Shutting down the economy resulted in sky rocketing unemployment nationally. In an effort to keep tenants and homeowners in their homes, governors throughout the country issued emergency executive orders, many of which restricted the ability of mortgage lenders to foreclose on borrowers in default, or otherwise charge fees and default interest. With the national economy reopening, the expectation is that many of these executive orders will soon be rescinded.
State legislatures are proactively seeking to fill the upcoming void to make sure that the perceived mistakes of great recession where millions of homeowners were thrown out of their homes is not repeated. As is often the case, the California legislature is leading the charge.
California’s Legislative Response – Bringing a Missile to a Knife Fight
California Banking and Finance Chair Monique Limon recently introduced sweeping mortgage legislation in Assembly Bill 2501—a move that would significantly affect mortgages for both single-family and multifamily borrowers, Property Assessed Clean Energy (PACE) financing, payday loans, and loans secured by autos and mobile homes.
Entitled the COVID-19 Homeowner, Tenant, and Consumer Relief Law of 2020, the legislation mandates long-term forbearances, restrictions on foreclosures, evictions and repossessions, and the installment of varying payment options and fee caps on payday loans. The law would be effective as soon as it is passed and remain applicable a full six months following the Governor’s declaration that the COVID-19 emergency status has come to a close.
Prohibition of Foreclosures and Mandatory Forbearances Related to Residential Collateral
If passed in its current form, the law would apply to all loans secured by 1-4 family residential property (even if they are business / investment purpose loans such as fix and flip and rental). The relief bill would restrict servicers (including the mortgage lender if self-servicing) or any of their affiliates from initiating or carrying out any type of judicial foreclosure proceedings or recording a Notice of Default. Additionally, servicers would be prohibited from taking any eviction action against tenants after a foreclosure. The new law would also temporarily halt all judicial and nonjudicial foreclosure proceedings and associated deadlines and mandate a 180-day forbearance requested by debtors undergoing financial stress. For borrowers over 60 days delinquent on their mortgage payments, an automatic 180-day forbearance would be triggered—during which no additional fees, penalties or further interest could be charged to the related account. There are also provisions for potentially extending the forbearance period and several categories of mandated notices and loan modification options.
Mandatory Forbearance for Multi-Family Loan Borrowers
For loans secured by multifamily properties (those with more than 5 residential units), the bill requires the lender to offer 180-day forbearances and provide borrowers with an option for an elective 180-day extension. Multifamily borrowers in forbearance would be required to offer their tenants rent relief and be prohibited from evicting them or charging them delinquency fees or penalties.
Auto & Mobile Home Related Restrictions
In situations involving auto-secured loans, lenders would be restricted from retaking possession of mobile homes or automobiles for as long as the official COVID-19 state of emergency remains in effect and for an additional 180-day window following its removal. This restriction would include a prohibition on all forms of verbal or written notice of intent to take repossession. Servicers would also be required to offer 90-day forbearances, with the borrower having the option to extend it for a further 90 days. Similar to the other relief measures, servicers would not have the ability to impose additional charges for delinquency and would also have to offer modification options prior to the end of the forbearance period.
PACE Program Restrictions
For the PACE Program, servicers would be mandated to provide notification to borrowers in 60 days or less of the date of enactment that they are eligible for forbearance on the upcoming yearly PACE assessment if experiencing financial stress related to the coronavirus pandemic. The owner of the property under certain circumstances may have to pay the deferred PACE assessment during the following year, however servicers could not implement additional charges or exercise any contractually afforded acceleration clauses.
With respect to payday loans or deferred deposit transactions, the legislation caps fees at rive percent of the check amount—cutting the current fee limit by two-thirds. Licensees would be mandated to offer clients payment options on existing transactions, giving the client up to 60 days to pay in four equal installments with no added charges. The bill would also restrict licensees from permitting clients to initiate deferred deposit transactions within 14 days of the repayment of a prior transaction.
Enforcement of Restrictions
Noncompliance related to any provision included within AB 2501 would be considered an unfair and deceptive business practice under Section 17200 of the Business and Professions Code, which offers a private right of action with a limited remedy. Effectively, a borrower could directly sue a lender for noncompliance rather than report the failure to the relevant regulator. Further, lenders in violation could actually lose their right to foreclose in the future unless they provided relief to the borrower.
Current Status of Legislation
On May 20, the Banking and Finance Committee approved the bill on a 7-3 vote. Currently, the bill sits in the Committee on Appropriations. The bill likely faces significant opposition and potential amendments—although the central focus of AB 2501 will stay the same: Financial entities offering mortgages, vehicle-secured loans, PACE program loans and deferred deposit transactions could be required to offer some form of forbearance to California borrowers.
If the bill is eventually signed into law, it would have a sweeping impact on the industry. Lenders would lose the capability to independently manage their own loans on a case-by-case basis and would be locked out of exercising any meaningful remedies despite significant borrower default.
California tends to be one of the more active legislative bodies whose legislation is often copied nationwide. If more states take California’s broad approach, lenders nationally will have little to no recourse against defaulted borrowers for the foreseeable future. If you have any questions or would like more resources on lending matters follow this link to go to Geraci’s website.
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