California's New Homeowner Bill of Rights: What We Can Learn

Last week the California legislature passed the Homeowner Bill of Rights, a series of bills enacted to protect California homeowners during the mortgage modification and foreclosure process.

This landmark law builds upon and extends reforms negotiated in the recent national mortgage settlement between 49 states and the nation's 5 largest loan servicers, a case brought over the practice of "robosigning" documents: Ally/GMAC, Bank of America, Citi, JPMorgan Chase and Wells Fargo. But unlike that settlement, this new legislation applies to all banks, although those that process fewer than 175 foreclosures a year would be exempt from some procedural requirements.

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The Homeowner Bill of Rights takes effect Jan. 1, 2013, and imposes the following requirements on lenders and loan servicers:

• Prohibits "dual track" foreclosures, where the servicer continues with the foreclosure process while at the same time negotiating a loan modification with the borrower;
• Guarantees a single point of contact provided by the lender/servicer for a borrower with a loan modification application pending;
• Requires banks to clearly explain to borrowers why they are rejected for a loan modification;
• Gives borrowers the right to sue lenders for "significant, material violations" of the law;
• Requires that servicers document their right to foreclose and imposes fines of $7,500 per loan on fraudulently signed mortgage documents.

Consumer advocate critics of the bill have charged that:

• Only first-lien mortgages for owner-occupants apply;
• By not taking effect until 2013, hundreds of thousands of troubled homeowners won't benefit from these protections;
• Servicers aren't obligated to consider applications for loan modifications or appeals before January 1, 2013.

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Similar measures to help homeowners have repeatedly failed in California over the past four years, after lobbying by banks and other lenders, but California Attorney General Kamala Harris is being credited with shifting the political landscape following her involvement in the national mortgage settlement.  Announcing the bill Harris said, "The California Homeowner Bill of Rights will give struggling homeowners a fighting shot to keep their home."

While most smaller banks and credit unions remained neutral, opposition to the Homeowner Bill of Rights was mounted by the large banks, the California Chamber of Commerce, title companies, real estate agents, trustees and securities industry representatives.

Rodney K. Brown, president and CEO of the California Bankers Association, stated in a response to a recent Sacramento Bee editorial: "Our industry cannot support legislation that promotes meritless litigation, particularly in an environment where our court system is already overburdened, that will ultimately have no impact on the underlying financial condition of the borrower who cannot afford to stay in their home." However, Brown agreed with some of the bill's provisions, such as borrowers being entitled to an answer regarding their loan modification before being foreclosed upon and eligible loan modification applicants having a consistent point-of-contact.

Will other states follow California's lead by enacting similar homeowner protection legislation?  While perhaps a little too early to tell, if this victory for troubled California homeowners last week is any indication, the odds are looking better and better that some relief is on the horizon.

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Image: Robert Conrad Photography, via Flickr