SB 1275: Fairness, Transparency, Accountability

The Problem SB 1275 Addresses

Foreclosures Continue at Record Pace: The foreclosure crisis continues to rage in California, with little sign of easing in the near future. Nearly 200,000 foreclosures were completed in California last year, and are on pace to exceed that number in 2010. At the same time, the main federal loan modification program (HAMP) has produced fewer than 48,000 permanent loan modifications in California.

Borrowers Experience Alarming Level of Problems with Their Servicers: Borrowers, housing counselors and attorneys throughout the State report that they regularly face seemingly insurmountable obstacles when they contact loan servicers for assistance with loan modifications. These problems include extreme delays in processing applications, repeated loss and re-requests for application documents, miscalculating borrower income leading to mistaken denials, providing inconsistent, inaccurate and contradictory information to borrowers, and most egregiously, selling homes when the homeowner is making monthly payments on a trial loan modification, or has applied for a loan modification and is waiting for a determination. California's financial services industry has acknowledged its own shortcomings.i

Recent changes to the federal HAMP program provide strong evidence that systemic problems exist with respect to borrower outreach and premature and wrongful foreclosures. SB 1275, in conjunction with changes to the HAMP program, will reduce the opportunity for servicers to make the kinds of mistakes that are devastating California families.

What Will SB 1275 Do?

SB 1275 builds on existing law requirements of SB 1137 to ensure that delinquent borrowers understand the foreclosure process and receive fair consideration for loan modifications in lieu of foreclosures. The key provisions of SB 1275:

1. Requires Servicers to Evaluate Borrowers for Loan Modifications Before Initiating Foreclosure
2. Provides Narrowly-Crafted Remedies for Significant Violations Leading to Wrongful Foreclosures
3. Provides Early Foreclosure Process Notice to Delinquent Borrowers
4. Standardizes Servicer Outreach Efforts to Borrowers

SB 1275 Would Treat Borrowers Fairly. By making procedural changes to the foreclosure process, SB 1275 seeks to avoid unnecessary foreclosures of residential properties when a loan modification is a viable option, and to improve communications and transparency to borrowers when the home cannot be saved.

• Borrower Solicitation Efforts. Requires that servicers engage in specified attempts to contact the borrower, incorporated from existing law (SB 1137). For loans covered by HAMP, compliance with HAMP solicitation requirements will satisfy these requirements.
• Modification Review and Determination Before Initiating Foreclosure. Consistent with recent changes to HAMP, requires that if a servicer has a loan modification option and the borrower applies for one, the borrower will be either approved or denied on the merits of their situation based upon the requirements of HAMP or the servicer's modification program (if any) before the servicer files a notice of default.

SB 1275 Adds Transparency And Accountability To The Foreclosure Process. SB 1275 makes procedural improvements by requiring (1) an early notice to borrowers in default describing the foreclosure process and options for avoiding foreclosure; (2) a denial explanation letter if the borrower is later denied a loan modification; and (3) the servicer to include a declaration of compliance with the law to be filed with the notice of default, similar to the requirement of existing law.

SB 1275 Provides Narrowly Crafted Remedies For Significant Violations. Under existing law, if a mortgage servicer violates HAMP or California's foreclosure process requirements and wrongfully forecloses on a borrower, the borrower has no remedy.

SB 1275 would add a limited remedy only where a home is sold in foreclosure after a serious violation of the bill's requirements. Because the bill sets forth specific and limited remedies for violations of the law, the servicer knows in advance the precise scope of potential liability, something that is currently lacking for similar claims.

• Tiered Remedies. Creates 2 levels of remedies with the stronger remedies available only for the most significant violations.
• No Remedy For Technical Errors. Specifically provides that a borrower does not have a cause of action for technical or de minimis failures or errors.

What Will SB 1275 Not Do?

The Bill Does Not And Is Not Intended To Halt All Foreclosures. Like in current law, if a servicer cannot reach a borrower after engaging in the required outreach, the servicer may file the notice of default and proceed with foreclosure. Otherwise, the servicer must simply give the borrower the benefit of a decision on a loan modification prior to proceeding with foreclosure. Remedies are available only after the sale of a home in foreclosure. The bill does not provide a right to halt a foreclosure.

SB 1275 Does Not Require A Mortgage Servicer To Have A Loan Modification Program. SB 1275 makes procedural changes only in the event that a servicer is bound by HAMP or has another loan modification available to a borrower. If a servicer has no loan modification option available to a borrower, then it may tell the borrower that, and the servicer would be excluded from many of the bill's requirements.

SB 1275 Does Not Alter Or Even Address Qualification Requirements For A Loan Modification. SB 1275 specifically provides that it does not require that mortgage servicers provide every borrower with a loan modification, and does not impose any substantive requirements for loan modifications at all. Whether a borrower qualifies for a loan modification will continue to be determined by the requirements of HAMP or the servicer's own programs (if any), as applicable.
 

• SB 1275 would not require servicers to provide a loan modification if the homeowner is not eligible under existing programs.

• • The bill would not require servicers to modify a loan if the homeowner is unemployed.
  • The bill would not require servicers to provide a loan modification that the homeowner cannot afford it.
  • The bill would not require servicers to provide a loan modification if the net present value to the owner of providing the loan modification does not exceed the net present value of proceeding with foreclosure.
  • The bill would not require servicers to modify a loan if the homeowner can afford current payments (such as so-called "strategic defaulters.")

i "Banking officials are quick to acknowledge they can do better. But they contend that they are dealing with a crisis that keeps growing beyond efforts to staff for it. 'Unfortunately, our member banks, as committed as they are to working with their customers, still haven't found a big enough magic wand to wave over this thing,' said Rod Brown, president and chief executive officer of the California Bankers Association." Jim Wasserman, "Banks Feel Modification Backlash," The Sacramento Bee (Sept. 6, 2009), available at http://www.sacbee.com/realestatenews/story/2163510-p2.html.