California Enacts New Foreclosure Protection Law

July 14, 2008

On July 8, 2008, Governor Schwarzenegger signed into law Senate Bill 1137. The new law, effective immediately, substantially changes the procedures lenders and servicers are required to follow prior to foreclosing on mortgages on owner-occupied residences made between January 1, 2003 and December 31, 2007. Most significantly, SB 1137 requires all lenders and servicers to wait thirty days after making, or attempting to make, contact with borrower homeowners prior to initiating foreclosure proceedings.

Specifically, the lender or servicer is required to contact the borrower in person or by telephone to assess the borrower’s financial position and to explore options for the borrower to avoid foreclosure. After the initial contact, the borrower has the right to request an additional meeting that must occur within 15 days.

If contacting the borrower in person or telephone is unsuccessful, the lender or servicer must at least use “due diligence” to attempt to contact the borrower. This requires sending the borrower a first-class letter with a toll free number of a HUD-certified counseling agency and attempting to call the borrower at least three time. The lender must then wait two weeks for a response, and then send a certified letter. Finally, the lender must post a “prominent link” on its website with contact numbers and information related to how the borrower can avoid foreclosure.

SB 1137 also contains protections for loan servicing companies from claims of their loan investors in connection with workout plans or loan modifications. This protection appears to be intended to motivate them to work with borrowers on workout plans or loan modifications.

Another, and perhaps the harshest, obligation imposed on lenders by SB 1137 is the requirement that all legal owners of a vacant residential property purchased at a foreclosure sale “maintain” such property. “Failure to maintain” includes permitting excessive foliage, failure to prevent trespassers or squatters, failing to prevent mosquito larva from growing in standing water, and generally any condition that creates a public nuisance. Lenders in violation of this section face civil fines of up to $1,000 per day for a violation.