By Joshua R. Mino, Attorney, Houser and Allison, APC
Joshua R. Mino was born in Orange, California. He attended the University of California, Berkley, graduating with a double major in political science and rhetoric in 2003. Mino received his Juris Doctorate degree in 2006 from the University of San Diego, where he received the Pro Bono Service Recognition Award. Mino has represented clients in a wide range of matters in state and federal courts, including litigation involving real estate and construction, lender liability, consumer financial services, class action litigation, employment, insurance and coverage issues, public entity defense, catastrophic personal injury and property claims and general commercial litigation. Mino is admitted to practice in California and Washington, D.C.
In September 2016, California’s Governor, Jerry Brown, signed into law SB 1150, which was enacted to provide protections to surviving spouses and other heirs from alleged abuses by mortgage servicers after the death of a borrower. The stated legislative purpose behind this enactment, arises from alleged mortgage servicers refusal to provide account details or discuss possible foreclosure prevention alternatives with surviving spouses and heirs because they were not a party to the mortgage. This lack of communication purportedly resulted in homes being lost to foreclosure, when basic information about the loan was all that would have been required to avoid foreclosure. SB 1150 which is commonly referred to as the Survivors Bill of Rights (“SBOR”) was enacted to require mortgage servicers to provide the basic account information to allow the heirs to make payments, reinstate or payoff the loans. SBOR also requires mortgage servicers to consider the surviving heirs for a loan assumption and other loss mitigation alternatives on assumable loans.
SBOR is expected to go into effect on January 1, 2017. California will become the first state in the nation to implement a law to protect surviving heirs, who are not a party to the note, and provide them with certain rights. These protections will apply only to first lien mortgages on property that was owner-occupied by the deceased borrower. However, the property is not required to be the alleged heirs primary residence. SBOR will be codified in California Civil Code section 2920.7, and is considered a corollary statute to California’s Homeowners’ Bill of Rights (“HBOR”), which went into effect in January 2013. SBOR will extend the same protection that HBOR provides to borrower to their surviving spouse or heir during the review period for the assumption of the loan and any simultaneously sought foreclosure prevention alternatives. This includes the prohibition on “dual tracking” the foreclosure while the review is ongoing.
In order for the obligations and restrictions under SBOR to be triggered, someone claiming to be a successor in interest and who is not a party to the loan or promissory note, must provide notice that the borrower is deceased. Once notice is received by the mortgage servicer, it cannot “record a notice of default” until the servicer requests documentation to establish the death of the borrower and which demonstrates the alleged heirs ownership interest. The loan servicer must provide a minimum of 30 days to the surviving heir to provide evidence of death of the borrower and a minimum of 90 days to provide proof of the alleged ownership interest. If the requested evidence is not provided, the servicer may commence the foreclosure proceedings.
If the claimant provides “reasonable documentation,” of borrower’s death and that the claimant holds an interest in the property, that person will be deemed a successor in interest under SBOR. Within 10 days from this determination, the servicer is mandated to provide the successor with basic loan information including, “the loan balance, interest rate, interest rest dates and amounts, balloon payments if any, prepayment penalties if any, default or delinquency status, the monthly payment amount , and the payoff amounts.”
The servicer “shall allow a successor” to apply to assume the loan and, if requested, must simultaneously consider the successor for foreclosure prevention alternatives on any assumable loan. The language is unclear whether the sucessor must initiate the request or whether the obligation is on the servicer to offer an assumption review. However, the review obligation is specifically limited to the investor’s requirements, guidelines and creditworthiness of the successor. SBOR does not mandate the approval of an assumption by the successor or any other loss mitigation alternatives. To ere on the side of caution, servicers should advise the successor of the right to apply for an assumption of the loan. Once the review process has commenced, the successor is entitled to the same rights as the borrower under HBOR. This includes the right to appeal and the time constraints imposed before foreclosure proceedings may recommence.
If a mortgage servicer violates these provisions, it will be subjected to the same damages mechanism under HBOR. If the Trustee’s Deed Upon Sale (“TDUS”) has not been recorded, the successor can seek injunctive relief from the Court to stop the foreclosure. Prior to the recordation of the TDUS the successor is not entitled to damages and can only compel compliance with SBOR. If injunctive relief is ordered, the successor may be entitled to collect attorney’s fees to obtain the injunction. If a TDUS has already been recorded, the successor is entitled to collect any, “actual economic damages” suffered as a result of the material violation. If the violation was the result of “intentional, reckless or resulted from willful misconduct” the successor may be entitled to the greater of treble the actual damages or statutory damages of $50,000.
Similar to HBOR, SBOR includes a safe harbor provision. It allows a servicer an opportunity to correct any SBOR violations. Once the servicer corrects the SBOR violation it “shall not be liable for any violation” and should avoid all liability. However, once the TDUS is recorded, the safe harbor protection cannot be utilized. Accordingly, servicers should attempt to correct any alleged violations before the TDUS is recorded whenever possible to avoid liability. SBOR also provides additional protections to mortgage servicers that adhere to the “successors in interest” regulations contained within Regulation X and Z. A servicer’s compliance with these regulations will be “deemed to be in compliance” with SBOR. Lastly, SBOR provides that should any successor be “engaged in a legal dispute over the property” and has filed a claim in any “legal proceeding” SBOR’s protections will not apply. This provision could apply to any potential civil proceedings, contested Family Law, Probate or Bankruptcy proceedings involving the property. Therefore, a servicer should conduct a search to confirm whether the successor is engaged in any ongoing legal disputes regarding the property. If any ongoing cases are located, the servicer would not be obligated to comply with SBOR.
The full implications of SBOR are yet unknown, but given its incorporation of HBOR’s procedures and safeguards, mortgage servicers should expect delays in the ability to foreclose while the SBOR obligations are satisfied. For example, foreclosure proceedings will be delayed a minimum of 90 days upon receipt of a notice of borrower’s death. When taking into account the additional time to review the successor for an assumption and possible loss mitigation, as well as the required appeal period, the actual delay will be considerably longer. While the purpose behind the enactment of SBOR is well intentioned, because of the technical requirements of the statute and the mandated foreclosure holds, similar to HBOR, there is potential for abuse.
Because this statute addresses a population, that is likely only a small fraction of any servicer’s portfolio, SBOR will likely have little impact on daily operations. However, policy and procedures need to be implemented to comply with SBOR, because the potential exposure for violations can be significant.