The much heralded California Homeowner Bill of Rights went into effect on January 1, 2013. It expands urgency legislation, enacted four years ago, that amended the trustee sale foreclosure processes to reduce foreclosures and increase workouts, loan modifications, and short sales. See Stats 2012, chs 86–87 (AB 278 and SB 900). It’s well intended, but is it actually going to reduce the foreclosure rate in the long run?
The California Homeowner Bill of Rights (HBR) is an attempt to ensure that, as part of the trustee sale (nonjudicial foreclosure) process, borrowers have opportunity for “available loss mitigation options.” But here’s the problem: the legislation doesn’t “require a particular result” (CC §2923.4(a)), i.e., loan modifications are not mandated.
Litigation counsel in California differ widely on how much impact the HBR will actually have on borrower negotiations with lenders and borrower actions against lenders. An area of much interest is borrower remedies for violations of the HBR.
Because the 2008 legislation didn’t prescribe any remedies for lender violations, many courts were confused; some said there was no private right of action at all for borrowers, and others imposed a temporary stay of the foreclosure as the single remedy; none of them, however, awarded damages.
The HBR tipped the scales because the trustee sale law now provides a private right of action to borrowers for either injunctive relief or damages for violations of the law, including an award of attorney fees to the prevailing buyer, but there is no remedy to set aside a trustee sale in the HBR.
This may look like a green light for more court actions, but both borrower and lender attorneys must be aware of two preemption arguments—one that has succeeded and another that is developing—before concluding that there will be a multitude of successful court actions by borrowers.
The courts are already divided on whether some of these borrower-protective trustee sale statutes are preempted by federal laws that regulate savings and loan associations and national banks. On the rise are proposed federal regulations that are very similar to the California statutes; preemption would apply because a state law may not regulate lending entities on the same grounds as federal law, if the laws are inconsistent.
In addition to the borrower remedy issue, there are two other noteworthy elements of the HBR:
• It forbids an entity from initiating a trustee sale unless it is (1) the holder of the beneficial interest under the deed of trust, (2) the original or substituted trustee under the deed of trust, or (2) the designated agent of the holder. Does this mean that lenders and foreclosing parties must now respond to “show me the note” demands?
• It bars dual tracking (i.e., lenders may not proceed with foreclosure while trial loan modifications or applications for permanent loan modifications are pending). This clearly advantages borrowers and adversely affects lenders when the borrower is in default.
For a more thorough look at the many components of the HBR, check out CEB’s Law Alert. The HMB will also be covered in the January 2013 update of CEB’s California Mortgages, Deeds of Trust, and Foreclosure Litigation, chaps 2, 7, and 10, and in the March 2013 update of CEB’s California Landlord-Tenant Practice, chap 8.
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