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BY: JOHN V. GIARDINELLI, ATTORNEY AT LAW
CASEY MCINTOSH, PARALEGAL, researched and contributed to these articles.
Although some economists believe that we have reached the bottom of the housing recession, that prospect has not prevented the California legislature from enacting laws to protect borrowers in the future. On July 11th, Governor Brown signed the “Homeowner Bill of Rights” into law. A combination of five bills, including Assembly Bill 278 and Senate Bill 900, the “Bill of Rights” aims to keep California homeowners in their homes by avoiding foreclosure wherever possible. According to California Attorney General, Kamala D. Harris, who backed these laws, “[t]hese common-sense reforms will require banks to treat California homeowners more fairly and bring more transparency and accountability to their practices in our state.”
The key elements of the Homeowner Bill of Rights are that it will (1) prohibit lenders from engaging in dual tracking (defined below); (2) require lenders to provide a single point of contact for borrowers seeking foreclosure prevention alternatives; (3) provide borrowers with certain safeguards during the foreclosure process; and (4) provide borrowers with the right to sue lenders for material violations of this law.
The law will generally come into effect on January 1, 2013. As it stands now, it pertains only to first trust deeds secured by owner-occupied properties with one-to-four residential units. A “borrower” is defined as a natural person who is potentially eligible for a foreclosure prevention alternative program. This person cannot have filed bankruptcy, surrendered the secured property, or be working with an organization that is advising him or her on how to avoid their contractual obligations by extending the foreclosure process.
Prohibition of Dual Tracking
“Dual tracking” is when a lender continues to pursue foreclosure even though the borrower is applying for a loan modification, a short sale, or other foreclosure alternative. In the recent past, it has been a common complaint from borrowers and their REALTORS® that they have been in the process of a loan modification or short sale and their house was sold at a Trustee’s Sale. The new law prohibits a mortgage servicer from recording a Notice of Default, Notice of Sale, or conducting a Trustee’s Sale for foreclosure if a short sale has been approved or if a borrower’s complete application for a loan modification is pending. Even still, if the loan modification is denied, the lender cannot proceed with the foreclosure process until 31 days after giving the borrower a written denial of the modification (or longer if the denial is appealed). If a short sale has been approved after the notice of default has been filed, the lender must rescind or cancel any pending Trustee’s Sale. This provision of the law sunsets, or expires, on January 1, 2018.
Single Point of Contact
Another issue that borrowers have faced is the fact that they cannot make contact with a single person at the lender’s company. Phone call after phone call would be made to different people at the company or to an automated, non-responsive answering service. No one would know anything about the borrower’s situation, the status of the modification, or any other foreclosure alternatives available to the borrower.
Pursuant to the new law, upon a borrower’s request, the lender must establish a “single point of contact” for the borrower to contact about foreclosure alternatives. The single point of contact can be an individual or a team, but he, she or they must have knowledge of the borrower’s status and the foreclosure alternatives available to the borrower. The contact will assist in coordinating the application for the foreclosure prevention alternative and giving status reports when requested. The contact will also have access to those with the ability and authority to stop the foreclosure process, should one have already been commenced.
Safeguards for Borrowers
Additional safeguards have been added for borrowers. Until January 1, 2018, a loan servicer must provide written acknowledgement of a borrower’s submission of a loan modification application within five (5) days of receipt of the application. In the confirmation, the lender must provide a description of the loan modification process and include an estimated timeframe for the lender’s servicer to reach a decision. The confirmation must also address any deficiencies in the borrower’s application. If the loan modification is denied, the servicer must send a written notice to the borrower specifying why it was denied. However, smaller banks do not need to comply with these requirements until January 1, 2018.
Another safeguard that is included in the Bill is that any written approval for a foreclosure prevention alternative must be honored by a subsequent mortgage servicer if the loan is transferred or sold. Again, smaller banks do not have to comply with this requirement. Further, it will expire on January 1, 2018.
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Legal Remedies for Borrowers
Per Attorney General Harris, “[h]omeowners will also have a clearly-defined right to access the courts to protect themselves from violations of these protections.” While some have argued that this aspect of the Bill will merely delay the foreclosure process and encourage litigation, others argue that homeowners whose rights have been violated should have the opportunity to remain in their homes and seek damages. Under
the new law, homeowners who feel that they have been treated unfairly or were not given due process are presented with two options. If the lender’s misconduct occurs during the foreclosure process, borrowers may seek injunctive relief, which is a court-ordered act or prohibition of an act (such as stopping the foreclosure sale). However, if the misconduct occurs after the foreclosure sale has already taken place and it is not possible for a borrower to get his or her home back, they may seek monetary damages. Essentially, borrowers will have the right to sue banks for “significant, material” violations of the new laws.
While the Homeowner Bill of Rights has been surrounded by controversy and the arguments both for and against it have been well-presented, the Bill nonetheless addresses several major concerns that have plagued California homeowners and REALTORS® for the past several years. It has been touted as some of the “most stringent legal protections in the nation against predatory, aggressive bank lending practices.” It will be interesting to see how, once enacted, it affects both borrowers and banks alike.