California Enacts Two Bills with Significant Impacts on Mortgage Licensees in the State
The California legislature ended its legislative session late on Monday, August 31, 2020, by passing two significant bills that will be of interest to the state’s mortgage servicers and other licensees—AB 3088 and AB 1864.
AB 3088 imposes new forbearance-related requirements on mortgage servicers related to the COVID-19 pandemic (in addition to significant protections for tenants in California beyond the scope of this summary). AB 1864 renames, reorganizes, and grants new authority to California’s primary financial services regulator to create a “mini-CFPB”—although many licensees are exempt from the new authority. Governor Newsom has signed AB 3088 into law, which took effect immediately as an urgency measure, and is expected to follow suit with AB 1864 in the near future.
Below we summarize those provisions from the bills that are particularly relevant to California mortgage licensees and federal- and state-chartered depository institutions servicing mortgage loans in California.
AB 3088 – Mortgage Forbearance Requirements
AB 3088 enacts a series of measures designed to protect tenants and homeowners from certain hardships connected to the COVID-19 pandemic.
Among the measures most relevant to mortgage servicers are those related to forbearance. The bill does not impose mandatory forbearance requirements on mortgage servicers, although that relief had been initially proposed by the bill’s author. In an effort to reach a compromise and enact some immediate mortgage protections, the enacted version of the bill includes a notice obligation if a mortgage servicer denies a forbearance; it also obligates mortgage servicers to comply with applicable federal guidance for post-forbearance options. The California legislature has signaled that it will continue working on issues related to mortgage forbearance in its next session, which starts in February.
AB 3088 includes the following notable requirements and provisions, which apply to a mortgage loan secured by a one-to-four family residential dwelling, including individual condo or cooperative units, if the loan was outstanding as of the enactment date of the bill. The bill states that it applies to federal and state-chartered depository institutions and California-licensed mortgage servicers:
- Notice Obligation for Denied Forbearance Request. Mortgage servicers that deny a borrower’s forbearance request made during the effective time period—i.e., the effective date of the legislation through April 1, 2021—must provide written notice to the borrower that states the specific reasons that forbearance was not provided. This requirement is applicable only if two criteria are met: (1) the borrower was current as of February 1, 2020, and (2) the borrower is experiencing a financial hardship that prevents the borrower from making timely payments on the mortgage obligation due, directly or indirectly, to the COVID-19 emergency. The bill does not address how a servicer would know if a borrower is experiencing such a financial hardship related to the COVID-19 emergency, whether a servicer could require the forbearance request to be in writing or request documentation to verify a financial hardship, or whether a servicer is required to determine whether it will deny a forbearance request within a certain period of time after request.
If the mortgage servicer issues a written notice denying a forbearance request as required by the new law, and the notice cites a curable defect (such as an incomplete application), the servicer must:
- Specifically identify any curable defect in the written notice;
- Provide 21 days from the mailing date of the written notice for the borrower to cure any identified defect;
- Accept receipt of the borrower’s revised request for forbearance before the aforementioned 21-day period lapses; and
- Respond to the borrower’s revised request within five business days of receipt of the revised request.
Servicers of federally-backed mortgage loans that comply with the relevant provisions regarding forbearance in Section 4022 of the CARES Act or, for non-federally-backed mortgage loans, offer forbearance that is consistent with the requirements of the CARES Act, will be deemed to be in compliance with the new notice requirement. As Section 4022 of the CARES Act mandates mortgage forbearance for federally-backed loans upon an attestation by the borrower of financial hardship due to COVID-19, any mortgage servicer providing that required forbearance and electing to extend the same forbearance protection to non-federally backed loans through April 1, 2021, are not denying forbearance requests and, thus, are not required to comply with this new notice requirement. If, however, a servicer is servicing a non-federally backed mortgage loan that meets the two conditions noted above, the servicer will be required to provide the statutory notice if it denies a forbearance request.
- Compliance with Federal Guidance for Post-forbearance Options. Mortgage servicers must comply with applicable federal guidance regarding borrower options following a COVID-19 related forbearance. Servicers of federally-backed mortgage loans will be considered in compliance with this requirement if the servicer complies with guidance regarding borrower options following a COVID-19 related forbearance issued by Fannie Mae, Freddie Mac, FHA, VA, or USDA. Similarly, servicers of non-federally backed loans will be considered in compliance with the requirement if the servicer reviews a customer for a solution that is consistent with the same applicable guidance. Separately, the bill notes that it is the intent of the Legislature that a mortgage servicer offer a borrower a post-forbearance loss mitigation option that is consistent with the servicer’s contractual or other authority.
For federally-backed mortgage loans sold to Fannie Mae or Freddie Mac or insured or guaranteed by FHA, VA, or USDA, mortgage servicers already are bound by the post-forbearance loss mitigation options required by these agencies. A failure to comply with this applicable federal guidance for post-forbearance loss mitigation options is now a violation of California law, for which the bill provides harmed borrowers with a private right of action for material violations.
For non-federally backed mortgage loans, the bill requires a servicer to “review a customer for a solution that is consistent” with applicable federal guidance to comply with the law. If a servicer’s servicing agreement or other authority does not permit it to offer a post-forbearance option consistent with applicable federal guidance for those loans, it is unclear whether the servicer’s review of the customer for an option it cannot provide would be deemed compliance with the law. Nevertheless, a servicer still may be able to take the position that it does not violate this section of the California law as long as it is otherwise offering post-forbearance options consistent with the servicer’s contractual or other authority.
- Forbearance and Post-forbearance Communication Language. Mortgage servicers must communicate about forbearance and post-forbearance options described in the bill in the borrower’s preferred language if the servicer regularly communicates with any borrower in that language.
- Potential Penalties. Borrowers harmed by a material violation of the forbearance requirements enacted by the bill may bring an action to obtain injunctive relief, damages, restitution, and any other remedy to redress the violation. The remedy could include attorney’s fees and costs.
AB 1864 – Mini-CFPB
In January 2020, Governor Newsom included plans in his proposed 2020-2021 California state budget that would create a state version of the Consumer Financial Protection Bureau (or, a “mini-CFPB”). While those plans were temporarily tabled during budget negotiations in June of 2020, the California mini-CFPB will soon be a reality after the enactment of AB 1864. The bill renames and reorganizes the state’s current financial services regulator—the Division of Business Oversight (“DBO”)—and enacts a new consumer protection law that grants the revamped regulator more expansive oversight and enforcement authority over consumer financial products and services. A few of the bill’s more notable highlights include the following:
- Renaming and Reorganization. The bill renames the “Division of Business Oversight” as the “Department of Financial Protection and Innovation” (“DFPI”). The new DFPI is, upon Governor Newsom’s signing of the bill, charged with the execution of laws that are currently the responsibility of the DBO. The name change will not affect the validity of actions, proceedings, permits, or other actions taken by the DBO. In addition to the authority previously held by the DBO, the DFPI will be granted additional duties and powers, as described in more detail below. The California state budget provides $10.2 million in 2020-2021, growing to $19.3 million in 2022-2023, to facilitate the DFPIs expanded role.
- Expanded Oversight and Enforcement Authority. The bill enacts the California Consumer Financial Protection Law (“CCFPL”). The CCFPL grants the DFPI authority that resembles the authority granted to the CFPB under the Dodd-Frank Act, including regulatory and enforcement authority over “any person that engages in the offering or providing of a consumer financial product or service to a California resident.” “Consumer financial product or service” is defined in a similar manner as that term is defined in the Dodd-Frank Act and includes either a “financial product or service that is delivered, offered, or provided for use by consumers primarily for personal, family, or household purposes” or a financial product or service specifically identified in the bill. The list of specifically identified financial products or services is largely consistent with the list included in the Dodd-Frank Act definition.
Among other things, the CCFPL would grant the DFPI the power to bring administrative and civil actions, issue subpoenas, promulgate regulations, hold hearings, issue publications, conduct investigations, and implement outreach and education programs. Additionally, the CCFPL would require the DFPI to regulate the provision of consumer financial products or services, including unlawful, unfair, deceptive, and abusive acts and practices related to those products and services, and to exercise nonexclusive oversight and enforcement authority under California consumer financial laws and, to the extent permissible, under the federal consumer financial laws. The bill gives the DFPI authority to bring a civil action or other proceeding to enforce the provisions of Title X of the Dodd-Frank Act (i.e., the Consumer Financial Protection Act) with regard to entities under DFPI’s oversight. However, nothing in the CCFPL expands upon or limits the authority granted by Section 5552 of the Dodd-Frank Act governing the enforcement powers of the states. The result is that the DFPI will have the same powers as the DBO currently has with regard to enforcement of federal consumer financial laws.
- Prohibitions. Covered persons and service providers are subject to certain prohibitions under the CCFPL, such as a prohibition on engaging in any unlawful, unfair, deceptive, or abusive act or practice with respect to consumer financial products or services. Violations of these prohibitions or of any rule or final order, or condition imposed in writing by the DFPI, may result in a penalty of $5,000 for each day during which the violation or failure to pay continues, or $2,500 for each act or omission in violation. Penalties increase for reckless or knowing violations.
- Exemption for Mortgage and Other Licensees. Importantly, the bill exempts certain types of licensees from the entirety of the new CCFPL, including the following: (1) licensees of any state agency other than the DFPI when acting under the authority of that license (as an example, this exemption covers mortgage lenders licensed under the Real Estate Law and regulated by the Department of Real Estate); and (2) certain licensees regulated by the DFPI, including escrow agents, finance lenders/brokers/program administrators/mortgage loan originators under the California Financing Law (“CFL”), and residential mortgage lenders/mortgage servicers/mortgage loan originators under California’s Residential Mortgage Lending Act (“RMLA”). The CCFPL also does not apply to federally- or state-chartered (outside of California) banks, bank holding companies, trust companies, saving and loan associations, savings and loan holding companies, credit unions, and organizations subject to oversight of the Farm Credit Administration. As a result, although mortgage licensees under the CFL and RMLA will remain subject to the existing authority of the DBO—soon-to-be DFPI—they will not be subject to the new, expanded authority under the CCFPL. This is a significant victory for mortgage licensees in California.
The enactment of both AB 3088 and AB 1864 represent compromises between mortgage industry groups, Governor Newsom and the California legislature to strike a balance between protection of California consumers and new regulation of licensed entities in the state. While we expect California legislators to continue their focus on consumer relief measures in the face of the COVID-19 pandemic, the important safe harbors and exemptions applicable to mortgage licensees in these two bills may reduce the effects of relevant provisions.