The Great Real Estate Meltdown of 2008 generated numerous attempts to address the massive uptick in real estate foreclosures. The all-too-common scenario that needs to be addressed is when a borrower is told by a nameless mortgage servicer’s phone representative that they can qualify for a loan modification if they just stop making payments on the loan. The borrower stops making payments, but there is no record that the borrower did so in reliance on a verbal recommendation from the mortgage servicer. The loan modification never happens, and the home is foreclosed upon.
New legislation will hopefully put an end to this injustice. The website of the State of California Department of Justice Office of the Attorney General states that the passage of these new laws means that the “California Homeowner Bill of Rights became law on January 1, 2013, to ensure fair lending and borrowing practices for California homeowners. The laws are designed to guarantee basic fairness and transparency for homeowners in the foreclosure process.”
Now that the California Homeowner Bill of Rights (SB 900 and AB 278) has become law, an entire new set of revisions to the real estate foreclosure statutes will affect all homeowners in California whose homes face the threat of foreclosure. The California Homeowner Bill of Rights amends multiple sections of the California Civil Code and adds more than a dozen new laws. Although many of the provisions of the California Homeowner Bill of Rights sunset on January 1, 2018, there are also provisions that come into effect to extend the reach of this Bill of Rights past its sunset provisions.
The California Homeowner Bill of Rights compels the parties driving foreclosures to engage in a new process requiring much more contact with the owners being foreclosed upon long before the actual default and sale of the property. Lenders and servicers are required to contact the “defaulting” owners and to seriously engage in the restructuring of the mortgage loans. Lenders and servicers must comply with very specific procedures and must demonstrate compliance before starting the actual foreclosure proceeding itself.
Adding to this new compliance requirement is the question of proving such with the fact that defaulting elders may have competency and life expectancy issues, that for all practical purposes, the Homeowner Bill of Rights may stop or dramatically slow foreclosures on elders.
The California Homeowner Bill of Rights has broader application than prior law through an expansive definition for “mortgage servicer”:
(1) Any “person or entity who directly services a loan, or who is responsible for interacting with the borrower, managing the loan account on a daily basis including collecting and crediting periodic loan payments, managing any escrow account, or enforcing the note and security instrument, either as the current owner of the promissory note or as the current owner’s authorized agent.”
(2) A subservicing agent to a master servicer by contract.” 
The only exception to this broad-brush definition is that the term “mortgage servicer” does not include a trustee, or a trustee’s authorized agent, acting under a power of sale pursuant to a deed of trust. This may lead to the exclusion of the Mortgage Electronic Registration Systems, Inc. (MERS) which has been one of the thorns in the side of lawyers trying to deal with foreclosure issues. (Ibid.).
But where the California Homeowner Bill of Rights gives, it also takes away. A “borrower” excludes those who have already “surrendered the secured property as evidenced by either a letter confirming the surrender or delivery of the keys to the property to the mortgagee, trustee, beneficiary, or authorized agent” or “has contracted with an organization, person, or entity whose primary business is advising people who have decided to leave their homes on how to extend the foreclosure process and avoid their contractual obligations to mortgagees or beneficiaries” or “an individual who has filed a case under Chapter 7, 11, 12, or 13 of Title 11 of the United States Code and the bankruptcy court has not entered an order closing or dismissing the bankruptcy case, or granting relief from a stay of foreclosure.” The law will apply only to first lien loan mortgages or deeds of trust secured by owner-occupied residential real property containing no more than four dwelling units.
So the process begins. Contacting the borrower is now the responsibility of the mortgage servicer. Contact must be in person or by telephone and must include an assessment of the alternatives to foreclosure. California Civil Code § 2923.7(a) added a single point of contact requirement: “upon request from a borrower who requests a foreclosure prevention alternative, the mortgage 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.”
The common borrowers’ nightmare – submitting documents over and over again and never speaking with the same representative – should go by the wayside.
Another bonus for the litigator is that the new laws include a provision for the award of the borrowers’ attorney’s fees: The “court may award a prevailing borrower reasonable attorney’s fees and costs in an action brought pursuant to this section. A borrower shall be deemed to have prevailed for purposes of this subdivision if the borrower obtained injunctive relief or was awarded damages pursuant to this section.” Borrowers are able to recover their attorney’s fees as a prevailing party if they simply succeed in obtaining injunctive relief prohibiting the mortgage servicer from foreclosing - prior to the actual resolution of the action. Bad news for the mortgage servicer, but a possible boon to the borrowers. All that is required to show for injunctive relief is a showing of “sufficient grounds.” Borrowers are not required to show they will prevail at trial. If the court merely enjoins foreclosure to allow the borrower time to set forth all of the facts establishing the case, then the injunction seems to meet the prevailing party standard. The elder law attorney now has two weapons and two ways of recouping the attorney’s fees and costs of the action.
The questions remain: Will the provisions of The Elder Abuse and Dependent Adult Civil Protection Act (“EADACPA”) apply if the “single point of contact” fails to provide information to an elder borrower concerning all of the remedies? What if the elder borrower lacks capacity? We will have to wait and see.
Additionally, there is a new danger that perhaps the legislature did not consider. When the borrower submits the completed application for modification, the mortgage servicer is then foreclosed (pun intended) from taking any action to foreclose until all the requirements set forth in the new statutes have or have not been done. This effectively means that there is now a shifting of the burden of proof on the mortgage servicer to establish through a preponderance of evidence that the actions as set forth in the statutes (as well as all the other previous requirements set out in the Civil Code) have occurred. Prior to this, the mortgage servicer only had to prove that a borrower had defaulted and nothing more. These new statutes shall force lenders into enacting complex procedures that will require the implementation of new policies within their companies and the hiring and training of personnel to affect those policies and procedures. As such, lenders may look anew at judicial foreclosure as a preferred method of foreclosing on properties, especially properties where the differential between the loan and the current value is significant, because in a judicial foreclosure the lender may be able to recover a deficiency judgment from the borrower in default. This revised threat of judicial foreclosure also gives the lender the big stick to make the borrower much more willing to relinquish the property without the necessity of court action.
The legislation is new. We do not yet know what the courts will do with all the new provisions and especially how those new provisions will impact the rights of elders when combined with EADACPA. But any attorney dealing with the loan modification morass has some way to fight back.
Geoffrey Steele is a partner at Steele, George, Schofield & Ramos, LLP. He is a civil litigator, with an emphasis on real property and financial elder abuse.
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