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California Passes Significant Protections Against Illegal Foreclosure Processes

California Passes Significant Protections Against Illegal Foreclosure Processes

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Published by: choyen20008019 on Jul 05, 2012
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07/05/2012

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By: David DayenTuesday July 3, 2012 6:00 amPressured by a coalition of activists and state Attorney General Kamala Harris, theCalifornia legislature completed a months-long project yesterday tosignificantly improveits foreclosure process. The measure gives homeowners a new right to sue over fraudulent practices, ends dual tracking – where servicers process foreclosures while negotiating loanmodifications – 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 Californiahomes are in foreclosure or seriously delinquent, and another 700,000are at risk. A tough anti-fraud policy in the nation’s largest state will create ripple effects through the mortgageindustry and could lead to an overall change in practices.“Each day’s not equal in the lives of these homeowners,” said Kamala Harris, the AttorneyGeneral 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 doesextend due process to borrowers facing foreclosure. Banks would have to pay attorney’sfees for the borrower if they won the suit. The private right of action allows borrowers tosue – 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 inlimited 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 wantto 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 intoeffect January 1,go further in many ways than the servicing standards in the nationalforeclosure fraud settlement, and extend many policies permanently, rather than sunsettingafter 3 1/2 years. The prohibition on dual tracking (the first in the nation) and the mandatefor a single point of contact are permanent. The bill codifies the law with respect to robo-signing and other document processing fraud. In thestatute, it states that all crucialforeclosure 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 theloan and the chain of title, or other declarations or affidavits – “shall be accurate andcomplete and supported by competent and reliable evidence,” and that the servicer mustverify 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 informationin the documents without having any knowledge thereto).If violations are found, state law enforcement can impose penalties on the lender if theyfind “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 inmind 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’soffice 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 Congressthat 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. “Thespirit 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 beaccountability… Where there are violations, there will be consequences.”The hard-fought victory, which forced an unusual procedural method through a specialconference committee, because Democratic members of the committee of jurisdictionweren’t interested in the bill, came about in large part because of a coalition of progressivegroups and community activists that agitated for passage. The California CourageCampaign and the Alliance of Californians for Community Empowerment (ACCE) led theway, in some cases using online toolsto show how money flowed from the banking industry into the pockets of key Democrats. They created the space that forced thoseDemocrats to back off and let the bill pass above their objections. “We showed theconnection 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 politiciansthink of us. We care about ordinary Californians, and we work together to get the jobdone.”The bill is not perfect. In addition to the sunset provision on robo-signing enforcement andthe limitations on the private right of action, the measures only apply to primary and notsecondary 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 takingmatters into their own handsin the midst of a failed effort to cope with the foreclosurecrisis and persistent fraud nationally. Through it all, banking interests made the falsecritique that passing laws to force legal processes on the system would delay what theyconsider necessary foreclosures, slow the housing market and harm the broader economy. None of this is true – foreclosures destroy local economies and strip property values – butthat’s the common argument.

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