provision. The consent judgments and the servicing standards incorporated within them "shall retain full force and effect" for only three and a half years from the date of entry of the judgments.31
California Homeowner's Bill of Rights
Recognizing that the NMS applies to only five servicers and has a limited existence, California became the first state to take the settlement's servicing standards and other provisions and use them to create new statutory provisions. Between July and September 2012, several bills were enacted that are collectively called the HOBR.32 The HOBR explicitly states that its provisions do not obviate or supersede the obligations of the signatories to the federal NMS.33 Beginning on January 1, 2013, the HOBR provides that a mortgage servicer,34 mortgagee, trustee, beneficiary, or authorized agent "may not record a notice of default" (NOD) under certain deeds of trust, which is a legal prerequisite to a nonjudicial foreclosure sale,35 until several new requirements are met.36
For banks and other institutions that, during the immediately preceding annual reporting period, as established with their primary regulator, foreclosed on 175 or fewer California residential real properties, the HOBR prohibits a mortgage servicer, mortgagee, trustee, beneficiary or authorized agent from recording a notice of default until two prerequisites have been met.37 First, at least 30 days must pass after either 1) the mortgage servicer made initial contact with the borrower, by telephone or in person, to "assess the borrower's financial situation and explore options for the borrower to avoid foreclosure," or 2) the servicer satisfied certain specified due diligence requirements in attempting to reach the borrower.38 This is similar to those provisions of Civil Code Section 2923.5 that were enacted in 2008 and had been set to expire on January 1, 2013. Second, if the borrower has submitted a "complete application"39 for a first mortgage loan modification, the mortgage servicer must issue a "written determination" regarding the borrower's eligibility for the loan modification that the borrower has requested.40
The HOBR defines a "borrower" as any natural person who is a mortgagor or trustor and who is potentially eligible for any federal, state, or proprietary first lien loan modification or other available loss mitigation option offered by, or through, his or her mortgage servicer. However, some individuals are excluded, such as those who have filed for bankruptcy.41 In addition, the provisions only apply to first lien mortgages or deeds of trust that are secured by owner-occupied residential real property containing no more than four dwelling units.42
For banks and other institutions who foreclosed on more than 175 residential real properties in California during the immediately preceding annual reporting period, additional requirements must be met before a NOD can be recorded.43 In addition to meeting the requirements imposed on those foreclosing on 175 or fewer residential properties,44 a mortgage servicer with more than 175 foreclosures must also provide each borrower with written information on the rights of borrowers who serve in the military or are a military dependent.45 The mortgage servicer must also advise each borrower about his or her right to request information, including a copy of the promissory note, a copy of the deed of trust, a copy of any assignment of the deed of trust, and a copy of the borrower's payment history since the borrower was last less than 60 days past due.46 Dual-tracking is banned for all mortgage servicers. Under the HOBR, mortgage servicers can no longer record a NOD while a borrower has an application pending for a loan modification.47 Instead, the mortgage servicer must first make a written determination that the borrower is ineligible.48
For banks and other institutions that exceed the threshold of 175 residential property foreclosures, the written notice denying the loan modification must identify the reasons for the denial and provide instructions on how to appeal the denial.49 The servicer is prohibited from recording a NOD until at least 31 days have passed after the borrower has been notified in writing of the denial and no appeal has been received.50 If the borrower appeals the denial, the servicer is prohibited from recording a NOD until the later of 15 days after the denial of the appeal or 14 days after a first lien loan modification is offered after appeal but declined by the borrower, or, if a first lien loan modification is offered and accepted after appeal, the date on which the borrower fails to timely submit the first payment or otherwise breaches the terms of the offer.51 The mortgage servicer is also required to acknowledge receipt in writing of any document related to a first lien loan modification application.52 Once a NOD is recorded, the mortgage servicer must provide the borrower with additional information in writing, including foreclosure prevention alternatives (unless the borrower has previously exhausted the loan modification process).53
As with previous law, once the applicable requirements have been met for recording a NOD, the NOD that is recorded must contain a declaration attesting to the servicer's compliance with the requirements.54 Addressing the issue of robo-signing, the HOBR further states that the declaration must "be accurate and complete and supported by competent and reliable evidence."55 In addition, the servicer must "ensure that it has reviewed competent and reliable evidence to substantiate the borrower's default and the right to foreclose, including the borrower's loan status and loan information."56 Any servicer who "engages in multiple and repeated uncorrected violations" of this provision is liable for a civil penalty of up to $7,500 per mortgage or deed of trust in an action brought by a governmental entity.57
The HOBR also directs mortgage servicers who exceed the 175 residential property foreclosure threshold to have a SPOC.58 If a borrower requests a foreclosure prevention alternative, the servicer "shall promptly establish a single point of contact and provide to the borrower one or more direct means of communication with the single point of contact."59 This SPOC is defined as "an individual or team of personnel each of whom has the ability and authority to perform the responsibilities" required by law.60 Further, the servicer has to "ensure that each member of the team is knowledgeable about the borrower's situation and current status in the alternatives to foreclosure process."61
In a departure from prior law, entities are barred from recording or causing to be recorded a NOD, or otherwise initiating the foreclosure process, unless they hold "the beneficial interest under the mortgage or deed of trust, or [are] the original trustee or the substituted trustee under the deed of trust, or the designated agent of the holder of the beneficial interest."62 Further, for trustee's sales, a requirement is added that whenever a trustee's sale is postponed for a period of at least 10 business days pursuant to Civil Code Section 2924g, a mortgagee, beneficiary, or authorized agent shall provide written notice to the borrower within five business days of the postponement.63
In addition to civil penalties that a governmental entity may pursue for violating the provisions governing declarations in NODs, the HOBR also contains other significant enforcement mechanisms. If a trustee's deed upon sale has not yet been recorded, a borrower is entitled to bring an action for injunctive relief to enjoin material violations of certain aspects of the law.64 On the other hand, if the trustee's deed upon sale has been recorded, then the borrower can bring an action for "actual economic damages" resulting from the violation if it was not corrected or remedied before the trustee's deed was recorded.65 If the court finds that the material violation was intentional, reckless, or resulted from willful misconduct, the court may award the borrower treble the actual damages or statutory damages of $50,000.66 A prevailing borrower may also be awarded reasonable attorney's fees and costs.67 Some of the provisions of the HOBR sunset on January 1, 2018, but at that time, other, similar provisions become effective.
Evictions, Law Enforcement, and Blight
The HOBR also includes several other new California laws. One addresses evictions of residential tenants in possession of foreclosed residential properties. A tenant or subtenant under a month-to-month or periodic tenancy leasing a rental property that is sold in foreclosure is entitled to receive 90 days' written notice to quit, rather than the 60 days' notice provided under prior law.68 Tenants in possession under a fixed-term residential lease entered into before transfer of title at the foreclosure sale "shall have the right to possession until the end of the lease term, and all rights and obligations under the lease shall survive foreclosure...."69 The foregoing does not apply if, for example, the purchaser will occupy the house as a primary residence, the fixed-term lease was entered into with the mortgagor or a parent, child, or spouse of the mortgagor, or the fixed-term lease was not the result of an arms-length transaction.70
Various law enforcement provisions applicable to mortgage and foreclosure-related crimes are enhanced. The California Attorney General's office is authorized to impanel a special statewide grand jury "to investigate, consider, or issue indictments in any matters in which there are two or more activities, in which fraud or theft is a material element, that have occurred in more than one county and were conducted either by a single defendant or multiple defendants acting in concert."71 This would include the ability to investigate and indict perpetrators of financial crimes involving victims in multiple counties. The time for prosecuting some misdemeanors relating to, for example, engaging in unlawful loan modification activities or providing mortgage loan originator services without a license, is extended. Specifically, prosecution of such violations must be commenced within "three years after discovery of the commission of the offense, or within three years after completion of the offense, whichever is later."72
Finally, the HOBR makes permanent some laws relating to real property blight, including Civil Code Section 2929.3. This statute requires a legal owner to maintain vacant residential property purchased by that owner at a foreclosure sale, or acquired by that owner through foreclosure under a mortgage or deed of trust, or else face governmental penalties.73 However, new homeowners are given additional time in which to abate any violation for a residential property foreclosed on or after January 1, 2008, and before an enforcement agency could take action.74
New Dodd-Frank Regulations
At the federal level, the Dodd-Frank Act, enacted in 2010 in response to the financial crisis, established the Consumer Financial Protection Bureau (CFPB). The CFPB was directed to "regulate the offering and provision of consumer financial products or services under the Federal consumer financial laws."75
Following execution of the NMS, the CFPB issued two Notices of Proposed Rulemaking, including draft regulations, that are similar to some NMS provisions. One proposed regulation would impose requirements relating to early intervention with delinquent borrowers and obligate servicers, among other things, to make a good faith effort to notify borrowers of loss mitigation options.76 In addition, this draft regulation would require "continuity of contact" with delinquent borrowers and regulate the loss mitigation procedures applicable to servicers that offer such options to borrowers. The other proposed regulation would impose certain duties on servicers that make loss mitigation options available to borrowers in the ordinary course of business related to evaluation of borrower applications for these options.77 As of November 2012, the draft rules were still out for public comment, and it was unknown when the CFPB would promulgate final rules, if at all. If any rules are adopted, one issue likely to arise is whether they would preempt state statutes like the HOBR.
Regardless of whether a mortgage servicer is a party to the NMS, the provisions negotiated by the five major servicers in that settlement are likely here to stay in the form of new state laws and proposed federal regulations affecting California foreclosures. The practical effect of the new provisions is yet to be seen, but undoubtedly borrowers and the residential mortgage industry should anticipate significant changes in the way that they interact and how their business relationships are structured.
1 Press Release, CoreLogic Reports 57,000 Completed Foreclosures in September (Oct. 31, 2012), available at http://finance.yahoo.com/news/corelogic-reports-57
2 See generally http://oag.ca.gov/hobr.
3 David Streitfeld, JPMorgan Suspending Foreclosures, N.Y.Times, Sept. 29, 2010, available at http://www.nytimes.com/2010/09/30/business/30mortgage.html?_r=0.
4 See Complaint, United States v. Bank of America, No. 12-0361(D.C. Dist., Mar. 14, 2012) (on file with authors).
5 See Executive Summary of MultiState/Federal Settlement of Foreclosure Misconduct Claims [hereinafter Executive Summary], available at http://portal.hud.gov/hudportal/documents
7 Complaint, Bank of America, No. 12-0361 at ¶64(h).
8 See Ally Consent Judgment, exh. A, at §I.A.1, available at http://www.justice.gov/opa/documents/residential-consent-judgement.pdf. (Servicers must ensure that factual assertions in pleadings, declarations, affidavits, and sworn statements in judicial foreclosures, "and notices of default [and] notices of sale...submitted...in non-judicial foreclosures," are "accurate.").
9 Id. at §§I.A.18, I.B.10, IV.B.13.
10 Id. at §IV.A.1.
11 Id. at §IV.G.1.
12 Id. at §IV.G.2.
13 Id. at §IV.G.3.
14 Id. at §IV.G.3.d.
15 Id. at §IV.B.
16 Id. at §IV.C.1.
17 Id. at §IV.D.1.
19 See http://www.nationalmortgagesettlement.com/about.
20 See, e.g., National Mortgage Settlement Fact Sheet: Mortgage Servicing Settlement, available at http://www.nationalmortgagesettlement.com.
22 See Executive Summary, supra note 5.
23 See https://www.mortgageoversight.com.
24 Jim Puzzanghera, Banks Have Given $10.6 Billion in Relief in National Settlement, L.A. Times, Aug. 29, 2012, available at http://articles.latimes.com/2012/aug/29/business/la-fi-mo-mortgage-settlement-fore-closure-bank-of-america-20120829.
25 See, e.g., Ally Consent Judgment, exh. E, at §J.3, available at http://www.justice.gov/opa/documents/residential-consent-judgement.pdf.
26 See, e.g., id., exhs. F, G, H. See also Executive Summary, supra note 5, at 4.
27 Id. Mortgage Electronic Registration Systems, Inc., known as MERS, is a private corporation that administers a national registry of real estate debt interest transactions. See Fontenot v. Wells Fargo Bank, NA, 198 Cal. App. 4th 256, 267 (2011).
28 Ally Consent Judgment, exhs. F, G, H.
31 See, e.g., Ally Consent Judgment, exh. E, at §K.
32 The California HOBR includes AB 278 and SB 900 (servicing and foreclosure requirements), AB 2314 (blight and crime prevention), AB 2610 (protections for tenants in foreclosed properties), AB 1950 (fraud issues), and SB 1474 (multijurisdictional fraud and crimes).
33 Civ. Code §2923.4(b). See also Civ. Code §2924.12(g).
34 See Civ. Code §2920.5(a) (definition of "mortgage servicer").
35 Civ. Code §2924(a)(1).
36 Civ. Code §§2923.5(a), 2923.55(a).
37 Civ. Code §§2923.5, 2924.18(b).
38 Civ. Code §2923.5.
39 See Civ. Code §2924.18(d).
40 Civ. Code §§2923.5(a)(1)(B), 2924.18(a)(1).
41 Civ. Code §2920.5(c).
42 Civ. Code §§2924.15, 2924.18(f).
43 Civ. Code §§2923.55(g), 2923.6(i).
44 Civ. Code §2923.55(a)(2).
45 Civ. Code §2923.55(b).
47 Civ. Code §§2923.6(c), 2924.18(a)(1).
49 Civ. Code §2923.6(f).
50 Civ. Code §2923.6(e)(1).
51 Civ. Code §2923.6(e)(2).
52 Civ. Code §2924.10.
53 Civ. Code §2924.9.
54 Civ. Code §2924.17(a).
56 Civ. Code §2924.17(b).
57 Civ. Code §2924.17(c).
58 Civ. Code §2923.7(g).
59 Civ. Code §2923.7(a).
60 Civ. Code §2923.7(e).
62 Civ. Code §2924(a)(6). Previously, Civ. Code §2924 stated that the "trustee, mortgagee or beneficiary, or any of their authorized agents" shall file a NOD.
63 Civ. Code §2924(a)(5).
64 Civ. Code §§2924.12(a)(1), 2924.19(a)(1).
65 Civ. Code §§2924.12(b)-(c), 2924.19(b)-(c).
66 Civ. Code §§2924.12(b), 2924.19(b).
67 Civ. Code §§2924.12(i), 2924.19(h).
68 Civ. Code §2924.8; Code Civ. Proc. §1161b.
69 Code Civ. Proc. §415.461(b)
71 Penal Code §923(c).
72 Penal Code §802(e).
73 Civ. Code §2929.3.
74 Health & Safety Code §17980.
75 12 U.S.C. §5491(a).
76 Proposed C.F.R. §1024.40, available at http://www.gpo.gov/fdsys/pkg/FR-2012-09-17/html/2012-19974.htm.
77 Proposed C.F.R. §1024.41, available at http://www.gpo.gov/fdsys/pkg/FR-2012-09-17/html/2012-19974.htm.