What Does CA AB 3088 Mean for Mortgage Servicers?, examined some new and notable obligations California imposes on mortgage servicers, including requirements to provide forbearance denial notices. In that blog, we promised the publication of a Part II that further expanded upon CA AB 3088. In this Part II, we discuss some of the ways in which CA AB 3088 significantly expands servicers' obligations under the California Homeowners' Bill of Rights, and we also discuss some fairly significant tension between CA AB 3088 and Regulation X of the CFPB Mortgage Servicing Rules.
Expansion of Homeowners' Bill of Rights (HBOR)
As many of you know, historically, HBOR's provisions only applied to "first lien mortgages or deeds of trust that are secured by owner occupied residential real property containing no more than four dwelling units." Cal. Civ. Code § 2924.15 (emphasis added). CA AB 3088, however, amends § 2924.15 to expand the HBOR to also apply to any first lien mortgages or deeds of trust that are:
- Secured by residential real property;
- Occupied by a tenant as the tenant's principal residence; and
- Contain no more than four dwelling units.
In addition, where the property is occupied by a tenant, HBOR, as amended by CA AB 3088, only applies if the:
- Property owner is an individual who owns, or individuals who collectively own, no more than three residential real properties, each of which do not contain more than four dwelling units;
- The property is occupied by a tenant pursuant to a lease entered into before, and in effect before, March 4, 2020, and "in good faith and for valuable consideration that reflects the fair market value in the open market between informed and willing parties;" and
- The tenant is unable to pay rent due to a reduction in income as a result of COVID-19.
This expanded scope applies to the most pertinent HBOR provisions, including requirements related to borrower contact (phone calls/letters), loss mitigation, and the penalties available for failure to comply with HBOR's myriad requirements. Importantly, these amendments remain in effect until January 1, 2023, even if the pandemic ends sooner.
California's efforts are clear: The state is attempting to provide relief for small landlords, and their tenants, who are experiencing a reduction of income as a result of COVID-19. Practically speaking, however, servicers who seek to limit HBOR to this expanded scope face some obstacles – including gathering information related to the reason a tenant has reduced income (such as what kind of documentation does a servicer have to accept here, or what if a tenant won't cooperate with the landlord and provide the documentation the servicer requires?). In addition, servicers are going to have very little information as to how a lease was entered into or the fair market rental value of a property when the lease was entered into (e.g., how is fair market value of the lease determined, or on what source should servicers rely?). Moreover, HBOR is silent on some key questions – namely, how to treat mixed-use properties and whether or not a lease must be written.
Ultimately, we have seen that, at least at the outset, many servicers have had to simply expand the scope of HBOR to any property occupied by a tenant, which can greatly increase the scope of loans where servicers are making calls/sending letters and complying with certain loss mitigation requirements. Bradley will continuously monitor these amendments (and how courts interpret these new provisions) and the impact they may have on a servicer's operations. As the pandemic comes to an end, hopefully later this year, servicers may want to review their practices to determine if there are ways to tailor their processes to only those loans specifically covered by HBOR.
Tension with CFPB Mortgage Servicing Rules
While CA AB 3088 may seem simple on its face, there is some tension between the California bill and Regulation X of the CFPB mortgage servicing rules, which creates complexities and operational challenges that mortgage servicers must evaluate and overcome.
For example, when a forbearance request is denied, a servicer's denial letter must cite the defect in the borrower's request, "including an incomplete application or missing information, that is curable." Any such written denial letter must also provide the borrower 21 days to cure the identified defect. While most in the industry, including the CFPB, are unlikely to view such correspondence as a denial of a forbearance request, the California bill arguably suggests otherwise because of this specific content requirement in a forbearance denial notice. As a result, the most conservative interpretation of the law is to treat a servicer's request for additional information to complete an application as a forbearance denial notice and subject to all of the content requirements described in CA AB 3088. The problem, however, is that a servicer's request for additional information to complete a loss mitigation application is already governed by Regulation X of the CFPB mortgage servicing rules, and there are specific content requirements in Regulation X that simply do not line up well with the California bill. In an incomplete loss mitigation application acknowledgement letter required by Regulation X, a servicer must provide the borrower with a "reasonable date" by which the borrower should submit the missing information/documentation and, pursuant to Regulation X, the "reasonable date" will very rarely be 21 days, the amount of time California gives a borrower to cure any identified defect. Indeed, in some cases the "reasonable date" in the CFPB acknowledgement letter will be less than 21 days and, in some cases, the "reasonable date" will be more than 21 days; regardless, the Regulation X-mandated timelines will very often not line up with the California bill's timelines. And this is just one example; there are other areas of tension between Regulation X of the CFPB mortgage servicing rules and the California bill, including, but not limited to, issues related to the time in which a borrower has to appeal a loss mitigation determination by the servicer and the time in which a servicer must respond to a borrower's submission of a complete loss mitigation application.
In short, servicers will face the difficult decision of whether to (1) send one set of letters that satisfy Regulation X and send a completely separate set of letters intended to satisfy California's bill or (2) try and create letters that satisfy both Regulation X of the CFPB's mortgage servicing rules and California's bill. Unfortunately, no matter the option a servicer chooses, the correspondence is likely to cause significant confusion for borrowers.
Servicers must continue to be vigilant as they work through these new requirements and identify their impact on their processes and relationship with other laws. As with many things during this unprecedented time, there will be an opportunity, hopefully soon, to reassess processes that were implemented as quickly as possible to identify areas of improvement or potential conflicts that require resolution with other laws and/or requirements.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.