BILL ANALYSIS
SENATE COMMITTEE ON BANKING, FINANCE,
AND INSURANCE
Senator Michael J. Machado, Chair
SB 1137 (Perata) Hearing Date: April 2,
2008
As Proposed to Be Amended (see attached mockup)
Fiscal: No
Urgency: Yes
SUMMARY Would enact several changes to the procedures that
must be followed before the holder of a mortgage may issue a
notice of default (NOD) or notice of trustee sale, require the
holder of a mortgage to mail a specified notice to the tenant(s)
of a property on which foreclosure proceedings have begun, and
impose penalties on property owners who fail to adequately
maintain foreclosed properties, as specified.
DIGEST
Existing law
1. Regulates the non-judicial foreclosure process pursuant to
the power of sale contained within a mortgage contract, and
provides that in order to commence the process, a trustee,
mortgagee, or beneficiary must record a NOD and allow three
months to lapse before setting a date for sale of the
property (Civil Code Section 2924);
2. Further provides that the mortgagee, trustee or other
person authorized to make the sale must give notice of sale,
and requires notice of the sale to be made, as specified, at
least 20 days prior to the date of sale (Civil Code Section
2924f);
3. Permits a party to a residential rental agreement to
terminate a periodic tenancy by giving 30 days written
notice, unless the tenant has resided in the dwelling for
one year or more, in which case a 60-day notice is required,
as specified (Civil Code Sections 1946 and 1946.1);
4. Provides that tenants or subtenants in possession of a
rental housing unit which has been sold due to foreclosure
SB 1137 (Perata), Page 2
shall be given written notice to vacate the property.
Notice must be provided at least as far in advance as the
term of the lease, not to exceed 30 days (e.g., if the lease
is weekly, notice must be given one week before the person
must vacate; if the lease is monthly or longer, notice must
be given 30 days prior; Code of Civil Procedure Section
1161a);
5. Provides that anything which is injurious to health,
indecent, or offensive to the senses, obstructs the free use
of property, or unlawfully obstructs free passage is a
nuisance (Civil Code Section 3479).
SB 1137 (Perata), Page 3
This bill
1. Would make findings and declarations about the nature of
the mortgage crisis in California and the importance of
enacting an urgency statute to address the threats to the
state economy and local economies that current mortgage
market troubles are creating;
2. Would provide that a mortgagee, trustee, beneficiary, or
authorized agent may not file a NOD until 30 days after
contact is made with a borrower, as described below, or 30
days after satisfying due diligence requirements relating to
contact, as described below.
a. Would require a mortgagee, trustee, beneficiary, or
authorized agent to contact a borrower in person or by
telephone to assess the borrower's financial situation
and explore options for the borrower to avoid
foreclosure. During the initial contact, the mortgagee,
trustee, beneficiary, or authorized agent must advise the
borrower that he or she has the right to request a
subsequent meeting and that, if the meeting is requested,
the mortgagee, trustee, beneficiary, or authorized agent
must schedule the meeting within 14 days;
b. Would provide that the assessment of the borrower's
financial situation and discussion of options may occur
at the first contact, or at the subsequent meeting
scheduled for that purpose, but that in either case, the
borrower must be provided a toll-free number for
HUD-certified housing counseling agencies;
c. Would allow any meeting to occur telephonically;
3. Would provide that, as part of the NOD, a mortgagee,
trustee, beneficiary, or authorized agent must include a
declaration that it has contacted the borrower, tried with
due diligence to contact the borrower, or that the borrower
has surrendered the property to the mortgagee, trustee,
beneficiary, or authorized agent;
4. Would provide that if a mortgagee, trustee, beneficiary, or
authorized agent already filed the NOD prior to enactment of
this bill, and did not subsequently file a notice of
rescission, the mortgagee, trustee, beneficiary, or
authorized agent must include a declaration, as part of the
SB 1137 (Perata), Page 4
notice of sale, stating either of the following:
a. The borrower was contacted to assess his or her
financial situation and to explore options for the
borrower to avoid foreclosure;
b. No contact occurred, in which case the mortgagee,
trustee, beneficiary, or authorized agent must list the
efforts made, if any, to attempt the contact;
5. Would authorize a mortgagee's, trustee's, beneficiary's, or
authorized agent's loss mitigation personnel to participate
by telephone during any contact required by the bill, and
would authorize borrowers to designate a HUD-certified
housing counseling agency, attorney, or other advisor to act
on their (the borrower's) behalf in conversations with the
mortgagee, trustee, beneficiary, or authorized agent. Any
contact made by a HUD-certified housing counseling agency,
attorney, or other advisor on a borrower's behalf satisfies
the requirement for a mortgagee, trustee, beneficiary, or
authorized agent to contact a borrower prior to filing an
NOD. Any loan modification or workout plan offered at the
meeting by the mortgagee, trustee, beneficiary, or
authorized agent is subject to approval by the borrower;
6. Provides that a mortgagee, trustee, beneficiary, or
authorized agent that has not contacted a borrower, as
required by the bill, may file an NOD if failure to contact
the borrower occurred despite the due diligence of the
mortgagee, trustee, beneficiary, or authorized agent, and
defines due diligence as all of the following:
a. A mortgagee, trustee, beneficiary, or authorized
agent must first attempt to contact a borrower by sending
a first-class letter that includes the toll-free number
for HUD-certified housing counseling agencies;
b. After the letter has been sent, the mortgagee,
trustee, beneficiary, or authorized agent must attempt to
contact the borrower by telephone, at the primary
telephone number on file, at least three times, at
different hours and on different days. The mortgagee,
trustee, beneficiary, or authorized agent may use an
automated system to dial borrowers, as long as a customer
who answers the call is connected to a live
representative of the mortgagee, trustee, beneficiary, or
SB 1137 (Perata), Page 5
authorized agent;
c. The "three-call" requirement described immediately
above does not apply if the mortgagee, trustee,
beneficiary, or authorized agent attempts to contact the
borrower and learns that the borrower's telephone number
has been disconnected;
d. If the borrower does not respond to the mortgagee,
trustee, beneficiary, or authorized agent within two
weeks after the telephone call requirements have been
satisfied, the mortgagee, trustee, beneficiary, or
authorized agent is required to send a certified letter
to the borrower, return receipt requested;
e. The mortgagee, trustee, beneficiary, or authorized
agent must provide a way in which borrowers can contact
it in a timely manner, including a toll-free number that
provides access to a live representative during business
hours;
f. If a mortgagee, trustee, beneficiary, or authorized
agent has an Internet Web site, it must post a prominent
link on its homepage to the following information:
i. Options that may be available to
borrowers who are unable to afford their mortgage
payments and who wish to avoid foreclosure, and
instructions to borrowers advising them on steps to
take to explore those options;
ii. A list of financial documents borrowers
should collect and be prepared to present to the
mortgagee, trustee, beneficiary, or authorized agent
when discussing options for avoiding foreclosure;
iii. A toll-free number for borrowers who wish
to discuss options for avoiding foreclosure with
their mortgagee, trustee, beneficiary, or authorized
agent;
iv. A toll-free number for HUD-certified
housing counseling agencies;
7. Provides that the provisions, described above, requiring
certain acts to be performed prior to filing an NOD or a
SB 1137 (Perata), Page 6
notice of sale, do not apply if any of the following are
true:
a. A borrower has surrendered the property, as
evidenced by either a letter confirming the surrender or
by delivery of the keys to the property;
b. The borrower has contracted with an organization,
person, or entity whose primary business is advising
people on how to extend the foreclosure process and avoid
their contractual obligations to the mortgagee, trustee,
beneficiary, or authorized agent;
c. The borrower filed for bankruptcy, and the
bankruptcy proceeding is active;
8. Would apply the provisions described in Numbers 2 through 7
above only to loans that are secured by residential real
property, are for owner-occupied residences, and were made
between January 1, 2003 and December 31, 2007;
9. Would codify a legislative finding that any duty servicers
may have to maximize the net present value under their
pooling and servicing agreements is owed to all parties in a
loan pool, not to any particular parties, and that a
servicer acts in the best interest of all parties if it
agrees to or implements a loan modification or workout plan,
as specified;
10. Would codify the intent of the Legislature that the
mortgagee, trustee, beneficiary, or authorized agent offer
the borrower a loan modification or workout plan, if such a
modification or plan is consistent with its contractual or
other authority;
11. Would require the following, effective 60 days after
enactment of the bill, with respect to loans secured by
residential real property, when the billing address for the
mortgage note is different than the property address:
a. A mortgagee, trustee, beneficiary, or authorized
agent must mail an envelope addressed to "resident" of
the property, upon posting a notice of sale for the
property (the word "resident" would appear in English);
b. Inside the envelope, the following notice must be
SB 1137 (Perata), Page 7
included, in English, Spanish, Korean, Tagalog, Chinese,
and Vietnamese: "Foreclosure process has begun on this
property, which may affect your right to continue to live
in this property. Twenty days or more after the date of
this notice, this property may be sold at foreclosure.
If you are renting this property, the new property owner
may either give you a new lease or provide you with a
60-day eviction notice. However, other laws may prohibit
an eviction in this circumstance or provide you with a
longer notice before eviction. You may wish to contact a
lawyer or your local legal aid or housing counseling
agency to discuss any rights you may have";
12. Would require a legal owner to maintain vacant, residential
real property purchased by that owner at a foreclosure sale
or acquired by that owner through foreclosure under a
mortgage or deed of trust.
a. Would provide that a governmental entity may impose
civil fines and penalties of up to $1,000 per day per
violation on such a legal owner for failure to maintain
the property;
b. Would require any governmental entity that chooses
to impose fines and penalties pursuant to the bill to
give notice of the claimed violation, including a
description of the conditions giving rise to the claim of
violation, give the legal owner an opportunity to remedy
the violation at least 14 days prior to imposing fines
and penalties, and allow the legal owner an opportunity
to contest any fines and penalties imposed;
c. Would provide that "failure to maintain," for
purposes of this section, includes failure to adequately
care for the property, including, but not limited to,
permitting excessive foliage growth that diminishes the
value of surrounding properties, failing to take action
to prevent trespassers or squatters from remaining on the
property, or failing to take action to prevent mosquito
larva from growing in standing water;
d. Would require fines and penalties collected pursuant
to this provision to be directed to local nuisance
abatement programs and clarify that this provision does
not pre-empt any local ordinance;
SB 1137 (Perata), Page 8
13. Would provide that, notwithstanding existing law, a tenant
or subtenant in possession of a rental housing unit that has
been sold due to foreclosure shall be given 60 days' written
notice to leave the property before that tenant may be
removed from the property, but would provide that this
provision does not apply if any party to the mortgage note
remains in the property as a tenant, subtenant, or occupant;
14. Would provide that nothing in the bill is intended to
affect any local just-cause eviction ordinance, and that the
bill does not, and shall not be construed, to affect the
authority of a public entity to regulate or monitor the
basis for eviction;
15. Would provide that its provisions are severable and that
they sunset on January 1, 2013.
SB 1137 (Perata), Page 9
COMMENTS
1. Purpose of the bill To reduce the number of foreclosures
in California, ensure that foreclosed properties do not
become a source of blight to the communities in which they
are located, and provide increased protections to
individuals who rent properties that ultimately go into
foreclosure.
2. Background California is currently suffering the effects
of a severe housing crisis, which has not only negatively
affected borrowers who have lost their homes to foreclosure,
but has also had significant negative ripple effects on
housing values, local economies, and the state economy.
Although many other states across the United States have
been affected by what has colloquially become known as "the
subprime mortgage crisis," California is suffering more than
many others.
During February 2008, the most recent month for which
foreclosure data are available, RealtyTrac reported that
California, Nevada, and Florida continued to document the
highest foreclosure rates in the country. California's
foreclosure rate was second highest in the nation, with one
in every 242 households receiving a foreclosure filing
during the month. Foreclosure filings were reported on a
total of 53,629 California properties in February, a 131
percent increase from February 2007. California and Florida
metropolitan areas accounted for nine of the top ten
metropolitan foreclosure rates in February. Stockton,
California had the second highest foreclosure rate in the
country (one out of every 87 households). Other California
metropolitan areas in the top ten were Modesto (#3), Merced
(#4), Riverside-San Bernardino (#5), Bakersfield (#7),
Vallejo-Fairfield (#8), and Sacramento (#9).
The Mortgage Bankers Association (MBA) has also reported that
California is among only four states nationwide (the others
being Nevada, Florida, and Arizona) that are driving
historically high nationwide rates of default and
foreclosure. According to MBA, California and Florida,
together, accounted for 30% of the foreclosure starts in the
country during the fourth quarter of 2007. These two states
accounted for 39% of all prime adjustable rate mortgages
(ARMs) outstanding, but 47% of prime ARM foreclosure starts.
They accounted for 29% of subprime ARMs outstanding, but
SB 1137 (Perata), Page 10
36% of subprime ARM foreclosure starts. In California, the
rate of foreclosure starts more than doubled between the
fourth quarter of 2006 and the fourth quarter of 2007. In
the third quarter of 2007, national delinquency rates were
at their highest levels in 21 years, while the rate of
foreclosure starts and the percentage of loans in the
process of foreclosure were at their highest levels ever
during that same quarter. Fourth quarter 2007 delinquency
rates, rates of foreclosure starts, and the percentage of
loans in the process of foreclosure were higher than they
were in the third quarter of 2007. Doug Duncan, chief
economist for MBA, has said that MBA does not expect
foreclosures to reach a peak until late 2008.
To date, efforts to help mitigate the subprime housing crisis
have focused on the importance of responsiveness and
flexibility by the financial institutions that hold and
service mortgages toward their borrowers. Many of the
nation's financial institutions have publicly stated that
they view foreclosure only as a last resort, but these same
institutions have also run into significant challenges in
their efforts to review the loans in their portfolios for
possible modification or refinance.
In November 2007, Governor Schwarzenegger reached an agreement
with several state-regulated financial institutions to
engage in streamlined modifications of certain types of
subprime ARMs. In December 2007, President Bush and U.S.
Secretary of the Treasury Henry Paulson announced the HOPE
NOW Alliance plan, an industry-led plan intended to
facilitate streamlined modifications of selected subprime
ARMs. The American Securitization Forum has also published
guidance documents intended to facilitate loan modifications
by servicers, pursuant to the contractual terms specified in
pooling and servicing agreements. Despite the existence of
these voluntary initiatives, and as noted above, defaults
and foreclosures continue to rise.
This bill is a response to the expectation that defaults and
foreclosures will continue to grow in number in California
through 2008, and out of concern over the negative impact
they will have on California homeowners, California's local
economies, and the state economy.
3. Outstanding Issues In the months since this Committee
heard SB 926 (Perata), a similar bill which passed this
SB 1137 (Perata), Page 11
Committee in January 2008, the author has tried to negotiate
a workable compromise with several of the industry groups
that had been opposed to SB 926. As noted below in the
opposition section, many of these groups remain opposed to
the version of the bill before the Committee. However, the
number of outstanding issues has been narrowed
significantly. This section describes six of the remaining
outstanding issues. While not an all-inclusive list of
every outstanding issue remaining on the bill, the list
below does include the most significant issues separating
those who support the bill from those who are opposed.
a. Scope of the bill: Some have suggested that
the bill be limited to subprime and nontraditional
loans, as those loans were defined in SB 385
(Machado), Chapter 301, Statutes of 2007, and in the
federal guidance documents that formed the basis for
SB 385. The author has not accepted an amendment
limiting the bill to subprime and nontraditional
loans, but has offered an amendment to limit the
provision of the bill requiring lender/borrower
contact to loans entered into after January 1, 2003.
Those who would like the scope of the bill limited to
subprime and nontraditional loans believe it will
focus lenders' and servicers' efforts where they are
most needed. Others believe that if the intent of SB
1137 is to facilitate communication between troubled
borrowers and those who hold their mortgages, there is
no valid reason for limiting the bill to subprime and
nontraditional loans. Borrowers with prime and/or
traditional loans may find themselves unable to afford
their mortgages. If SB 1137 is limited to subprime
and nontraditional loans, those with subprime or
nontraditional loans could receive preferential
treatment, relative to those who obtained prime or
traditional loan products.
b. Findings and declarations section: One of the
findings remains problematic to those who remain in
opposition. The problematic language reads as
follows, and describes loan modifications authorized
under pooling and servicing agreements: "That
modification is in the best interest of investors when
the borrower's ability and willingness to pay under
the modified terms continues to produce revenue for
SB 1137 (Perata), Page 12
the investor, whereas a default on the loan and
foreclosure of the property causing significant
financial loss to the investor is likely to occur
without a restructuring or other modification of the
loan." Those opposed would like the language deleted.
Proponents believe that the language provides
important background supporting the intent of the
bill.
c. Terms under which the provisions that require
certain acts to be performed prior to filing an NOD or
a notice of sale do not apply: The bill currently
states that mortgagees, trustees, beneficiaries, and
authorized agents do not need to contact borrowers or
try with due diligence to do so in certain instances,
such as those in which a borrower has surrendered the
property, contracted with a company such as
youwalkaway.com to surrender their property, or is in
active bankruptcy. However, opponents would also like
relief from the requirement to contact or attempt to
contact a borrower, when the borrower was previously
given a loan modification or other form of loan
forbearance, and has subsequently fallen behind on
that forbearance plan or modification.
d. Operative date of the provisions requiring
certain acts to be performed prior to filing an NOD or
notice of sale: Proponents prefer a delay of 30 days
after enactment of the bill. Opponents prefer a
longer delay.
e. Manner in which the tenant notice will be
posted publicly on the property that is the subject of
a notice of sale: Opponents and proponents agree that
the bill will require a notice in English, Spanish,
Chinese, Korean, Vietnamese, and Tagalog to be posted
outside every property on which a notice of sale has
been filed, and that the notice will read as described
above in Number 11b. The issue still to be resolved
is exactly where on the outside of the property the
notice will be posted and what steps, if any, will be
required of mortgagees, trustees, beneficiaries, and
authorized agents to ensure that the tenant notice is
not taken down after it is posted.
f. Definition of "failure to maintain" and length
SB 1137 (Perata), Page 13
of time that property owners have to remedy a
violation prior to being subject to fines for failure
to maintain a property: Furthermore, as written, the
bill gives owners up to 14 days in which to remedy
conditions giving rise to a claim of violation. The
opponents would like more time. As written, the bill
could result in a property owner being fined for
failure to maintain the interior of a property.
Opponents would like to clarify that point, to avoid
being liable for interior violations that do not pose
a risk to health or safety.
4. Support Senator Perata introduced this bill to help people
affected by the subprime mortgage crisis stay in their homes
and prevent neighborhoods afflicted with foreclosures from
becoming areas of blight. According to Senator Perata, "The
mortgage crisis is taking a terrible toll on Oakland and the
rest of California. It is crucial that we give homeowners
the tools they need to avoid foreclosure when possible
because that's the best outcome for everybody. Foreclosures
are not only devastating for the families who are forced
from their homes, but for the neighborhoods and communities
surrounding them that can see vacancies increase, properties
fall into disrepair, and housing values decline."
The Center for Responsible Lending (CRL) supports SB 1137 as an
important part of the effort to stem the tide of
foreclosures and ameliorate the effects of the current
crisis on homeowners, tenants, neighborhoods, communities,
and the California economy as a whole. Last December, CRL
estimated that nearly 500,000 borrowers in California would
lose their homes to foreclosure, due to reckless lending
practices in the subprime market. Foreclosures are already
at extremely high levels, and CRL expects the worst is still
to come. Based on the timing of rate resets for subprime
adjustable rate mortgages, CRL expects the highest volume of
resets to occur in the Spring and in October of 2008.
CRL supports the requirement in the bill that lenders schedule
a meeting to work with borrowers in default, prior to filing
an NOD, and the provisions that would provide additional
notice and time to tenants of properties facing foreclosure.
The organization is disappointed, however, that the bill
lacks a provision, previously in SB 926, which would have
required the meeting between lenders and borrowers to be
conducted in the language in which the loan was originally
SB 1137 (Perata), Page 14
negotiated. CRL notes that lenders or affiliated brokers
typically met face-to-face with borrowers to place them into
the problem loans; it is reasonable, then, to require a
meeting with borrowers before foreclosing on the loan and
taking away their home.
Consumers Union (CU) supports SB 1137, and believes that by
creating sensible stop-gap protections for borrowers before
they lose their homes, SB 1137 will help preserve
homeownership by preventing unnecessary home foreclosures
from occurring. SB 1137 encourages early contact and
communication between borrowers and lenders to protect
against unnecessary mortgage loan foreclosures. CU supports
the provision of the bill that requires a lender or
servicing agent to contact a borrower and conduct a meeting
to discuss loss mitigation options. However, like CRL, CU
believes it is important to require that the notice and
meeting be provided in the language in which the loan was
negotiated.
CU also supports the provision of the bill that prohibits a
lender or servicing agent from filing an NOD until 30 days
after the meeting, or if no meeting has occurred, 30 days
after using due diligence to try to arrange the meeting. To
maximize the benefit of the lender/homeowner meeting, it is
essential that homeowners not only have the benefit of a
meeting to discuss their options, but that they also be
given sufficient time in which to exercise their options.
By requiring that all residents of a property be notified when
a property is threatened with foreclosure, owners and
tenants alike will be on notice that their occupancy may be
in peril. Tenants have increasingly become the silent
victims in the foreclosure crisis, often kept in the dark by
their landlords about the foreclosure status impacting their
tenancy.
Finally, CU notes that SB 1137 will help protect neighboring
properties around foreclosed-upon properties, by requiring
the foreclosing entity to maintain the property to prevent
nuisance and blight, and by making owners of these
properties liable for fines if they fail to do so. This is
an important requirement, both because it helps protect
community integrity and supports existing homeownership, and
because it helps guard against potential public safety
concerns such as squatting and abandoned properties becoming
SB 1137 (Perata), Page 15
havens for illegal activities.
California ACORN writes in qualified support of SB 1137, a bill
which will provide much needed protection for hundreds of
thousands of families all over California in danger of
losing their homes. ACORN supports the provision of the
bill that requires a meeting between a lender and a
borrower. It believes that this provision may help may
families keep their homes. ACORN also commends the addition
of a provision allowing a borrower to be represented by a
HUD-certified counselor during the meeting. However, ACORN
is very concerned about the removal of a provision that
previously required the meeting between lenders and
borrowers to be in the language spoken at the time the loan
was originated. Like the other organizations above, ACORN
also supports the tenancy provisions and nuisance provisions
of the bill.
In its letter, ACORN urges the addition of several amendments,
many of which have been taken by the author. The three
amendments requested by ACORN that have not yet been taken
include the following: 1) Codify legislative intent that
mortgagees, trustees, beneficiaries, or authorized agents
exercise reasonable efforts to contact loan investors, if
applicable, to secure authority to mitigate losses by
offering loan modifications and other alternatives to
foreclosure; 2) Clarify that the definition of "failure to
maintain" includes the failure to provide gas, electricity,
and other services reasonably necessary for tenants living
in foreclosed homes to enjoy habitable premises, and 3)
Reinstate the provision designed to ensure that the language
of the borrower/lender meeting be one that the borrower
understands.
The California Reinvestment Coalition (CRC), together with
fifty four other organizations, also writes in qualified
support of SB 1137. CRC recently surveyed 38 of the 80
HUD-certified mortgage counseling agencies in California.
According to the survey, most counselors do not find lenders
responsive, nor receptive to modifying loans for long-term
affordability. Servicers are offering short-term
modifications that only postpone borrowers' day of
reckoning. Foreclosures are a very common outcome;
beneficial loan modifications are not happening. Despite
lenders' assertions about reaching out to borrowers before
they face problems from rising interest rates and increasing
SB 1137 (Perata), Page 16
monthly payments, most counseling agencies do not see this
happening. Most counselors express frustration over their
interactions with servicers on borrowers' behalf.
Given the findings of its survey, CRC is disappointed that SB
1137 no longer contains SB 926's requirements of an
in-person meeting between borrower and servicer, conducted
in the same language in which the loan was negotiated.
Telephonic meetings will necessarily be less effective than
in-person meetings, and meetings conducted in a language not
understood by the borrower will of course be meaningless.
CRC hopes that these provisions will be restored to SB 1137,
and that the bill will not be further weakened. At the same
time, CRC and the other groups signing on to CRC's letter
believe that the current bill's provisions will help
thousands of borrowers in California retain their homes,
protect tenants, preserve neighborhood property values, and
protect communities from blight. CRC is asking the author
to take the same amendments requested by ACORN.
5. Opposition The United Trustees Association (UTA) is
opposed to the bill unless it is amended. UTA is concerned
about the scope of the bill and would like to see it reduced
to subprime and nontraditional loans, as those terms were
defined in SB 385. UTA also notes that there are numerous
drafting issues it continues to discuss with the author's
staff, in hopes of arriving at an acceptable product.
The California Bankers Association, California Association of
Industrial Banks, California Association of Realtors,
California Chamber of Commerce, California Financial
Services Association, California Land Title Association,
California Mortgage Bankers Association, and Securities
Industry and Financial Markets Association (the industry
coalition) oppose SB 1137. While the industry coalition
appreciates amendments that differentiate and improve SB
1137, relative to SB 926, SB 1137 still contains several
provisions that create substantial compliance challenges and
that lead to significant new legal exposure for lenders as
they work with borrowers to prevent unnecessary
foreclosures.
For example, the industry coalition believes that the scope of
the bill is too broad. The section of the bill that
requires borrowers to contact or attempt to contact a
borrower to arrange a meeting applies to all loans secured
SB 1137 (Perata), Page 17
by residential real property, including multi-family loans,
equity loans, and others. It is not limited to borrowers
who were particularly affected by the types of subprime
loans identified by proponents as problematic. Furthermore,
the layering of due diligence requirements creates a host of
opportunities for a borrower to challenge the filing of an
NOD, thereby delaying or creating uncertainty within the
foreclosure process. The provision of the bill provision
that allows entities to assess fines and penalties is
unclear about whether the 14-day period commences once the
legal owner receives notice, or when the government entity
mails the notice. The industry coalition also asks: If the
legal owner is unable to completely repair the property to
the government entity's standard, would the entire period of
penalties apply, or would there be a lesser penalty assessed
that reflects the efforts made by the legal owner? What
entities are covered under the term "governmental entity"?
The industry coalition notes that extensive local ordinances
already exist relating to property maintenance. SB 1137
fails to limit or preempt local standards, creating
significant compliance challenges resulting from non-uniform
standards. Mortgagees, trustees, and beneficiaries are
already motivated to maintain the property, because their
interest is in selling the property as soon as possible.
Once a loan goes into default, the lender is typically the
one party with an economic interest in maintaining the
property.
Finally, the industry coalition takes issue with the provision
of the bill that gives a tenant or subtenant of a rental
housing unit that has been sold due to foreclosure 60 days'
written notice before the tenant or subtenant may be removed
from the property. This provision will delay the ability to
resell and frustrate the ability of an owner to repair the
property. Further, tenants have no incentive to maintain
the property during this time.
The California Credit Union League (CCUL) is opposed to the
bill for many of the reasons cited above by the industry
coalition, and asserts that credit unions played virtually
no role in subprime lending. Among CCUL's concerns:
Innocent errors in documenting the several steps of due
diligence could lead to the voiding of an NOD or substantial
litigation costs. Furthermore, while CCUL appreciates the
provision of the bill that gives owners of foreclosed
SB 1137 (Perata), Page 18
properties up to 14 days in which to remedy a claim of
public nuisance, the provision presents substantial
difficulties. If a lender obtains the property through
foreclosure, and the borrower has damaged or neglected the
property, a lender would have just two weeks to evaluate the
property's condition and remedy the situation or face stiff
financial penalties. SB 1137 would make a lender
responsible for a borrower's negligence or, worse yet, for
purposeful damage made to the property by a borrower prior
to surrender.
The Apartment Association, California Southern Cities
(Apartment Association) is opposed to specific provisions of
the bill affecting landlords and tenants. The two sections
to which the Apartment Association is opposed are Section 4
(which requires lenders to send a notice to the "resident"
of a property that had entered the foreclosure process about
their rights and options) and Section 6 (which requires a
60-day notice to terminate a tenancy following foreclosure).
The Apartment Association notes that almost every rental
will remain a rental, regardless of ownership, and believes
that the bill will encourage tenants to stop paying rent.
Tenants should be encouraged to pay rent and comply with
contractual provisions. The Apartment Association also
believes that the 60-day notice period is not necessary for
multi-family rentals.
6. Prior Legislation
a. SB 926 (Perata), 2007-08 Legislative Session:
Substantially similar to SB 1137. Failed passage on
the Senate Floor.
POSITIONS
Support
AARP
Affordable Housing Services
Asset Policy Initiative of California
ByDesign Financial Solutions
California ACORN
California Alliance for Retired Americans
California Capital Financial Development Corp
California Coalition for Rural Housing
SB 1137 (Perata), Page 19
California Community Economic Development Association
California LULAC Housing Commission
California Reinvestment Coalition
California Resources and Training
Center for California Homeowner Association Law
Center for Human Rights, Law, and Advocacy
Center for Responsible Lending
CHARO
Civic Center Barrio Housing Corporation
Community Housing and Credit Counseling Center
Community Legal Services in East Palo Alto
Consortium for Elder Abuse Prevention
Consumer Action
Consumer Federation of California
Consumers Union
East LA Community Corporation
East Oakland CDC
Fair Housing Council of Orange County
Fair Housing Council of the San Fernando Valley
Fair Housing of Marin
H.O.U.S.E. (Home Ownership Utilizing Supportive Education)
Housing and Economic Rights Advocates
Housing Rights Center
Human Rights/Fair Housing Commission of Sacramento
Jefferson Economic Development Institute
Just Cause Oakland
Mission Economic Development Agency
League of California Cities
Love, Inc.
Low Income Investment Fund
Mission Community Financial Assistance
National Council of La Raza
Nehemiah Community Reinvestment Fund
Non Profit Housing of Northern California
Northbay Family Homes
Orange County Community Housing Corporation
Pacific Asian Consortium in Employment
Public Interest Law Firm of the Law Foundation of Silicon Valley
Project Sentinel
Renaissance Entrepreneurship Center
Rural Community Assistance Corporation
SF EARN
Sacramento Mutual Housing Association
Self-Help Enterprises
Sierra Planning and Housing Alliance, Inc.
Suburban Alternatives Land Trust
SB 1137 (Perata), Page 20
The Watsonville Law Center
Unity Council
Urban Strategies Council
Western Center on Law and Poverty
Lisa A. Baker, Executive Director, Yolo County Housing Authority
Joanne Baker, Certified Counselor, NID Housing Counseling Agency
Oppose
United Trustees Association (oppose unless amended)
Apartment Association, California Southern Cities
California Association of Industrial Banks
California Association of Realtors
California Bankers Association
California Chamber of Commerce
California Credit Union League
California Financial Services Association
California Land Title Association
California Mortgage Bankers Association
Securities Industry and Financial Markets Association
Consultant: Eileen Newhall (916) 651-4102