California Is Poised To Enact Foreclosure Legislation

As California goes, so goes the nation? Let's hope not, at least as to legislation that will make California the first state in the nation to codify provisions of the National Mortgage Settlement. The new provisions will affect all entities that conduct more than 175 foreclosures a year in California. The Assembly and the Senate passed identical bills, and Governor Brown is expected to sign the measure into law today.

Underlying these requirements is a fundamental shift in the obligations of the mortgage servicer, which will include providing a "meaningful opportunity" for borrowers to be considered for loan modifications and other "foreclosure prevention alternatives." The law imposes additional notice requirements, prohibits dual tracking and robosigning, and regulates the loan modification process. It also exposes servicers, foreclosure trustees, and beneficiaries to very large penalties and payment of attorney's fees for material violations of the new provisions.

The law will become effective on January 1, 2013 and includes sunset provisions as of January 1, 2018. However, many of the obligations will continue beyond that date due to separate, mirror-image provisions included in the law that take effect when the prior provisions expire.

IMPACT ON MORTGAGE SERVICERS

Longer, more complicated foreclosure process. By adding significant new procedures to the non-judicial foreclosure process, the legislation will only further delay non-judicial foreclosures in California, which took about a year on average in 2011.1 Bounty for trial lawyers. The private right of action and possibility of recovering attorney's fees creates a win/win for trial lawyers. Lenders do have good lines of defense. Although materiality is not defined in the statute, it should be interpreted in the context of the purpose of the statute, which is to ensure borrowers have an opportunity to pursue foreclosure alternatives before the foreclosure sale. As long as the servicer remedies the violation before the foreclosure sale, then, the borrower should not be able to obtain an injunction. The private right of action states this expressly, providing that servicers that correct any material violation before the property has been sold at a foreclosure sale "shall not be liable." New Civil Code § 2924.12(c). However, servicers may have to litigate the case through summary judgment to defeat the borrower's allegations of a material violation or prove any material violation has been corrected. Enhanced opportunity for strategic behavior. By creating numerous new technical obligations, the legislation will only expand what we have seen so far in California -borrowers filing suit based on bare-bones allegations of a "material" violation without any obligation to identify in the complaint the nature of the violation or how that violation impacted their access to foreclosure alternatives. We also expect borrowers will attempt to capitalize on the robosigning provisions to try to breathe new life into the "hold the note" and MERS theories that the California Court of Appeal already rejected. See, e.g., Gomes v. Countrywide Home Loans, Inc., 192 Cal. App. 4th 1149 (2011); Calvo v. HSBC Bank USA, N.A., 199 Cal. App. 4th 118 (2011). Clogged court dockets will greatly delay the resolution of these cases, even for frivolous claims or those that are remedied after the litigation is filed. Possible defense for signatories of National...