T. Robert Finlay, Esq.
Wright, Finlay & Zak, LLP
When COVID first hit, Sacramento proposed two Bills concerning foreclosure moratoria and mandatory forbearance requirements. Assembly Bill (AB) 2501 included a combination of both that could have prevented foreclosure on any residential loan through March 2022. However, with the help of Mike Belote, Mike Arnold, the CMA and its members, the mortgage industry narrowly avoided a huge mess by only two Assemblyperson votes in June.
Many of the same provisions from AB 2501 resurfaced in the Senate with AB 1436. Through more heroic efforts by the “Mikes,” AB 1436 gave way to a far more rational and fair balance between the rights of lenders to enforce their security and trying to help borrowers impacted by COVID-19 – AB 3088. Championed as a compromise by Governor Newsom’s office, AB 3088 passed both houses and was signed by the Governor just before the Legislature session ended on August 31, 2020. Passed as urgency legislation, AB 3088 became effective the next day – September 1st.
What exactly does AB 3088 mean to the CMA and its members? To answer that question, it’s important to look first at what its enactment does not mean – there is no foreclosure moratorium, no mandatory forbearance requirement and no blanket eviction moratorium.
What AB 3088 does is (1) extends the Homeowner Bill of Rights (“HOBR”) to first liens securing loans to individuals encumbering certain non-owner occupied residential property; (2) creates a specific procedure for handling forbearance requests from qualified borrowers between September 1, 2020 and April 1, 2021; and (3) limits the circumstances where tenants can be evicted for non-payment of rent. Since the last section does not directly address REO evictions, the remainder of the article will focus on the HOBR and forbearance aspects of AB 3088.
Extension of HOBR
Since 2013, HOBR has applied exclusively to first liens securing consumer loans to individuals on owner-occupied residential properties. This limited scope has now been expanded. Effective September 1, 2020, HOBR applies to a new category of first liens securing loans made to individuals that meet the following requirements:
- The property contains 1-4 units;
- The property is owned by an individual (or group of individuals) who own no more than 3 residential properties, each containing 4 units or less;
- The property is occupied as the tenant’s primary residence pursuant to an Applicable Lease – one in effect on March 4, 2020, negotiated in good faith and at fair market value; and
- The tenant is unable to pay rent due to a reduction in income resulting from COVID.
The intention of this expansion was to cover loans made to small landlords (for acquisition or improvement of investment properties), who are actually impacted in their ability to make mortgage payments by a tenant’s inability to pay rent due to COVID-related income reduction. Since most of the above information to demonstrate coverage is potentially unknown, the most conservative approach is to apply HOBR to any first lien to individual borrower(s) on a 1-4 unit residential property. Later, if the servicer is able to confirm that one or more of these requirements were not met, it can take the loan out of its HOBR compliance pool.
Noticeably absent from AB 3088 – the HOBR extension does not apply to loans made to entities or encumbering properties owned by entities!
Unfortunately, there is not enough room to delve into HOBR’s many requirements in this article. But, the reader should now have enough information to know if HOBR applies. If you have a question as to whether HOBR applies, such as with Notices of Default recorded before September 1st, or shortly after September 1st before you were aware of the new statutes, please reach out to your counsel or the author to discuss how best to comply with HOBR on your particular loan.
New Forbearance Response Requirements
AB 3088 created Civil Code §3273 et seq. to address forbearance requests received September 1, 2020 through April 1, 2021. But, the new requirements do not apply to all loans, borrowers or requests. Instead, there are a series of confusing and overlapping thresholds before the new law applies to a forbearance request. Below is a list of some of those requirements:
- Only applies to loans originated on or before September 1, 2020;
- Only applies to loans originated by certain licensees (which covers most CMA licensed members);
- Only applies to borrowers who are:
- A natural person who is the mortgagor or trustor;
- A confirmed successor in interest (SII) under Federal Law – Section 1024.31 of Title 12 of the Code of Fed Regulations;
- A person with a power of attorney for either of the above; and
- An entity owning a property with 1-4 units, provided that the property is by at least one tenant and the entity is NOT a:
- LLC with at least one member as a Corporation
- Only applies if the “borrower” was current on payments as of February 1, 2020; and
- Only applies if the borrower is experiencing a financial hardship that prevents the borrower from making timely payments due, directly, or indirectly, to the COVID emergency. Note – the code does not provide a definition of financial hardship.
If all of these conditions have been met and the borrower requests any type of forbearance between September 1, 2020 and April 1, 2021, the loan servicer must either approve the request (in which case, there are no specific requirements), send a “defective” notice letter, giving the borrower 21 days to cure the defect, or deny the request in writing. The written denial must identify the specific reasons why the borrower did not qualify for the forbearance. If the lender later ends up proceeding with the recording of a Notice of Default, the denial notice must also be attached to the Civil Code §2923.5 Declaration (for those licensees foreclosing on 175 or fewer CA loans yearly), which is recorded with your Notice of Default.
Practice Tip: Be careful about including certain private consumer information in the denial letter if the letter is to be attached to the Notice of Default Declaration, as it becomes public when recorded.
*This article is not intended to provide everything one needs to comply with AB 3088’s new requirements. Instead, it is intended to give the reader enough information to know what to look for when servicing its loans. For more information, please contact your counsel or the author at firstname.lastname@example.org. In addition, if you need more substantial help, Wright, Finlay & Zak has an AB 3088 Compliance Package to help CMA members set up their internal compliance procedures and answer any questions.
While AB 3088 definitely adds layers of additional procedures for certain loans, it is a welcomed improvement compared to many of the other bills that were narrowly or otherwise defeated during 2020. For that, we have to thank the “Mikes” for all their hard work, as well as the CMA members who voiced their opposition to their representatives and donated to the PAC. Since 2021 is bound to be another challenging year, please remember to donate to the PAC early and often. Thank you!
Since 1994, Mr. Finlay has focused his legal career on consumer finance and mortgage-related litigation, compliance and regulatory matters. Mr. Finlay is at the forefront of the mortgage banking industry, handling all aspects of the ever-changing default servicing and mortgage banking litigation arena, including compliance issues for servicers, lenders, investors, title companies and foreclosure trustees.