Dubbed as the “Homeowner’s Bill of Rights,” on July 11, 2012, California Governor Jerry Brown signed into law AB 278/SB 900 marking the first U.S. state to adopt into law the residential mortgage foreclosure reform principles outlined in the February 2012 National Mortgage Servicing Settlement with the nation’s top five mortgage servicers. The Homeowner’s Bill of Rights (“HBOR”) makes changes to nonjudicial foreclosure protocols for first lien residential mortgage loans. The law takes effect on January 1, 2013 and sunsets generally on January 1, 2018. HBOR will primarily impact the current practices of financial institutions, lenders, and other mortgage servicers regarding foreclosure proceedings as follows: (1) prohibits “dual tracking” non-judicial foreclosure with a pending loan modification; (2) prohibits the practice commonly referred to as “Robo-Signing” (3) creates a private right of action; and (4) makes attorney’s fees and costs available to the borrower.

The Scope Of The Homeowner’s Bill Of Rights:  With certain exceptions, HBOR applies only to first lien mortgages or deeds of trust that are secured by owner-occupied residential real property containing no more than four dwelling units. Cal. Civ. Code § 2924.15. In addition, HBOR distinguishes between regulated /licensed lenders who conduct 175 or fewer residential foreclosures per year in California (Smaller Residential Mortgage Lenders) and other lenders (Larger Residential Mortgage Lenders) in that some parts of the law do not apply to Smaller Residential Mortgage Lenders. Cal. Civ. Code § 2924.18(b). A deed of trust in the mortgage industry is legal security relating to a property, and is used in place of a mortgage.  In a deed of trust, the loan borrower is the trustor. The borrower/trustor transfers the subject property in a trust to an independent third party, which is the trustee. The trustee holds a conditional title on behalf of the lender or the promissory note holder, the beneficiary. The trustee is delegated with certain trustee powers under the deed of trust. 

The Homeowner’s Bill Of Rights Prohibits Dual Tracking: The law’s prohibition on dual tracking a non judicial foreclosure with a loan modification or short sale is perhaps HBOR’s most significant component. Pursuant to HBOR, a mortgage servicer cannot commence foreclosure by recording a notice of default or notice of sale while a loan modification is pending or during short sale. If the mortgage servicer approves the borrower’s loan modification application, the mortgage servicer generally cannot record a notice of default, notice of sale, or proceed with a trustee’s sale so long as the borrower is in compliance with the terms of the written loan modification. Cal. Civ. Code § 2924.11. This approval must be honored by a subsequent mortgage servicer if the borrower’s loan is transferred or sold.  Cal. Civ. Code § 2924.11(g). If a notice of default or notice of sale has been recorded or a trustee’s sale has been scheduled before the loan modification application was approved, the mortgage servicer must record a rescission of the notice of default or notice of sale, or cancel the pending trustee’s sale upon the approval of the loan modification application. Cal. Civ. Code § 2924.11(d). HBOR’s no-dual tracking provisions apply until January 1, 2018, and do not apply to Smaller Residential Mortgage Lenders.

The Homeowner’s Bill Of Rights Prohibits “Robo-Signing:” In an apparent response to the practice commonly known as “robo-signing,” HBOR requires a mortgage servicer to review the foreclosure documents and ensure that the documents are accurate, complete, and supported by “competent and [reliable] evidence” concerning the borrower’s loan, loan status, and the mortgage servicer’s right to foreclose. Cal. Civ. Code § 2924.17(b). The law places the burden of compliance on the mortgage servicer. 

The Homeowner’s Bill Of Rights Creates A Private Right Of Action For Borrowers To Seek Injunctive Relief Or Monetary Damages:  If a trustee’s sale has not been recorded, a borrower may bring an action for injunctive relief to enjoin the mortgage servicer from proceeding with foreclosure until the mortgage servicer corrects a material violation of the law. Cal. Civ. Code § 2924.12. On the other hand, if a trustee’s sale has already occurred and the deed on sale has been recorded, a borrower may pursue an action for “actual economic damages.” If the court finds that the material violation was “intentional or reckless, or resulted from willful misconduct by a mortgage servicer,” the court may award damages to the borrower the greater of treble actual damages or $50,000 statutory damages. Cal. Civ. Code § 2924.12(b).

The Homeowner’s Bill Of Rights Makes Attorney’s Fees Available To The Borrower:  HBOR authorizes the court to award the prevailing borrower reasonable attorneys’ fees and costs. Cal. Civ. Code § 2924.12(i). Given the discretionary nature of HBOR’s attorneys’ fee provision, it is unclear whether the court may also award attorneys’ fees and costs to a prevailing mortgage servicer. While the idea of reciprocity of attorneys’ fees is not unusual in California, the statutory provision mandating reciprocity applies only to contract provisions containing one-sided attorneys’ fee provisions, rather than to one-sided attorneys’ fee provision contained in a statute, such as HBOR.  

The requirements imposed by HBOR are not insurmountable, but because HBOR imposes significant obligations and restrictions, financial institutions, lenders, and mortgage servicers must implement procedures to ensure compliance with the law. Loan servicing employees and individuals must be given proper training and the right tools in their daily activities for evaluating loans and dealing with borrowers. Finally, it remains to be seen whether any of the provisions of HBOR may be challenged on preemption grounds under the National Bank Act.