CA Homeowner Bill of Rights

Litigation Costs

Failure to comply with HBOR statutes will be costly in the event of litigation. Homeowner attorneys are suggesting that attorney fees are likely to hit $60,000 or more per case, depending upon how far the action goes. This would appear to be a reasonable estimate in that each case will require continued litigation until the Injunction can be lifted.

For homeowners that have been foreclosed upon, the dollar amount can increase dramatically. Adding to attorney fees would be the greater of either actual damages, or $50,000. Add to this allegations under different Consumer Protection statutes, and the costs to the servicer could rise significantly.

Defending HBOR Lawsuits

Defending of HBOR lawsuits will be a time consuming process, filled with many potential pitfalls for the lender/servicer. Servicer concerns include:

• Payment of Attorney Fees to Opposing Counsel
• Damages to the Homeowner under HBOR
• Treble Damages under Consumer Protection Statutes
• Delay of foreclosures
• Servicer Attorney Fee Costs
• The risk that Investors will have grounds to file lawsuits against the servicers for losses incurred by improper foreclosure actions        resulting in the HBOR violations.
• Loss of income stream from lack of monthly payments by homeowners over an extended period

The question that arises is how to defend against the HBOR lawsuit.

HBOR Compliance

The most effective way to avoid HBOR litigation is through the use of effective compliance training monitoring. This would involve the specific training of each person engaged in the process of modification or foreclosing of loan, and the personal monitoring of each loan modification and foreclosure to ensure that all statutory guidelines were being followed. However, these measures alone will not ensure compliance with the statutes.

To understand why training and monitoring alone will not be a "cure", we only have to look at the Federal Government to understand the magnitude of the problem.

Every four years in the US and even in the States, a new President or Governor is elected to office. Often, this means that the opposition party comes into power, and a complete new team of officials is placed into power across the governmental spectrum. With the new Administration comes the demand for new policies, procedures and practices.

As each new administration tries to implement its goals and objectives, it becomes increasingly apparent that the goals and objectives and mandated changes will fail. Government is too large, to "established" in policies and procedures, too change.

Though smaller, lenders and servicers suffer the same problems. Changing a single policy or procedure takes months to implement, even in its simplest form. For a complex set of new legal statutes governing the modification and foreclosure process, implementation to ensure compliance is almost impossible to achieve. Though proper training and monitoring will help in compliance efforts, ultimately far too many instances of non-compliance will occur. When compliance fails, other defenses must be ready to be engaged to protect the lender/servicer from losses.

Compliance Review

To avoid litigation in most cases, a Compliance Review of the modification and foreclosure process could be conducted prior to filing appropriate Notices of Default or Trustee Sale's. The Review would cover the modification process and foreclosure process to ensure compliance with HBOR, and the review of documents filed, or ready for filing, to ensure that all are accurate and reflect the proper parties involved. Doing so would reduce significant numbers of lawsuits, or in the case of some, reduce the number of allegations in the Complaint. It would also serve to ensure that any injunction stopping the foreclosure would be greatly reduced in the amount of time it remained in place.

The compliance review could be "automated" to the point that data from the different servicing platforms could be imported into the Review, and then automated processes run to determine potential compliance issues, and then "alerts" issued to resolve the issues prior to the foreclosure. (This could be run at any time.)

The key to any compliance review is who would be developing the review and the knowledge of the statutes, case law, and potential allegations. In house personnel would likely not have the litigation knowledge combined with the modification and foreclosure knowledge to recognize issues that homeowner attorneys would focus upon. (Black Diamond Sentinel currently has the personnel and is developing such a system at this time.)

Litigation Response

In far too many situations, the compliance review will not stop an attorney who is interested in filing a lawsuit under HBOR. In those instances, further action must be ready and capable of being implemented.

The homeowner attorney is working from a "deficit" of knowledge. He is conducting an analysis of the homeowner's modification procedure and foreclosure process, using only what documents that the homeowner has available. Usually, this is only a small portion of documents, often only a denial letter, Notice of Default and Notice of Trustee Sale. The homeowner has usually discarded the rest. Therefore, the attorney will "assume" other violations that might or might not actually exist and will seek injunctive relief from the Court to stop any foreclosure process. For the attorney, this is not an issue generally in that,m at the time of filing, allegations do not have to be proved, and homeowner representations can be used in the complaint. Only at further stages in the judicial process is "proof required" to keep the lawsuit alive.

At this point, the compliance review becomes critical to the servicer defense. For the injunction to be lifted, compliance with all appropriate status it must be shown. The compliance review will show that the homeowner attorney does not have all the facts, and that the servicer has followed all appropriate HBOR statutes prior to beginning a foreclosure action or filing a Notice of Trustee Sale. This should enable the servicer to have the Injunction lifted.

If a compliance review had not been done previously, it now becomes imperative that one be done. The review must be conducted to identify all deficiencies in the process, addressing the allegations of the borrower in particular, and showing that compliance has indeed occurred.

If compliance has not occurred where allegations have been made, or if other deficiencies are detected, then all issues must be addressed and corrected, and proof provided the court for the lifting of the Injunction.

Even now, the end result may still be in doubt. The Court may not accept the qualifications of the person who has done the review, especially if it is a servicer employee who is making the claims of compliance.   At this point, it is better to have specialized personnel to be involved in the process.

With the compliance review, a third party person with knowledge of the statutes and the review process, and with the credibility of an expert witness should comprise that specialized person. The person could provide a declaration to the Court of his findings on the review, any actions taken to correct the deficiency, and be able to testify if needed, that all conditions have been met so as to lift the injunction. At that point, the homeowner has to mount a rebuttal argument, showing evidence, which would likely be insufficient, to prevent lifting of the Injunction.

HBOR and Modification Denial

At some point in the litigation process, the issue of the modification denial will be raised. The homeowner will claim that he should have been offered a modification under either the terms of the National Mortgage Settlement, HAMP, or HBOR. These claims almost always represent that the homeowner has the "right" to a modification, and that the homeowner does qualify for one. (The homeowner does not have a "right" to a modification, regardless of the claim.)

Additionally, the homeowner may claim that any terms offered were not compliant with what terms could be offered.
In defense of the modification denial, actions must be taken to show that:

• The Net Present Value Test was "negative" and the results of the test were not in favor of the investor.
• The offer of terms for a modification was consistent with what was authorized under any contractual obligations to an investor.
• The borrower had the Ability to Repay the loan after any modification.
• The Default Risk of the borrower has been lessened significantly.
• The borrowers have a realistic positive cash flow.

Black Diamond has programs designed to address these issues to show that the decision of the servicer on the modification was appropriate.


HBOR posses specific issues and threats to both lenders and servicers who are engaging in loan modification efforts or in foreclosure actions. The HBOR offers homeowners defenses in foreclosure and modification actions that will certainly serve to delay foreclosures, and can be costly to the servicer or lender.

Avoiding HBOR issues is not just issuing a memo to all personnel directing them to follow new procedures. Effective training and monitoring of the different processes and methodologies must be conducted on a continuing basis.

An effective method to assist in compliance is to use compliance programs that are designed to identify problems so that they can be corrected before they become the focus of litigation.

Once litigation begins, the servicer/lender must take an aggressive defense to protect itself from losses based upon non-compliance. The first line of that defense must be a comprehensive review of the file to identify all "defects and deficiencies" that must be corrected to allow for the injunction to be dissolved.

Further actions must include recognition that a part of any litigation will involve the denial of a loan modification to a borrower. To defend, a series of evaluations of the loan, loan terms, Ability To Pay and Re-Default Analysis must be conducted to counter the allegations.

Though implementing effective HBOR compliance programs may be costly for all loans subject to foreclosure, the costs certainly are nothing in comparison to a successful litigation effort on the part of the homeowner. The money saved per action could run from many tens of thousands of dollars to easily over one hundred thousand dollars. 

Black Diamond Sentinel has the programs and resources to assist the lender or servicer in meeting the HBOR challenges now and in the future.

The HBOR requires servicers to determine if a homeowner qualifies for a loan modification when a homeowner requests one. The process of determining if a homeowner in default would qualify for a loan modification can be a complex process with many potential financial blind spots. There are many reasons for these challenges: first that the homeowner is currently in financial difficulty; second that the process requires information from the homeowner that might be intentionally incomplete. Lastly, what model is used to determine the ability of the homeowner to pay and is it realistic. At BDS we have developed a tested and proven methodology for the ability to pay process. Below we have provided actual examples of two different loan files that our team analyzed.


Loan File 1 - Fannie Mae/Freddie Mac Eligible


It is important to note in the analysis of this mortgage that the homeowner’s disposable income is negative by $463.26 even though this file would be approved by Fannie Mae or Freddie Mac's automated underwriting systems (AUS).


Loan File 2 - Fannie Mae/Freddie Mac Ineligible

As we can observe in this example, a loan which would not be accepted by Fannie Mae or Freddie Mac due to a low credit score is in fact a better borrower in all other regards.  The true telling sign is the disposable income at $1,136.71 per month whereas the Fannie Mae or Freddie Mac acceptable loan in Loan File 1 was negative and unsustainable.