A new California law protects widowed spouses and other survivors, including domestic partners, heirs, siblings, joint tenants, and other people who own their homes but are not listed on the mortgage, from foreclosure following the death of a mortgagor. The Homeowner Survivor Bill of Rights (SBOR), California Civil Code § 2920.7, went into effect on Jan. 1, 2017, and requires mortgage lenders and servicers to provide surviving spouses or heirs with information about the loan and grants these surviving persons the right to seek a loan assumption and modification, if needed. The law provides a private right of action against lenders and servicers that violate the law, including post-foreclosure remedies of $50,000 or treble actual damages.
Pre-Existing Protections for Surviving Heirs
Contracts, in general, may be transferred or assigned from one party to another. Mortgage contracts, however, commonly include “due-on-sale” clauses, allowing a lender to accelerate the loan if the borrower transfers the property. During the 1970’s, California1 and several other states enacted laws making due-on-sale clauses unenforceable. In response, Congress enacted the Garn-St. Germain Depository Institutions Act of 1982 (the Act or the Garn-St. Germain Act), preempting state laws restricting the enforcement of due-on-sale clauses. However, the Act exempts transfers from one joint tenant to another upon death, to a spouse or child of a borrower, and to a spouse in the context of a divorce settlement. Garn-–St. Germain does not require that lenders allow assumptions. Based on this exemption, however, mortgage lenders are subject to state laws prohibiting enforcement of due-on-sale clauses based on exempted transfers.
Fannie Mae-owned or guaranteed loans are also subject to special provisions concerning heirs. A 2013 Lender Letter, instructs servicers to “implement policies and procedures to promptly identify and communicate with the new property owner about a property transfer that is an exempt transaction” and to “allow the new owner to continue making mortgage payments and pursue an assumption of the mortgage.” The Fannie Mae Lender Letter specifically addresses delinquent loans: “[If the] new property owner is unable to bring the mortgage loan current but may be able to resolve the delinquency with a foreclosure prevention alternative . . . and assume the mortgage loan, the servicer must [allow the new owner to apply for a foreclosure alternative] and evaluate the request as if they were a borrower.” These protections apply to any transfer protected under the Garn-St. Germain Act. Freddie Mac has similar requirements.
Finally, in 2013, the non-GSE Home Affordable Modification Program (HAMP) Handbook was updated to allow successors-in-interest to apply for loan modifications, thus providing some protection for loans not owned or guaranteed by Fannie Mae or Freddie Mac. The HAMP Handbook instructs servicers to consider a non-borrower for a HAMP modification “as if he or she was the borrower,” and to suspend any ongoing foreclosure while doing so. It requires the servicer to “process the assumption and loan modification contemporaneously if the titleholder is eligible for HAMP and investor guidelines and applicable law (i.e., Garn-St. Domain-protected) permit an assumption of the loan.”2
In 2014, the Consumer Financial Protection Bureau (CFPB) promulgated mortgage servicing rules (Rules) through amendments to Real Estate Settlement Procedures Act implementing regulations. Among other things, the rules require servicers to maintain policies and procedures ensuring that they can “[u]pon notification of the death of a borrower, promptly identify and facilitate communication with the successor in interest of the deceased borrower with respect to the property secured by the deceased borrower's mortgage loan.” 12 CFR 1024.38. Several months before these rules went into effect, the CFPB issued a bulletin (CFPB Bulletin) clarifying its position on successors-in-interest. CFPB Bulletin 2013-12 (Oct. 15, 2013)(“Implementation Guidance for Certain Mortgage Servicing Rules”).
The CFPB directs servicers to take the following steps with respect to successors. First, servicers should promptly notify a successor of any documentation required to prove the death of the borrower and the successor’s legal interest in the property. Second, servicers should determine the information required in “reviewing the rights and obligations of successors-in-interest with respect to the property,” including documentation supporting the successor’s eligibility for loss mitigation and eligibility “to assume the mortgage loan, with or without a simultaneous loan modification.” It admonishes servicers to evaluate successors-in-interest for an assumption and modification “where appropriate” and to suspend foreclosure activities in those cases. Finally, the CFPB Bulletin instructs servicers to comply with laws affecting a “servicer’s obligations following the death of a borrower,” referring servicers to the Garn-St. Germain Act, and the Fannie Mae and Freddie Mac Servicing Guidelines. Six months after the Rules became effective, the CFPB issued another rule clarifying that its “Ability to Repay” rule does not apply to successors. 12 C.F.R. § 1038(b)(1)(vi) (2014).3
Homeowner Survivor Bill of Rights–The New Law
While federal law affords successors-in-interest some protection from acceleration or foreclosure following the death of a borrower, state laws creating protections for borrowers in foreclosure typically do not extend to successors.
Under SBOR, California is the first state to enact a law providing surviving heirs with protections like those afforded borrowers in foreclosure. Thus, SBOR requires lenders to apply the requirements of the California Homeowners Bill or Rights (HBOR) to successors while they are applying to assume the loan and/or for loss mitigation.
SBOR also attempts to close perceived gaps in the existing federal framework of protection for successors. A Senate Judiciary Committee report about SBOR notes that Garn-St Germain does not require lenders to allow successors to assume a decedent’s mortgage, but merely excludes successor transfers from its preemptive scope. The report goes on to explain that “[w]ithout the ability to assume a loan and be added to the mortgage note, a successor in interest lacks lawful authority to exercise rights as a homeowner under HBOR and pursue a mortgage loan modification, should a modification prove necessary. This bill remedies that situation by requiring a mortgage servicer to allow a successor in interest to assume the deceased borrower’s loan, unless such assumption is prohibited by the terms of the loan, at the successor’s election.” It also mandates certain communications with the successor about the loan and loss mitigation options.
SBOR applies to first-lien mortgages on owner-occupied properties in California that serve as the security for the decedent’s mortgage that are transferred to a “successor” upon the borrower’s death. A natural person may qualify as a successor in interest by providing documentation establishing that he or she is:
- The personal representative of the borrower’s estate, as defined in Section 58 of the California Probate Code (Probate Code).
- The devisee, as defined in Section 34 of the Probate Code, or the heir, as defined in Section 44 of the Probate Code, of the real property that secures the mortgage or deed of trust.
- The beneficiary of a Revocable Transfer on Death Deed, as defined in Section 5608 of the Probate Code.
- The surviving joint tenant of the borrower.
- The surviving spouse of the borrower if the real property that secures the mortgage or deed of trust was held as community property with right of survivorship, as specified, or
- The trustee of the trust that owns the real property that secures the mortgage or deed of trust or the beneficiary of that trust.
Servicers’ Duties under SBOR
Upon receiving notification from a person claiming to be a successor in interest to a deceased borrower, a servicer is precluded from recording a notice of default until it:
requests that the claimant submit reasonable documentation of the death of the borrower, such as a death certificate or other written evidence of the death of the borrower, within 30 days;
requests that the claimant reasonable documentation regarding his or her status as a in-interest within 90 days.
During these periods, the mortgage servicer may not foreclose. If the claimant fails to provide the necessary documentation by the deadline, the servicer may commence or continue foreclosure proceedings. If the claimant provides reasonable documentation that he or she is a successor in interest, the servicer must provide the claimant with basic loan information, including the loan balance, monthly payment amount, interest rate, interest reset dates and amounts, prepayment penalties if any, default or delinquency status, and the payoff amounts, within ten days of confirming his or her status as a successor. The successor may assume the borrower’s loan unless prohibited by law or contract terms and apply for loss mitigation options. If a successor applies for loss mitigation, he or she is entitled to all of the protections afforded borrowers under HBOR (e.g., no dual-tracking).
Private Right of Action–Remedies Afforded Survivors
Neither Garn-St. Domain nor the mortgage servicing rules provide a private right of action to the successor for violations. SBOR does. Patterned after HBOR Cal. Civil Code § 2920.5, et sec., if the property has not yet been sold at a trustee’s sale, a successor can seek to enjoin a foreclosure sale until the servicer complies with the law. The successor is not entitled to damages but may recover the attorneys’ fees. If a trustee’s sale has already occurred, the successor may recover “actual economic damages” arising from the violation. If the violation was “intentional, reckless, or resulted from willful misconduct” the successor is entitled to the greater of treble actual damages or statutory damages of $50,000.
Like HBOR, SBOR includes a safe harbor provision, which allows a mortgage servicer to correct any SBOR violations. Once the mortgage servicer corrects the SBOR violation it “shall not be liable for any violation.” However, the safe harbor can only be invoked prior to a trustee’s sale. SBOR also provides a safe harbor for mortgage servicers that adhere to the “successors-in-interest” regulations within Regulations X and Z. A servicer’s compliance with these regulations will be “deemed to comply” with SBOR.
If sued under SBOR, mortgage servicers should consider whether the Home Owner Loan Act (HOLA) or National Banking Act (NBA) preempt SBOR in that particular case. Because SBOR operates much like HBOR, servicers can look to HBOR preemption decisions for guidance.4 California state courts have generally held that HBOR is not preempted under either HOLA or the NBA, but federal courts have found HBOR preempted by HOLA (but not by NBA). Although Dodd-Frank amended HOLA in 2011 to adopt the NBA’s less strict conflict preemption analysis, that standard does not affect the application of state law to contracts entered before July 2010, and thus may be applicable to claims asserted under SBOR.