Pressured by a coalition of activists and state Attorney General Kamala Harris, the California legislature completed a months-long project yesterday to significantly improve its foreclosure process. The measure gives homeowners a new right to sue over fraudulent practices, ends dual tracking – where servicers process foreclosures while negotiating loan modifications – and extends a single point of contact at all borrowers. The state Assembly passed the companion bills by 53-25, with the Senate passing by 25-13.
The bill is crucial, because according to the latest statistics, more than 362,000 California homes are in foreclosure or seriously delinquent, and another 700,000 are at risk. A tough anti-fraud policy in the nation’s largest state will create ripple effects through the mortgage industry and could lead to an overall change in practices.
“Each day’s not equal in the lives of these homeowners,” said Kamala Harris, the Attorney General who pushed for the changes to state foreclosure law, in an interview with FDL News. She stressed the need to set up clear rules for foreclosures that enable the borrower to get a fair chance and for violaters of the law to face consequences.
The private right of action does not make California a judicial foreclosure state, but it does extend due process to borrowers facing foreclosure. Banks would have to pay attorney’s fees for the borrower if they won the suit. The private right of action allows borrowers to sue – and get an injunction stopping a foreclosure sale – if they can prove a willful, intentional or reckless violation of law. Statutory civil damages can range up to $50,000 per violation. The bank would have the “right to cure,” meaning they could fix their violations or settle through a modification during the judicial process. This was the piece of the bill that got the most attention from the financial services industry, and it survived in limited but still significant form. “Those who enter the courthouse [are] going to be there because the claim has merit,” said Harris. “Regardless of your perspective, you would want to know that person has access to the courts.”
(UPDATE: I screwed the pooch on this one a bit. Borrowers must prove a material violation to get a pre-sale injunction, and can sue after the foreclosure sale, on material grounds, without intent. To get the larger damages of $50,000 per violation, intent must be proven.)
The bills, which got the endorsement of Governor Jerry Brown yesterday and will go into effect January 1, go further in many ways than the servicing standards in the national foreclosure fraud settlement, and extend many policies permanently, rather than sunsetting after 3 1/2 years. The prohibition on dual tracking (the first in the nation) and the mandate for a single point of contact are permanent. The bill codifies the law with respect to robo-signing and other document processing fraud. In the statute, it states that all crucial foreclosure documents – the notice of default, notice of sale, assignment of a deed of trust, any substitution documents on behalf of a mortgagee, documents proving ownership of the loan and the chain of title, or other declarations or affidavits – “shall be accurate and complete and supported by competent and reliable evidence,” and that the servicer must verify that evidence (which gets at robo-signing, the process of servicers hiring $10-an-hour functionaries to sign affidavits attesting to the veracity of the underlying information in the documents without having any knowledge thereto).
If violations are found, state law enforcement can impose penalties on the
borrower lender if they find “multiple and repeated uncorrected violations” (essentially a pattern and practice of violations, which is the modus operandi of these systemic document problems – they never just alter one document). This would cost the servicer $7,500 per violation, and keep in mind they ordinarily robo-sign up to thousands a day, to use one example.
The problem is that this more aggressive enforcement for robo-signing sunsets in 2018. This was one of the concessions that industry squeezed out of the bill. However, Brian Nelson, a special assistant AG to Harris, and the lead negotiator on the bill, advised that the private right of action would enable a borrower to sue over document fraud beyond 2018. In addition, with the provision on what constitutes foreclosure fraud made clear, the AG’s office could bring a “17-200 action,” on unfair and deceptive practices in the foreclosure process, against the borrower. Those penalties are smaller under the statute, about $2,500 per violation.
Another key here concerns the willingness to enforce. Banks have testified before Congress that they’ve ended dual track and robo-signing, and that they will institute a single point of contact for all borrowers. We have heard this one before. And yet lapses continue. “The spirit with which I approach this is spirit of being a career prosecutor,” said Harris. “You put in place rules, but you want to have an enforcement component, so there will be accountability… Where there are violations, there will be consequences.”
The hard-fought victory, which forced an unusual procedural method through a special conference committee, because Democratic members of the committee of jurisdiction weren’t interested in the bill, came about in large part because of a coalition of progressive groups and community activists that agitated for passage. The California Courage Campaign and the Alliance of Californians for Community Empowerment (ACCE) led the way, in some cases using online tools to show how money flowed from the banking industry into the pockets of key Democrats. They created the space that forced those Democrats to back off and let the bill pass above their objections. “We showed the connection between campaign contributions from the mortgage industry, the devastation of foreclosures in California communities and lawmakers’ voting records,” said Rick Jacobs, the head of the Courage Campaign, in a statement. “We don’t worry about what politicians think of us. We care about ordinary Californians, and we work together to get the job done.”
The bill is not perfect. In addition to the sunset provision on robo-signing enforcement and the limitations on the private right of action, the measures only apply to primary and not secondary mortgages and owner-occupied residential properties with four or less units. There’s also a screwy provision exempting an ill-defined class of “strategic defaulters” from the protections.
But it does advance the ball in many ways. And it represents part of a trend of states taking matters into their own hands in the midst of a failed effort to cope with the foreclosure crisis and persistent fraud nationally. Through it all, banking interests made the false critique that passing laws to force legal processes on the system would delay what they consider necessary foreclosures, slow the housing market and harm the broader economy. None of this is true – foreclosures destroy local economies and strip property values – but that’s the common argument.
Nelson pushed back on this. “The bill doesn’t create delay,” he said, noting that under current law, it takes a bank 260 days to foreclose in California. 110 of those days are under current statutory limitations of posting a notice of default and a notice of sale. As for the rest, Nelson offered, “servicers have their own reasons for delay,” like not wanting to take on a glut of properties. Indeed, the goal is not to delay foreclosures at all, but to stop illegal foreclosures, and to give homeowners subjected to them a leg up to fight back on equal footing and stay in their homes.
It’s worth celebrating that California bucked this notion that due process is simply not affordable. The state said no to the idea that banks simply should not be forced to properly manage their own systems and should instead be allowed to violate the law for the good of the economy. “It’s a false choice, and I’m glad we had enough legislators today to say it’s a false choice,” Harris said.