Many of the provisions outlined earlier this year in a settlement between the country’s biggest mortgage servicers and state attorneys general have become law in California. The legislation expands protections for borrowers who seek a loan modification. But some in the mortgage industry warn that the new law will delay California’s housing recovery, raise the cost of credit for the state’s residents and increase litigation.
The state senate passed SB 900 last week by a vote of 25 to 13. California’s assembly passed AB 278 the same day by a vote of 25 to 13.
The legislation, dubbed the Homeowner Bill of Rights, prohibits dual track foreclosures — where a servicer simultaneously moves forward with a foreclosure while processing a loan modification request. It also requires that lenders establish a single point of contact for borrowers applying for modifications, and expands notice requirements before servicers take action on a modification application or pursue foreclosure.
In addition, the bill allows injunctions against foreclosure until violations are corrected and permits civil penalties against servicers that file multiple, inaccurate foreclosure documents or recklessly violate the law. Treble damages up to $50,000 can be awarded to borrowers when servicers are found to have recklessly violated the law.
With California Attorney General Kamala Harris at his side, Gov. Edmund G. Brown Jr. signed the legislation on Wednesday. Harris, who sponsored the bill, and Brown are both Democrats.
Brown said in a statement that the law will make the foreclosure process more fair and transparent and benefit the housing market.
“These new laws make California the first state in the nation to take provisions in the national mortgage settlement, which covered the nation’s five largest mortgage loan servicers, and apply those rules to all mortgage servicers,” the governor’s office said.
“These common-sense reforms will require banks to treat California homeowners more fairly and bring more transparency and accountability to their practices in our state,” Harris said in a previous statement. “Responsible homeowners will have a better shot to keep their homes.”
But Dykema’s Donald C. Lampe believes that the legislation has the potential to cause delays in the foreclosure process without any measurable long-term benefits, according to a statement from the national law firm.
In addition, Lampe sees the legislation delaying a meaningful recovery of California’s housing market and generating frivolous litigation.
During the first six months of this year, 45,936 foreclosures were completed in California — more than any other state — according to data from RealtyTrac. The Golden State accounted for 14 percent of all U.S. repossessions during the first-half 2012, and its foreclosure rate was the fourth-worst in the nation.
The Mortgage Bankers Association’s Mortgage Action Alliance Inc. urged its members in May to take action in supporting the California MBA’s effort to defeat the legislation, warning that it was “highly flawed, and will not accomplish these objectives. Consumer costs will increase and force California families to pay more for fewer choices. If enacted, the legislation also has great potential to seriously damage lenders, servicers and the fragile state economy.”
The Center for Responsible Learning, however, says that the new law will fix mortgage lending abuses and speed economic recovery. The group said the bill will fix rampant abuses in loan servicing and reduce foreclosures.
The new law becomes effective on Jan. 1, 2013, the same day that another law signed this week by Brown — SB 1069 — goes into effect prohibiting deficiency judgments on refinances.
