On September 1, 2020, California passed a new law titled the “COVID-19 Small Landlord and Homeowner Relief Act of 2020.” Although the majority of the new law addresses eviction issues between landlords and tenants, it imposes notable new obligations on mortgage loan servicers as well. This two-part blog series will address those changes. Part I will first address the forbearance notice requirements and a new borrower cause of action, and Part II will address the interplay of those requirements and the California Homeowners’ Bill of Rights (HBOR).
Forbearance Denial Notices Are Required
California now requires all mortgage servicers, including subservicers, to provide written notice to certain borrowers whose forbearance requests are denied between August 30, 2020, and April 1, 2021. The borrowers eligible for such notice must meet two criteria:
- Have been current on their mortgage payments as of February 1, 2020, and
- Be experiencing a financial hardship that prevents them from making timely payments on their mortgage, either directly or indirectly, because of the COVID-19 emergency.
Eligible borrowers are entitled to notice as to the “specific reason or reasons that forbearance was not provided.” The statute does not provide any timing requirements for giving such notice, which we presume was inadvertent.
Curable Denials
The statute further provides that, for any denials that are “curable,” the notice must explain any defects in the borrower’s request (an “incomplete application or missing information” are specifically called out in the statute). If the denial is curable, the borrower must be advised that they have 21 days to cure the identified defect. Upon submission of additional materials within 21 days, the servicer must accept the receipt of the renewed request and “respond” within five business days of receipt. Whether that response must include a final decision is not provided in the statute.
Which Loans Does This Really Impact?
For government-backed loans subject to the CARES Act, the new law is practically irrelevant. The GSEs, HUD, and FHA have all been clear that no documentation is necessary for a borrower to request a forbearance; rather a borrower must only attest to a need related to COVID-19. Most importantly, servicer denials for CARES Act forbearances are virtually unheard of because the threshold is so low.
California’s new law is therefore targeted to privately held loans where the investor is not obliged to follow the CARES Act and is within its rights to request a financial package from a borrower seeking assistance. As discussed below, the new law both encourages such servicers to mimic the CARES Act for private loans while also giving them protections for enforcing their investor’s criteria that may deny forbearance requests.
CARES Safe Harbor
The new law provides that compliance with the CARES Act shall be deemed to be compliance with California’s law (see Sections 3273.10(d); 3273.11(b)). Similarly, a servicer who provides forbearance consistent with the CARES Act for a non-federally backed mortgage shall be deemed to be in compliance with the new law (see Sections 3273.10(d); 3273.11(c)).
This encouragement to mirror the CARES Act forbearances for privately held loans is tempered by California’s statement that the Legislature’s intent is for a servicer to “offer a borrower a postforbearance loss mitigation option that is consistent with the mortgage servicer’s contractual or other authority” (see Section 3273.12). This sentence is California’s sole acknowledgment that servicers may still apply their investor’s loss mitigation criteria to privately held loans, which may not include forbearances.
CARES Now Has a Cause of Action in California
The most notable mortgage-related change in the new law is the creation of a cause of action for a violation of the CARES Act, despite the fact that the CARES Act omits such a right. The state statute requires that a servicer “comply with applicable federal guidance regarding borrower options following a COVID-19 related forbearance” and then provides that “a borrower who is harmed by a material violation of this title may bring an action to obtain injunctive relief, damages, restitution, and any other remedy to redress the violation” (see Sections 3273.11(a); 3273.15(a)). A court is also permitted to award reasonable prevailing attorneys’ fees and costs to a borrower in any action based on a violation of the title in which injunctive relief against a foreclosure sale, including a temporary restraining order, is granted (see Section 3273.15(b)). A borrower may not be induced to waive her rights in this respect.
HBOR
In Part II to this blog, we will describe how California expanded the scope of loans to which the HBOR is applicable and detail how those changes may impact a servicer’s HBOR compliance.