CA Homeowner Bill of Rights

For more than five years, California has suffered through the housing and foreclosure crisis, with thousands of homes being lost by homeowners monthly through foreclosure.  Allegations of improper foreclosure through faulty paperwork or fraud have been common. Problems associated with efforts to achieve loan modifications under HAMP, or through the National Mortgage Settlement are the subject of media attention on a daily basis.  Regulatory agencies have added their own set of problems within the industry.  The result is an ever increasing number of foreclosures being contested through State, Federal and Bankruptcy Courts.

As an attempt to address the various issues related to improper foreclosures or modification efforts, the California Legislature and the Attorney General wrote and then passed AB 278, otherwise known as the Homeowner Bill of Rights, (HBOR).  Having been signed into law in July 2012, the HBOR took effect on January 1, 2013.

The National Mortgage Settlement Agreement (NMSA) between the Attorneys General of all 50 states and the US Attorney General formed the basis of HBOR. The procedures and practices to which five servicers involved in the NMSA were required to adhere was the standard for HBOR. 

HBOR took those procedures in the NMSA and codified them into CA law.  Furthermore, it added other provisions, including a private right of action on the part of homeowners, a right that did not exist under the NMSA.  Today, the provisions of HBOR are fully in effect for lenders and servicers to follow.

Since HBOR took effect, tens of thousands of loans have been subjected to HBOR modification and foreclosure guidelines.  Many of the loans that have been denied modifications are now being reviewed by attorneys and contracted firms for compliance with HBOR policies and procedures.  So far, the reviews are indicating that full compliance with HBOR has been elusive for far too many lenders and servicers.

Today, there are numerous lawsuits filed by homeowners for non-compliance with HBOR working their way through the court system. Some cases have survived the demurrer and are now headed for trial.  Other cases have found the demurrer upheld, and allegations have been dismissed, usually with the ability to “amend” the complaint and re-file.  Some have been dismissed with prejudice, with no ability to amend.

The threat of HBOR lawsuits creates many potential pitfalls for lenders and servicers.  Under the private right of action, a lawsuit under certain sections of HBOR can result in automatic injunctions preventing the foreclosure until the problems are solved, which can only be determined as solved with the Court’s ruling.  Any such actions provide “attorney fees” to be paid by the lender or servicer to the homeowner attorney when non-compliance is found.  These fees can run up to $50k or more, according to attorneys.

If a foreclosure has been completed and non-compliance with certain HBOR are found, the greater of “actual damages” or “$50,000” is mandated.  It is unclear yet what will comprise actual damages, or whether the $50,000 is applicable to more than one HBOR violation in any one case. Again, the Appeals Court process will ultimately determine the answer to these issues.

However, it does not end there for allegations and damages. Likely, attorneys will be using Consumer Protection Statutes like CA B&P Code Section 17200 for HBOR non-compliance.  If successful, such would allow for treble damages.

At this time, there are no clear rulings to clarify HBOR requirements and to guide the courts in their rulings, for and against. However, as some of the cases work through the appeals process, it is expected that over the next year, there will be clear guidance of the legal ramifications of HBOR.


Barclay’s Report

HBOR and the NMSA are currently the main forces behind the recent slowdown in foreclosures in the Golden State, according to a research report from Barclays. In addition to stalling foreclosures, provisions in the new bill have also led to an increase in litigation risk for servicers, analysts found.

As a result of HBOR, many servicers have become significantly more cautious when carrying out foreclosure sales in the state. While the bill offers several protections to homeowners, one particular provision that allows borrowers to sue servicers for "material violations" of HBOR could result in additional costs for servicers

Violations of the HBOR include dual-tracking, failing to provide a single point-of-contact, and neglecting to deliver proper notice of loss mitigation options.

The report explained that prior to a foreclosure sale, homeowners can seek injunctive relief to halt the foreclosure process. If a homeowner secures an injunction, the borrower can pass all legal costs to the servicer through the HBOR, even if no material violation of the HBOR is proven later, the report explained.

"Our understanding is that securing an injunction may require only a declaration from the borrower that a material violation of the HBOR has occurred and some reasonable justification for further investigation into the alleged breach. It is possible that multiple consumer rights attorneys will offer their services on a contingent basis to borrowers facing foreclosure, effectively providing the homeowner with a zero-cost option to pursue litigation", the report stated.

If the request for an injunction is granted, legal costs could easily rise to the thousands as the court looks into the allegations. The process could also add another 6-12 months to the foreclosure process, according to the report.

"Furthermore, borrowers are much more incentivized to demand a copy of the promissory note, the chain of mortgage assignments, and the borrower's payment history to collect evidence that a breach of HBOR occurred, further stalling the foreclosure process", the report explained.

Even though California is not a judicial state, analysts suspect the increase in litigation risks and the extended foreclosure timelines might cause servicers to pursue more judicial foreclosures, which are exempt from the HBOR's provisions.

At Black Diamond Sentinel we have closely analyzed key components of the California Homeowner Bill of Rights to determine where mortgage servicers would potentially run into costly errors in their processes. These errors could easily trigger tens of thousands in legal costs to execute a foreclosure in California, a process that was once fairly simple in the state.

HBOR Statutes & Compliance

The HBOR is a complex regulatory scheme running over 20 pages in length. Many of the sections are reiterations of preceding statutes.

Compliance with HBOR is already proving to be difficult and time consuming. Governmental reviews of the NMSA have found that lenders and servicers are regularly found to be non-compliant with the NMSA, which formed the basis for HBOR. Media articles are being published weekly about the lack of compliance as well. The NMSA issues spill over into HBOR statutes and the result in California is an increasing amount of HBOR litigation being filed.

Black Diamond Sentinel has been following the progression of HBOR compliance through the review of modification and foreclosure files, and has identified the most likely areas on which homeowner attorneys will focus for borrower litigation.

California Civil Code Section 2923.3 – Opportunity to Receive a Meaningful Modification

This section of HBOR requires that the borrower have the opportunity to receive a "Meaningful Attempt" for a loan modification. It does not guarantee a modification, but it does require a legitimate attempt to be made by a lender or servicer to find terms for a modification that would be of benefit, if possible.

There will not be one specific action that will define whether compliance with §2923.3 will be met. Instead, compliance will be dictated by the "entire modification and foreclosure" process. It will be judged on the timeliness of actions, demands and requirements of the lender/servicer, and communications between the borrower and lender/servicer. It will be the "totality" of the process that determines compliance.

There will be a tendency to underestimate the value of §2923.3 to the borrower, since neither damages nor injunctive relief are remedies for non-compliance. However, Consumer Protection Statutes like CA B&P Section 17200, will be used instead to attack the process. Under §17200, damages and attorney fees are allowed.

California Civil Code Sections 2923.5 & 2923.55

§2923.5 and §2923.55 are the statutory schemes that cover the initial notification efforts by a lender/servicer to a homeowner, prior to starting a foreclosure. §2923.5 has been a feature of California Law since 2008. §2923.55 is simply a reiteration of §2923.5. Failure to comply with §2923.55 does offer injunctive relief and / or damages.

Attorneys regularly file claims of non-compliance against lenders/servicers based upon §2923.5. Very seldom, when the facts of the case are known, do the claims hold up under scrutiny. Usually, this is simply a delaying tactic to stop the foreclosure.

With HBOR, §2923.55 may have greater play, especially with regard to the accuracy of the §2023.5 Affidavit of Compliance. The Affidavits are regularly found to be defective in accuracy, and the use of HBOR may allow for challenges to §2923.5 and demands for Injunctive Relief, if found to be present.

California Civil Code Sections 2923.6 & 2924.10

§2923.6 and §2924.10 may prove to be problematic for lenders/servicers under HBOR. Regularly, there are defects and deficiencies found within this statutory process. (§2924.10 is a reiteration of §2923.6.)

§2923.6 mandates a number of different actions on the part of the servicer when a loan modification is received. Some of its requirements are:

• A servicer must contact the borrower within 5 days upon receipt of a loan modification package detailing time frames involved, the process and other pertinent information.
• The borrower be advised that he has the right to request a copy of the Note, Deed, any Assignments and other recorded documents, and the Servicing Record of the loan.
• Any fiduciary duties that might exist.
• Requirement that with a denial of a loan modification, the homeowner be presented with available options, plus the ability to appeal the decision.
• The processes required for when a Notice of Default or Trustee Sale can be filed or not.

Review of loans that have been denied a loan modification will often find non-compliance with any number of issues under §2923.6. The non-compliance becomes problematic for the servicer because it offers a homeowner defense to stop or delay a foreclosure. Additionally, if a foreclosure had occurred, non-compliance provides for the $50,000 damage award plus attorney fees. For this reason, homeowner advocates will be reviewing this section with great care.

California Civil Code Section 2923.7 – Single Point of Contact

§2923.7 requires that a Single Point Of Contact (SPOC) be established for the homeowner when a modification is submitted. The SPOC must engage in different actions to include:

• Disclosing pertinent data as Options and Time Frames with regard to modification and/or foreclosure alternative.
• Coordinating receipt of documents and notification of missing documents.
• Have access to info and personnel to inform borrower in timely manner of the status of a modification.
• Ensure that borrower is considered for all foreclosure alternative options and briefed thoroughly.
• Has the ability to immediately stop foreclosure proceedings when necessary by picking up the phone and contacting the person who stops the foreclosures.
• Contact point must be able to transfer a borrower to a supervisor upon request.
• Borrower appeals.

Review of denied loan modifications has revealed serious deficiencies within this statute with most servicers. The most common deficiencies are found within the document processing procedures and missing document demands. Additionally, deficiencies occur regularly within proper notification of foreclosure alternatives by the SPOC, the reluctance to stop a foreclosure while waiting for documents to be delivered, borrower appeals, and even responding to borrower messages in voice mail communications.

Failure to properly comply again raises the potential for damages or Injunctive Relief.

California Civil Code Section 2924.9

§2924.9 requires that if a borrower had not "exhausted" all efforts in the modification process, upon the filing of a Notice of Default, the borrower must be notified of his options within five days of the filing of the Notice of Default.
Lenders regularly notify borrowers of options after the Notice of Default is filed, so this provision is not likely to be an issue for litigating purposes.

California Civil Code Section 2924.11

§2924.11 details processes that occur when a modification is accepted, denied, or in process. It relates to when a Notice of Default can be filed, under what circumstances it is required to be rescinded, and the processes to be filed when a loan modification is denied.

Compliance with §2924.11 is proving to be problematic for servicers when denials of loan modifications are issued. Servicers are not providing the required information, and are not disclosing the appeals process correctly. Often, when an appeal is requested, servicers will ignore it, or not meet the standards of continued processing and notifications.
Failure to comply with §2924.11 will offer homeowner defenses in the event of foreclosure.

California Civil Code Section 2924.17

§2924.17 requires that certain documents be accurate and have supporting evidence to show the accuracy of the documents, or else non-compliance with the statute would allow for damages or for Injunctive Relief. The covered documents are:

• §2923.55 Affidavit of Compliance
• Notice of Default
• Notice of Trustee Sale
• Assignment of Beneficiary
• Substitution of Trustee

It is required that before the documents are executed, the evidence of accuracy must be reviewed by servicer.

The accuracy of the indicated documents has been the subject of court filings, regulatory actions, and media focus since the housing crisis first began. Allegations of robo signing or of false documents and misrepresentations of beneficial interest occur on a daily basis across the country.

§2924.17 offers the homeowner the ability to challenge the accuracy of the documents, which has previously been withheld under California Foreclosure Statutes. Under previous law, a challenge to legal standing or other relevant issues was found not to be a statutory requirement. Under §2924.17, that standard would appear to no longer exist, and legal standing would be an issue.

This poses significant issues for servicers and lenders. It is common to find that certain servicers make assignments to themselves, when they have no beneficial interest in the loan. Then they refuse to name the true investor, though MERS will show on the registry that investor's name. At that point, §2924.17 should be applicable.

The other documents named in §2924.17 will often have the same types of deficiencies. Substitutions will be signed based upon improper beneficial interest. Notice of Defaults and Trustee Sales will be signed by the Trustees or their "agent", with only the "word" of the servicer that the loan is in default, with the signer having no actual knowledge of the default, except through the "word" of the servicer.

It is likely that §2924.17 will become a major factor in future foreclosure litigation.