Existing law generally regulates mortgages and mortgage servicers, as defined, including the transfer of servicing a borrowers debt to a subsequent mortgage servicer. Existing law provides that a covenant made by an owner or grantee of land to do or refrain from doing some act on the owners or grantees land, which doing or refraining is expressed to be for the benefit of the covenantee, is a covenant that runs with the land granted to the covenantor if specified requirements are met. The California Emergency Services Act establishes the effect of a proclamation of a state of emergency, as defined, or a local emergency, as defined.

This bill would require a transferor mortgage servicer servicing a mortgage secured by property, as defined, within the geographic limits of a proclaimed state of emergency or local emergency to deliver to a transferee mortgage servicer any material written records between the borrower and the mortgage servicer relating to the borrowers election to use insurance proceeds to repair or replace property damaged by a disaster for which the state of emergency or local emergency was proclaimed, as specified. The bill would prohibit the transferee mortgage servicer from dishonoring a previous written agreement to repair property made prior to the transfer between the transferor mortgage servicer and the borrower and approved by the owner of the promissory note.

Existing law generally regulates mortgages and mortgage servicers, as defined, including the transfer of servicing a borrowers debt to a subsequent mortgage servicer. Existing law provides that a covenant made by an owner or grantee of land to do or refrain from doing some act on the owners or grantees land, which doing or refraining is expressed to be for the benefit of the covenantee, is a covenant that runs with the land granted to the covenantor if specified requirements are met. The California Emergency Services Act establishes the effect of a proclamation of a state of emergency, as defined, or a local emergency, as defined.

This bill would require a transferor mortgage servicer servicing a mortgage secured by property, as defined, within the geographic limits of a proclaimed state of emergency or local emergency to deliver to a transferee mortgage servicer any material written records between the borrower and the mortgage servicer relating to the borrowers election to use insurance proceeds to repair or replace property damaged by a disaster for which the state of emergency or local emergency was proclaimed, as specified. The bill would prohibit the transferee mortgage servicer from dishonoring a previous written agreement to repair property made prior to the transfer between the transferor mortgage servicer and the borrower and approved by the owner of the promissory note.

Existing law generally regulates mortgages and mortgage servicers, as defined, including the transfer of servicing a borrowers debt to a subsequent mortgage servicer. Existing law provides that a covenant made by an owner or grantee of land to do or refrain from doing some act on the owners or grantees land, which doing or refraining is expressed to be for the benefit of the covenantee, is a covenant that runs with the land granted to the covenantor if specified requirements are met. The California Emergency Services Act establishes the effect of a proclamation of a state of emergency, as defined, or a local emergency, as defined.

This bill would require a transferor mortgage servicer servicing a mortgage secured by property, as defined, within the geographic limits of a proclaimed state of emergency or local emergency to deliver to a transferee mortgage servicer any material written records between the borrower and the mortgage servicer relating to the repair of property that suffered a total loss due to damage caused borrowers election to use insurance proceeds to repair or replace property damaged by a natural disaster for which the state of emergency or local emergency was proclaimed. proclaimed, as specified. The bill would prohibit the transferee mortgage servicer from dishonoring a previous written agreement to repair property made prior to the transfer between the transferor mortgage servicer and the borrower and approved by the owner of the promissory note.

Existing constitutional and statutory law prescribes the organization of the government in California. The existing Government Code prescribes certain definitions for purposes of its interpretation, including definitions for state, county, and city.

This bill would state the intent of the Legislature to enact legislation relating to governmental organization.

 UNFINISHED BUSINESS  

Bill No: SB 455

Author: McGuire (D)

Amended: 6/28/23

Vote: 21

SENATE BANKING & F.I. COMMITTEE: 7-0, 4/19/23

AYES: Limón, Niello, Bradford, Caballero, Min, Nguyen, Portantino

SENATE JUDICIARY COMMITTEE: 10-0, 5/2/23

AYES: Umberg, Wilk, Allen, Ashby, Caballero, Durazo, Laird, Min, Niello, Wiener

NO VOTE RECORDED: Stern

SENATE FLOOR: 40-0, 5/31/23

AYES: Allen, Alvarado-Gil, Archuleta, Ashby, Atkins, Becker, Blakespear, Bradford, Caballero, Cortese, Dahle, Dodd, Durazo, Eggman, Glazer, Gonzalez, Grove, Hurtado, Jones, Laird, Limón, McGuire, Menjivar, Min, Newman, Nguyen, Niello, Ochoa Bogh, Padilla, Portantino, Roth, Rubio, Seyarto, Skinner, Smallwood-Cuevas, Stern, Umberg, Wahab, Wiener, Wilk

ASSEMBLY FLOOR: 75-0, 8/28/23 - See last page for vote

SUBJECT: State of emergency: mortgage servicers: disasters

SOURCE: Author

DIGEST:

This bill provides responsibilities for transferor and transferee mortgage servicers related to a mortgage secured by real property located within the geographic limits of a proclaimed emergency, as specified.

Assembly Amendments

are technical and clarifying in nature.

ANALYSIS:

Existing federal law:

Regulation X (12 CFR Part 1024), which implements the Real Estate Settlement Procedures Act (12 U.S.C. 2601 et seq.):

1. Requires mortgage servicers to provide specified disclosures to a mortgage borrower related to any assignment, sale, or transfer of the servicing of a mortgage loan. (12 CFR 1024.33)
2. Requires mortgage servicers to maintain policies and procedures that are reasonably designed to ensure that the servicer can:
   1. As a transferor servicer, timely transfer all information and documents in the possession or control of the servicer relating to a transferred mortgage loan to a transferee servicer in a form and manner that ensures the accuracy of the information and documents transferred and that enables a transferee servicer to comply with the terms of the transferee servicer's obligations to the owner or assignee of the mortgage loan and applicable law.
   2. As a transferee servicer, identify necessary documents or information that may not have been transferred by a transferor servicer and obtain such documents from the transferor servicer. (12 CFR 1024.38)

Regulation Z (12 CFR Part 1026), which implements the Truth in Lending Act (15 U.S.C. 1601 et seq.):

1. Requires any person that becomes the owner of an existing mortgage loan by acquiring legal title to the debt obligation to provide a specified disclosure to the consumer who is obligated on the mortgage loan. (12 CFR 1026.39)

Existing state law requires that any person transferring the service of indebtedness on a loan, as specified, to a different servicing agent shall provide to the new agent all existing insurance policy information that the person is responsible for maintaining, including but not limited to flood and hazard insurance policy information. (Civil Code Section 2937)

This bill:

Defines “mortgage servicer” to have the same meaning as provided by subdivision (a) of Section 2920.5 of the Civil Code.

Defines “property” to mean residential real property that is improved by four or fewer residential dwelling units, affixed mobilehomes, and manufactures homes.

1. Defines “state of emergency” and “local emergency” to have the same meanings as defined in subdivisions (b) and (c), respectively, of Section 8558 of the Government Code.

Requires a transferor mortgage servicer servicing a mortgage secured by property within the geographic limits of a proclaimed state of emergency or local emergency to deliver to a transferee mortgage servicer any material written records between the borrower and the mortgage servicer relating to the borrower’s election to use insurance proceeds to repair or replace property damaged by a disaster for which the state of emergency or local emergency was proclaimed.

Prohibits a transferee mortgage servicer from dishonoring a pervious written agreement to repair property made prior to the transfer between the transferor mortgage servicer and the borrower and approved by the owner of the promissory note.

1. Provides that this bill shall not be interpreted to prohibit a mortgage servicer from delivering to a transferee mortgage servicer any material written records relating to a borrower’s election to use insurance proceeds to repair or replace damaged property that was not caused by a disaster for which a state of emergency or local emergency was proclaimed.

Comments

1. Purpose

According to the author:

Disaster survivors that hold an active mortgage at the time of the disaster and experience a total loss of their home or property enter into rebuild contracts with their mortgage servicer in order to begin the rebuild process. However, if a mortgage servicer sells the mortgage to another mortgage servicing company, the subsequent mortgage servicer may not be aware of any existing rebuild contracts or may have a different interpretation of what requirements the survivor must meet prior to releasing insurance rebuild funds.

By requiring that mortgage servicers must disclose any rebuild contracts or agreements to other mortgage servicers, and that those mortgage servicers are required to abide by those contracts and agreements, the rebuild process for these wildfire survivors will not be slowed down as a result of mortgage transfers. Ensuring that the terms of rebuild contracts are consistent between mortgage servicers will simplify and expedite the process for borrowers to receive their insurance funds to repair, rebuild, or replace their homes after experiencing a total loss of their property. Disaster survivors already face tremendous challenges to recover from the effects of the disaster and SB 455 will aid them to begin to rebuild their homes and their lives.

1. Background

Property insurance contracts often contain a mortgagee, loss payee, or lenders loss payable clause that is designed to protect a mortgage lender in the event that the property securing the mortgage is damaged, known as an insured loss event.^[1] In simple terms, this means that when a home is damaged or destroyed, the insurance company pays out the claim to the lender, not directly to the home owner who is the borrower on the mortgage loan. Navigating through an insured loss event requires actions of the borrower/property owner, the insurer, and the mortgage servicer.

A mortgage servicer is an entity that interacts with borrowers after a loan has been originated and the borrower begins to repay the loan. A mortgage servicer collects payments from the borrower and manages any associated escrow account. In many cases, the mortgage servicer is a different entity than the lender who initially funded the loan or the entity that is the holder and legal owner of the mortgage debt. In today’s mortgage markets, it is common for a mortgage lender to originate a loan and subsequently sell the loan to a third party, such as Fannie Mae or Freddie Mac.^[2] This third party either holds the loan as an investment or packages the loan into mortgage-backed securities that may be sold to other investors. Mortgage servicers play a critical role in interacting with borrowers, maintaining the flow of funds from borrowers to mortgage holders, and asserting mortgage holders’ rights when borrowers default on mortgage loans. The expectations or obligations of mortgage servicers who act on behalf of third-party investors are often specified in a servicing agreement or servicing guide lines provided by the investor.

1. Mortgage Servicers’ Obligations Related to Transfers

Over the life of a mortgage, a borrower may not always engage with the same mortgage servicer. In many cases, the actual mortgage does not change ownership, but the mortgage servicing rights are transferred, assigned, or sold to a new servicer. In other cases, the actual mortgage changes ownership, which often results in a change in the mortgage servicer – either the new mortgage holder services the mortgage itself or assigns the mortgage to a different third-party servicer.

Mortgage servicers have legal obligations, as cited in the Existing Federal Law section above, to notify borrowers with certain basic information when their mortgage is transferred from one servicer to another. The contents of the required notice include the effective date of the transfer, contact information for both the transferor and transferee servicers, and the date on which the transferor will cease to accept payments and the transferee will begin to accept payments relating to the mortgage loan. In addition to borrower notices, servicers are required to maintain policies and procedures that are reasonably designed to ensure the timely transfer of all information and documents related to a transferred mortgage loan from the transferor to the transferee. The official interpretation of this requirement makes clear a transferor servicer’s policies and procedures must be designed to ensure that “the transfer includes any information reflecting the current status of discussions with a borrower regarding loss mitigation options, any agreements entered into with a borrower on a loss mitigation option, and any analysis by a servicer with respect to potential recovery from a non-performing mortgage loan.”^[3] Further, the official interpretation makes clear a transferee servicer’s responsibility to have policies and procedures that “address obtaining any such missing information or documents from a transferor servicer before attempting to obtain such information from a borrower.”^[4] Neither the regulations, nor the official interpretations, however, provide any additional detail on how servicers should treat the transfer of a mortgage that is the subject of an insured loss event.

1. Mortgage Servicing Related to an Insured Loss Event

As part of their role in the mortgage financing system, a mortgage servicer plays a key role, along with the insurance company, in working with a borrower when the borrower’s property experiences an insured loss event. Mortgage servicers are expected to ensure the proof of loss claim is filed timely with the insurer and then monitor the disbursement of insurance loss proceeds. To illustrate the types of activities that mortgage servicers undertake in these scenarios, see the following bulleted list of servicers’ responsibilities that were sampled from the Fannie Mae servicing guide.^[5] Many servicers use Fannie Mae guidance to establish their policies for servicing all mortgages, not just those purchased by Fannie Mae, meaning that these activities are undertaken by nearly all mortgage servicers when dealing with an insured loss event.

• Determine if the property can be legally rebuilt.
• Obtain complete details on the damage to the property and determine the needed repairs.
• Discuss with the borrower any plans for repairing the property.
• Immediately issue the borrower a check for any amount designated for contents (for example personal property) or living expenses.
• Review and approve the final plans for repair, including obtaining the necessary bids to repair the property.
• Monitor and inspect repairs as completed to verify the repairs comply with the final repair plan.
• Conduct a final inspection to ensure all repairs are completed if the mortgage loan is 31 days or more delinquent at the time of the loss event.

The manner in which the mortgage servicer disburses insurance proceeds depends on the amount of those proceeds. Per the Fannie Mae guidelines, if the proceeds are less than or equal to $40,000, the servicer is authorized to release the proceeds in one payment. For proceeds greater than $40,000, the servicer is authorized to release the greater of $40,000, 33% of the proceeds, or the amount in excess of the unpaid principal balance, accrued interest, and advances on the mortgage loan. Any remaining funds are then disbursed based on periodic inspections of the progress of the repair work.^[6]

1. Intent of This Bill

The intent of this bill is relatively straightforward: the author intends to ensure that, in the event a mortgage is transferred, a borrower who is in the middle of a process to repair, rebuild, or replace their home due to a natural disaster does not experience delays in that process due solely to consequences stemming from the mortgage transfer. Given the prevalence of natural disasters that Californians endure, the desire to clarify public policy in this area seems sound. Furthermore, prevailing laws, policies, and practices related to mortgage servicing are generally aligned with the intent of the bill, even if the law does not specifically address this particular scenario. This bill provides clarity to mortgage servicers about their obligations when servicing a mortgage under this scenario.

FISCAL EFFECT: Appropriation: No Fiscal Com.: No Local: No

SUPPORT: (Verified 8/29/23)

City of Santa Rosa

Legal Aid of Sonoma County

OPPOSITION: (Verified 8/29/23)

None received

ARGUMENTS IN SUPPORT: Legal Aid of Sonoma County writes in support:

Ensuring that the terms of rebuild and replacement contracts are consistent between mortgage servicers and providers will simplify and expedite the process and allow survivors to receive the insurance fund they are entitled to in a timely manner, allowing survivors to repair, rebuild, or replace their homes more efficiently and cost effectively. [We are] very aware of the struggles that disaster survivors face. SB 455 will go a long way towards helping survivors rebuild or replace their homes and focus on recover.

ASSEMBLY FLOOR: 75-0, 8/28/23

AYES: Addis, Aguiar-Curry, Alanis, Alvarez, Arambula, Bains, Bauer-Kahan, Bennett, Boerner, Bonta, Bryan, Calderon, Juan Carrillo, Wendy Carrillo, Chen, Connolly, Megan Dahle, Davies, Dixon, Essayli, Flora, Mike Fong, Vince Fong, Friedman, Gabriel, Gallagher, Garcia, Gipson, Grayson, Haney, Hart, Holden, Hoover, Irwin, Jackson, Jones-Sawyer, Kalra, Lackey, Lee, Low, Lowenthal, Maienschein, Mathis, McKinnor, Muratsuchi, Stephanie Nguyen, Ortega, Pacheco, Papan, Jim Patterson, Joe Patterson, Pellerin, Petrie-Norris, Quirk-Silva, Ramos, Reyes, Luz Rivas, Rodriguez, Blanca Rubio, Sanchez, Santiago, Schiavo, Ta, Ting, Valencia, Villapudua, Waldron, Wallis, Ward, Weber, Wicks, Wilson, Wood, Zbur, Robert Rivas

NO VOTE RECORDED: Berman, Cervantes, McCarty, Rendon, Soria

Prepared by: Michael Burdick / B. & F.I. /

8/31/23 11:08:04

**** END ****

1. While there are differences between the three clauses, each is intended to protect the lender’s financial interest in the event that the property securing the mortgage is harmed. ↑

2. Fannie Mae and Freddie Mac are government-sponsored entities (GSEs) created by Congress to provide liquidity, stability, and affordability to the mortgage market. The two GSEs account for more than half of the mortgage financing activity in the nation, and their policies on mortgage underwriting and mortgage servicing influence the policies and practices of mortgage originators and servicers across the market. ↑

3. https://www.consumerfinance.gov/rules-policy/regulations/1024/interp-38/#38-b-4-i-Interp ↑

4. https://www.consumerfinance.gov/rules-policy/regulations/1024/interp-38/#38-b-4-ii-Interp ↑

5. https://servicing-guide.fanniemae.com/THE-SERVICING-GUIDE/Part-B-Escrow-Taxes-Assessments-and-Insurance/Chapter-B-5-Property-and-Flood-Insurance-Loss-Events/B-5-01-Insured-Loss-Events/1040963581/B-5-01-Insured-Loss-Events-04-10-2019.htm ↑

6. Note that these guide lines apply to mortgages that are current or no more than 30 days past due. Stricter disbursement guidelines apply for delinquent loans. ↑

SENATE THIRD READING

STR Bill Id:SB 455

Author:(McGuire)

As Amended Ver:June 28, 2023

Majority vote

SUMMARY

Provides responsibilities for transferor and transferee mortgage servicers related to a mortgage secured by real property located within the geographic limits of a proclaimed state of emergency, as specified.

Major Provisions

1. Requires a transferor mortgage servicer servicing a mortgage secured by property within the geographic limits of a proclaimed state of emergency or local emergency to deliver to a transferee mortgage servicer any material written records between the borrower and the mortgage servicer relating to the borrower's election to use insurance proceeds to repair or replace property damaged by a disaster for which the state of emergency or local emergency was proclaimed.
2. Prohibits a transferee mortgage servicer from dishonoring a previous written agreement to repair property made prior to the transfer between the transferor mortgage servicer and the borrower and approved by the owner of the promissory note.
3. Clarifies that a mortgage servicer may deliver to a transferee mortgage servicer any material written records relating to a borrower's election to use insurance proceeds to repair or replace damaged property that was not caused by a disaster for which a state of emergency or local emergency was proclaimed.

COMMENTS

A mortgage servicer handles the day-to-day task of managing a mortgage loan. The servicer processes loan payments, responds to borrower questions, and keeps track of principal and interest paid. In many cases, the mortgage servicer is not the lender and is servicing the loan on behalf of the lender or investor.

It is also common for a servicer to change over the life of a mortgage. If the mortgage servicer changes, the original and new servicers must provide notices to the borrower, often referred to as hello/goodbye letters. When certain information is transferred from one servicer to another, the required notification must include information such as the contact information for both the old and new servicers and the date on which the old servicer will stop accepting payments and the new server will begin accepting payments.

Mortgage servicers also work with homeowners affected by natural disasters and monitor and control the disbursement of insurance proceeds. In this situation, the the servicer typically obtains details on the property damage and the necessary repairs, discusses the plans for repair with the borrower, issues a check for any amounts designated for personal property or living expenses, and then disburses the insurance loss proceeds according to a set procedure. Following this, the servicer will typically review and approve the final plans for repair and monitor and inspect repairs as they are completed.

Mortgage servicers are an essential part of the process of rebuilding a home, but their role can introduce complications, frustration, and delay. Some of this delay is inevitable given the involvement and different interests of the mortgage lender, the homeowner, and the insurance company. However, the author's office points to a number of ways the process of transferring a mortgage from one servicer to another has interfered with rebuild projects, to the detriment of the homeowner:

1. Some new mortgage companies have added additional terms to existing rebuild agreements such as requiring more inspections, significantly delaying the rebuild for months, even when the previous company had agreed to terms.
2. An underinsured homeowner and their original mortgage company signed off on the rebuild of a smaller house, but the new mortgage company wouldn't honor the agreement. The new company refused to release all of the remaining funds because the rebuild was different from the lost home.

According to the Author

"Disaster survivors that hold an active mortgage at the time of the disaster and experience a total loss of their home or property enter into rebuild contracts with their mortgage servicer in order to begin the rebuild process. However, if a mortgage servicer sells the mortgage to another mortgage servicing company, the subsequent mortgage servicer may not be aware of any existing rebuild contracts or may have a different interpretation of what requirements the survivor must meet prior to releasing insurance rebuild funds.

By requiring that mortgage servicers must disclose any rebuild contracts or agreements to other mortgage servicers, and that those mortgage servicers are required to abide by those contracts and agreements, the rebuild process for these wildfire survivors will not be slowed down as a result of mortgage transfers. Ensuring that the terms of rebuild contracts are consistent between mortgage servicers will simplify and expedite the process for borrowers to receive their insurance funds to repair, rebuild, or replace their homes after experiencing a total loss of their property. Disaster survivors already face tremendous challenges to recover from the effects of the disaster and SB 455 will aid them to begin to rebuild their homes and their lives."

Arguments in Support

LegalAid of Sonoma County writes in support:

"Ensuring that the terms of rebuild and replacement contracts are consistent between mortgage servicers and providers will simplify and expedite the process and allow survivors to receive the insurance fund they are entitled to in a timely manner, allowing survivors to repair, rebuild, or replace their homes more efficiently and cost effectively. [We are] very aware of the struggles that disaster survivors face. SB 455 will go a long way towards helping survivors rebuild or replace their homes and focus on recover."

Arguments in Opposition

None received.

FISCAL COMMENTS

None. This bill is keyed non-fiscal by Legislative Counsel.

VOTES

SENATE FLOOR: 40-0-0

YES: Allen, Alvarado-Gil, Archuleta, Ashby, Atkins, Becker, Blakespear, Bradford, Caballero, Cortese, Dahle, Dodd, Durazo, Eggman, Glazer, Gonzalez, Grove, Hurtado, Jones, Laird, Limón, McGuire, Menjivar, Min, Newman, Nguyen, Niello, Ochoa Bogh, Padilla, Portantino, Roth, Rubio, Seyarto, Skinner, Smallwood-Cuevas, Stern, Umberg, Wahab, Wiener, Wilk

ASM BANKING AND FINANCE: 10-0-2

YES: Grayson, Chen, Cervantes, Dixon, Mike Fong, Gabriel, Papan, Petrie-Norris, Soria, Wicks

ABS, ABST OR NV: Bauer-Kahan, Waldron

ASM JUDICIARY: 10-0-1

YES: Maienschein, Connolly, Dixon, Haney, Kalra, Pacheco, Papan, Reyes, Sanchez, McKinnor

ABS, ABST OR NV: Essayli

UPDATED

VERSION: June 28, 2023

CONSULTANT: Luke Reidenbach / B. & F. / (916) 319-3081 FN: 0001220

Date of Hearing: July 5, 2023

ASSEMBLY COMMITTEE ON JUDICIARY

Brian Maienschein, Chair

SBPCA Bill Id:SB 455

Author:(McGuire) – As Amended Ver:June 28, 2023

PROPOSED CONSENT

SENATE VOTE: 40-0

SUBJECT: State of emergency: mortgage servicers: property repair

KEY ISSUE: SHOULD A TRANSFEROR MORTGAGE SERVICER BE REQUIRED TO DISCLOSE TO A TRANSFEREE MORTGAGE SERVICER MATERIAL WRITTEN RECORDS relating to A DISASTER-SURVIVOR’s election to use insurance proceeds to repair or replace property DAMAGE, AND SHOULD TRANSFEREE MORTGAGE SERVICERS BE PROHIBITED FROM DISHONORING a previous written agreement to repair property made prior to the transfer between the transferor mortgage servicer and the DISASTER-SURVIVOR?

SYNOPSIS

Over the last decade, California has been ravaged by a series of wildfires. California experiences more wildfires than any other U.S. state and the most acreage burned. Worse, California’s wildfires tend to be the most destructive. The Golden State suffered $14 billion in insured wildfire losses in 2017, the most in history. Survivors of these devastating wildfires who experience a loss of their home or property are forced to contend with emotional and financial trauma resulting from the loss of their home and possessions. Survivors often face additional challenges accessing their insurance proceeds to rebuild when their mortgage is sold to another mortgage servicing company. These subsequent mortgage servicing companies may not be aware of any existing rebuild contracts the survivor entered into with their original mortgage company or may have a different interpretation of what requirements the survivor must meet prior to releasing insurance rebuild funds. Under existing law, the subsequent mortgage servicer is not required to abide by any rebuild agreements made between the borrower and the previous mortgage servicer. This causes further delays for the disaster survivor to access their insurance proceeds and begin rebuilding their lives. This bill requires that any agreement made between the survivor and the mortgage company be disclosed to any subsequent mortgage servicer, and further requires that the subsequent mortgage servicer honor that original agreement. This measure promotes transparency, accountability, and helps ensure that survivors of devastating property destruction are able to rebuild their lives and homes. This bill is supported by Sonoma County Legal Aid and the City of Santa Rosa and previously passed the Committee on Banking & Finance by a vote of 10-0.

SUMMARY: Provides responsibilities for transferor and transferee mortgage servicers related to a mortgage secured by real property located within the geographic limits of a proclaimed state of emergency, as specified. Specifically, this bill:

1. Defines the following terms:
   1. “Mortgage servicer” as a person or entity who directly services a loan, or who is responsible for interacting with the borrower, managing the loan account on a daily basis including collecting and crediting periodic loan payments, managing any escrow account, or enforcing the note and security instrument, either as the current owner of the promissory note or as the current owner’s authorized agent;
   2. “Property” to mean residential real property that is improved by four or fewer residential dwelling units, affixed mobilehomes, and manufactures homes;
   3. “State of emergency” as a duly proclaimed existence of conditions of disaster or of extreme peril to the safety of persons and property within the state caused by conditions such as air pollution, fire, flood, storm, epidemic, riot, drought, cyberterrorism, sudden and severe energy shortage, electromagnetic pulse attack, plant or animal infestation or disease, the Governor’s warning of an earthquake or volcanic prediction, or an earthquake, or other conditions, other than conditions resulting from a labor controversy or conditions causing a “state of war emergency,” which, by reason of their magnitude, are or are likely to be beyond the control of the services, personnel, equipment, and facilities of any single county, city and county, or city and require the combined forces of a mutual aid region or regions to combat, or with respect to regulated energy utilities, a sudden and severe energy shortage requiring extraordinary measures beyond the authority vested in the Public Utilities Commission; and
   4. “Local emergency” as the duly proclaimed existence of conditions of disaster or of extreme peril to the safety of persons and property within the territorial limits of a county, city and county, or city, caused by conditions such as air pollution, fire, flood, storm, epidemic, riot, drought, cyberterrorism, sudden and severe energy shortage, deenergization event, electromagnetic pulse attack, plant or animal infestation or disease, the Governor’s warning of an earthquake or volcanic prediction, or an earthquake, or other conditions, other than conditions resulting from a labor controversy, which are or are likely to be beyond the control of the services, personnel, equipment, and facilities of that political subdivision and require the combined forces of other political subdivisions to combat, or with respect to regulated energy utilities, a sudden and severe energy shortage or deenergization event that requires extraordinary measures beyond the authority vested in the Public Utilities Commission.
2. Requires a transferor mortgage servicer servicing a mortgage secured by property within the geographic limits of a proclaimed state of emergency or local emergency to deliver to a transferee mortgage servicer any material written records between the borrower and the mortgage servicer relating to the borrower’s election to use insurance proceeds to repair or replace property damaged by a disaster for which the state of emergency or local emergency was proclaimed.
3. Prohibits a transferee mortgage servicer from dishonoring a previous written agreement to repair property made prior to the transfer between the transferor mortgage servicer and the borrower and approved by the owner of the promissory note.
4. Clarifies that a mortgage servicer may deliver to a transferee mortgage servicer any material written records relating to a borrower’s election to use insurance proceeds to repair or replace damaged property that was not caused by a disaster for which a state of emergency or local emergency was proclaimed.

EXISTING LAW:

1. Defines “mortgage servicer” as a person or entity who directly services a loan, or who is responsible for interacting with the borrower, managing the loan account on a daily basis including collecting and crediting periodic loan payments, managing any escrow account, or enforcing the note and security instrument, either as the current owner of the promissory note or as the current owner’s authorized agent. (Civil Code Section 29205.5.)
2. Requires that any person transferring the service of indebtedness on a loan, as specified, to a different servicing agent shall provide to the new agent all existing insurance policy information that the person is responsible for maintaining, including but not limited to flood and hazard insurance policy information. (Civil Code Section 2937.)
3. Defines “state of emergency” as a duly proclaimed existence of conditions of disaster or of extreme peril to the safety of persons and property within the state caused by conditions such as air pollution, fire, flood, storm, epidemic, riot, drought, cyberterrorism, sudden and severe energy shortage, electromagnetic pulse attack, plant or animal infestation or disease, the Governor’s warning of an earthquake or volcanic prediction, or an earthquake, or other conditions, other than conditions resulting from a labor controversy or conditions causing a “state of war emergency,” which, by reason of their magnitude, are or are likely to be beyond the control of the services, personnel, equipment, and facilities of any single county, city and county, or city and require the combined forces of a mutual aid region or regions to combat, or with respect to regulated energy utilities, a sudden and severe energy shortage requiring extraordinary measures beyond the authority vested in the Public Utilities Commission. (Government Code Section 8558 (b).)
4. Defines “local emergency” as the duly proclaimed existence of conditions of disaster or of extreme peril to the safety of persons and property within the territorial limits of a county, city and county, or city, caused by conditions such as air pollution, fire, flood, storm, epidemic, riot, drought, cyberterrorism, sudden and severe energy shortage, deenergization event, electromagnetic pulse attack, plant or animal infestation or disease, the Governor’s warning of an earthquake or volcanic prediction, or an earthquake, or other conditions, other than conditions resulting from a labor controversy, which are or are likely to be beyond the control of the services, personnel, equipment, and facilities of that political subdivision and require the combined forces of other political subdivisions to combat, or with respect to regulated energy utilities, a sudden and severe energy shortage or deenergization event that requires extraordinary measures beyond the authority vested in the Public Utilities Commission. (Government Code Section 8558 (c)(1).)

FISCAL EFFECT: As currently in print this bill is keyed non-fiscal.

COMMENTS: Over the last decade, California has been ravaged by a series of wildfires. California experiences more wildfires than any other U.S. state and in most years the most acreage burned. Worse, California’s wildfires tend to be the most destructive. The Golden State suffered $14 billion in insured wildfire losses in 2017, the most in history. Survivors of these devastating wildfires who experience a loss of their home or property are forced to contend with emotional and financial trauma resulting from the loss of their home and possessions. Survivors often face additional challenges accessing their insurance proceeds to rebuild when their mortgage is sold to another mortgage servicing company. These subsequent mortgage servicing companies may not be aware of any existing rebuild contracts the survivor entered into with their original mortgage company or may have a different interpretation of what requirements the survivor must meet prior to releasing insurance rebuild funds. Under existing law, the subsequent mortgage servicer is not required to abide by any rebuild agreements made between the borrower and the previous mortgage servicer. This causes further delays for the disaster survivor to access their insurance proceeds and begin rebuilding their lives. This bill requires that any agreement made between the survivor and the mortgage company be disclosed to any subsequent mortgage servicer, and further requires that the subsequent mortgage servicer honor that original agreement. This measure promotes transparency, accountability, and helps ensure that survivors of devastating property destruction are able to rebuild their lives and homes.

According to the author:

SB 455 is a common sense piece of legislation that will protect fire and other disaster survivors and help keep their home rebuilds on track. Tens of thousands of Californians have lost their homes and businesses to wildfires in the last eight years. Since 2015, over 42,000 homes, businesses and other structures have been damaged or destroyed by mega fires.

Not only do these survivors have to deal with the traumatic and life changing experience of losing their home, they also have to begin the challenging task of rebuilding their homes and lives. While mortgage sales and transfers are a common practice by mortgage companies, if a homeowner is in the process of a disaster rebuild, a number of issues have arisen. There have been cases where a rebuild is underway, the mortgage is sold, and the new provider refuses to release funds until additional information has been provided and an inspection has been completed, significantly delaying the payout and delaying the rebuild for months. In other cases, the insurance payout wasn’t sufficient to rebuild the same home as was lost, and the original provider had signed off on a smaller footprint. However, upon sale of the mortgage, the new provider refused to release all of the remaining funds because the rebuild was different than the lost home.

Survivors have been forced to liquidate pensions and use up their hard-earned savings in order to comply with the terms of their rebuild contracts, or default on their contracts when they entered into them in good faith after discussions with their mortgage company. Even if they eventually receive all of their insurance funds, which doesn’t always happen, survivors often aren’t made whole. SB 455 will make sure any agreements made between homeowners and their mortgage company on the rebuilding of their home after a disaster are disclosed to the new company if the mortgage is sold, and requires that the new financial institution honor the original agreement.

Ensuring that these existing rebuild agreements are honored when mortgages are sold is just common sense. Disaster survivors already face tremendous challenges to recover from the impacts of a disaster, and SB 455 will give homeowners certainty and peace of mind when they rebuild their home and lives.

Wildfires and other natural disasters are (increasingly) a part of life in California. Over the last decade, California has been ravaged by a series of wildfires. California experiences more wildfires than any other U.S. state (9,280 in 2021) and the most acreage burned (2.2 million acres). (Howard, Wildfire statistics: Which U.S. states have the most wildfires? Policygenius (Dec. 30, 2022), https://www.policygenius.com/homeowners-insurance/wildfires-by-state/.) Worse, California’s wildfires tend to be the most destructive. The Golden State suffered $14 billion in insured wildfire losses in 2017, the most in history. The worst years for other states don’t even come close: The next closest is Texas, which suffered $530 million in insured wildfire losses in 2011, followed by Colorado ($450 million in 2012) and Arizona ($120 million in 2002). (Id.)

In 2018, the state experienced the largest and most destructive fires in its history: almost 8,000 wildfires that destroyed more than 1.9 million acres of land, resulted in over 24,000 destroyed structures, and claimed the lives of 100 people. (https://www.fire.ca.gov/incidents/2018.) Although these numbers decreased in subsequent years, California is nevertheless expected to experience destructive weather events in the future.

Mortgage servicers are meant to work with homeowners’ insurance in the event of disaster-related losses. In addition to the obvious emotional impact a wildfire (and other disaster) may have on survivors, they may also face financial and practical challenges. Survivors may need to find temporary housing, replace lost possessions, and navigate the complex process of filing insurance claims and dealing with mortgage servicers.

Mortgage servicers typically handle the day-to-day task of managing a mortgage loan. The servicer processes loan payments, responds to borrower questions, and keeps track of principal and interest paid. In many cases, the mortgage servicer is not the lender and is servicing the loan on behalf of the lender or investor. Mortgage servicers also work with homeowners affected by natural disasters and monitor and control the disbursement of insurance proceeds. Servicers typically obtain details on the property damage and the necessary repairs, discusses the plans for repair with the borrower, issues a check for any amounts designated for personal property or living expenses, and then disburse the insurance loss proceeds according to a set procedure. Following this, servicers will typically review and approve the final plans for repair and monitor and inspect repairs as they are completed.

A problem can arise when—as commonly occurs—a mortgage servicer changes. If the mortgage servicer changes, the original and new servicers must provide notices to the borrower, often referred to as “hello/goodbye letters.” When certain information is transferred from one servicer to another, the required notification must include information such as the contact information for both the old and new servicers and the date on which the old servicer will stop accepting payments and the new server will begin accepting payments. The problems with introducing a new mortgage servicer ranges from annoyance to disaster. On one end of the spectrum, the introduction of a new servicer may result in delay, as is to be expected when a new entity takes over and attempts to onboard new accounts. A larger problem arises when an original mortgage servicer has approved a certain rebuild project, and the new servicer does not honor that agreement.

The author’s office points to a number of ways the process of transferring a mortgage from one servicer to another has interfered with rebuild projects, to the detriment of the homeowner:

• Some new mortgage companies have added additional terms to existing rebuild agreements such as requiring more inspections, significantly delaying the rebuild for months, even when the previous company had agreed to terms.
• An underinsured homeowner and their original mortgage company signed off on the rebuild of a smaller house, but the new mortgage company wouldn’t honor the agreement. The new company refused to release all of the remaining funds because the rebuild was different from the lost home.

This bill ensures that a transferor mortgage servicer secured by a property located within the geographic limits of a state of emergency, provides any material records related to the homeowner’s election to use insurance funds to repair or replace property in an area where a state of emergency was declared. The bill clarifies that the transferor mortgage servicer can provide these written materials even if the property is outside an emergency area. Given that many servicers operate at a large scale, this provision allows servicers to comply with the bill’s requirements for any total loss or rebuild scenario. And by prohibiting mortgage service transferees from dishonoring a previous agreement, it ensures that survivors of disaster can rebuild their property and their lives.

ARGUMENTS IN SUPPORT: The City of Santa Rosa writes in support:

Disaster survivors that hold an active mortgage at the time of the disaster and experience a total loss of their home or property enter into rebuild contracts with their mortgage servicer in order to begin the rebuild process. However, if a mortgage servicer sells the mortgager to another mortgage servicing company, the subsequent mortgage servicer may not be aware of any existing rebuild contracts or may have a different interpretation of what requirements the survivor must meet prior to releasing insurance rebuild funds.

Legal Aid of Sonoma County writes in support, arguing:

SB 455 will help our most vulnerable community members, including LASC’s clients and survivors throughout the state, maintain their rebuild timelines and prevent rebuild or replacement contracts from being abandoned as a result of funds being withheld by a mortgage servicer or provider. SB 455 is imperative because it will require rebuild or replacement funds be released in a timely manner, prevent the expenditure of additional funds on rebuild projects due to delays in release of funds, and prevent builders from cancelling contracts due to lack of timely payments or exhaustion of funds. [ . . . ]

Frequently, survivors enter rebuild or replacement contracts with the hope that their mortgage servicer will release the funds so the survivor can begin the rebuild or replacement process. However, it is also common for the survivor’s mortgage servicer or provider to sell the survivor’s mortgage to a new mortgage servicer or provider. When this occurs, the subsequent mortgage servicer or provider is often not made aware of the existing contract to rebuild or replace the lost home or the mortgage servicer or provider may simply have a different interpretation of what requirements must be met prior to releasing the survivor’s insurance funds under the terms of the existing contract.

Currently, without SB 455, the subsequent mortgage servicer or provider is not required to abide by any rebuild agreements that they were not made aware of prior to the transfer of the mortgage. This delays the rebuild process, increases the cost to rebuild, and leads to the abandonment of rebuilds. We need SB 455 to allow disaster survivors to rebuild or replace their lost homes and become permanently and safely rehoused in a timely manner. SB 455 will allow survivors to access their insurance proceeds after the total loss of their home by requiring mortgage servicers and providers to disclose the terms of any existing rebuild or replacement contract to any subsequent mortgage servicer. SB 455 will also require subsequent mortgage transferees to abide by such terms.

REGISTERED SUPPORT / OPPOSITION:

Support

City of Santa Rose

Legal Aid of Sonoma County

Opposition

None on file

Analysis Prepared by: Shiran Zohar / JUD. / (916) 319-2334

Date of Hearing: June 26, 2023

ASSEMBLY COMMITTEE ON BANKING AND FINANCE

Timothy Grayson, Chair

SBPCA Bill Id:SB 455

Author:(McGuire) – As Amended Ver:May 25, 2023

SENATE VOTE: 40-0

SUBJECT: State of emergency: mortgage servicers: property repair

SUMMARY: Provides responsibilities for transferor and transferee mortgage servicers related to a mortgage secured by real property located within the geographic limits of a proclaimed emergency, as specified.

Specifically, this bill:

1. Defines “mortgage servicer” to have the same meaning as provided by subdivision (a) of Section 2920.5 of the Civil Code.
2. Defines “property” to mean residential real property that is improved by four or fewer residential dwelling units, affixed mobilehomes, and manufactures homes.
3. Defines “state of emergency” and “local emergency” to have the same meanings as defined in subdivisions (b) and (c), respectively, of Section 8558 of the Government Code.
4. Requires a transferor mortgage servicer servicing a mortgage secured by property within the geographic limits of a proclaimed state of emergency or local emergency to deliver to a transferee mortgage servicer any material written records between the borrower and the mortgage servicer relating to the repair of property that suffered a total loss due to damage caused by a natural disaster for which the state of emergency or local emergency was proclaimed.
5. Prohibits a transferee mortgage servicer from dishonoring a previous written agreement to repair property made prior to the transfer between the transferor mortgage servicer and the borrower and approved by the owner of the promissory note.

EXISTING LAW:

1. Defines “mortgage servicer” means a person or entity who directly services a loan, or who is responsible for interacting with the borrower, managing the loan account on a daily basis including collecting and crediting periodic loan payments, managing any escrow account, or enforcing the note and security instrument, either as the current owner of the promissory note or as the current owner’s authorized agent (Civil Code Sec. 29205.5)
2. Requires that any person transferring the service of indebtedness on a loan, as specified, to a different servicing agent shall provide to the new agent all existing insurance policy information that the person is responsible for maintaining, including but not limited to flood and hazard insurance policy information. (Civil Code Section 2937)

FISCAL EFFECT: None. This bill is keyed Nonfiscal by Legislative Counsel.

COMMENTS:

1. Purpose.

According to the author:

Disaster survivors that hold an active mortgage at the time of the disaster and experience a total loss of their home or property enter into rebuild contracts with their mortgage servicer in order to begin the rebuild process. However, if a mortgage servicer sells the mortgage to another mortgage servicing company, the subsequent mortgage servicer may not be aware of any existing rebuild contracts or may have a different interpretation of what requirements the survivor must meet prior to releasing insurance rebuild funds.

By requiring that mortgage servicers must disclose any rebuild contracts or agreements to other mortgage servicers, and that those mortgage servicers are required to abide by those contracts and agreements, the rebuild process for these wildfire survivors will not be slowed down as a result of mortgage transfers. Ensuring that the terms of rebuild contracts are consistent between mortgage servicers will simplify and expedite the process for borrowers to receive their insurance funds to repair, rebuild, or replace their homes after experiencing a total loss of their property. Disaster survivors already face tremendous challenges to recover from the effects of the disaster and SB 455 will aid them to begin to rebuild their homes and their lives.

1. Wildfires and the process to rebuild

In recent years, California has faced an alarming increase in destructive wildfires. Most of the largest and devastating fires have taken place within the last decade, culminating in a particularly severe outbreak in recent years. This period has witnessed some of the worst wildfires in the state's recorded history.

For example, the 2017 Tubbs Fire, at the time the most destructive wildfire in California history, killed 22 people, and 5,000 homes burned down. The 2018 wildfire season included the Camp Fire in Butte County, which became the single most destructive wildfire in state history with nearly 19,000 structures destroyed and 85 fatalities, including the near-total destruction of the town of Paradise.

The fires in California and across the United States have enacted a significant economic and financial toll. According to one estimate, wildfires in the United States led to $16.8 billion in damages per year between 2017 and 2021, compared to $1.2 billion in damages per year during the 37 years prior.

Families seeking to rebuild their homes face significant obstacles in doing so, including rising supply costs, delays, and red tape. Families with insurance settlements can choose how to proceed, typically deciding between rebuilding their home, reducing their mortgage balance, or purchasing a new home altogether. According to the Senate Insurance Committee, insurers offer different types of “open” policies that determine the value of a claim at the time of the loss, with different policies offering different levels of benefits. For example, “actual cash value” policies provide for the cost to repair or replace the home, minus depreciation, and typically cap the coverage based on the estimated normal cost of replacement. Generally speaking, most policies, no matter their overall structure, will pay to build a new home after a total loss without regard to the condition of the original home, though basic insurance coverage might not provide the new costs of complying with more recent building codes.

The Legislature has passed a number of new laws designed to protect survivors during the insurance process. For example, SB 872 (Dodd), Chapter 261, Statutes of 2020, enacted a number of new protections for wildfire survivors, including prohibiting an insurance company from deducting the land value when paying an insurance claim if a wildlife survivor chooses to relocate rather than rebuild their home at the same location.^[1]

1. Mortgage servicers

Generally speaking, a mortgage servicer handles the day-to-day task of managing a mortgage loan. The servicer processes loan payments, responds to borrower questions, and keeps track of principal and interest paid. In many cases, the mortgage servicer is not the lender and is servicing the loan on behalf of the lender or investor.

It is also common for a servicer to change over the life of a mortgage. If the mortgage servicer changes, the original and new servicers must provide notices to the borrower, often referred to as hello/goodbye letters. When certain information is transferred from one servicer to another, the required notification must include information such as the contact information for both the old and new servicers and the date on which the old servicer will stop accepting payments and the new server will begin accepting payments.

Mortgage servicers also work with homeowners affected by natural disasters and monitor and control the disbursement of insurance proceeds. For those servicers that follow Fannie Mae’s guidelines, then the servicer typically obtains details on the property damage and the necessary repairs, discusses the plans for repair with the borrower, issues a check for any amounts designated for personal property or living expenses, and then disburse the insurance loss proceeds according to a set procedure. Following this, servicers will typically review and approve the final plans for repair and monitor and inspect repairs as they are completed.^[2]

1. What is the problem?

Mortgage servicers are an essential part of the process of rebuilding a home, but their role can introduce complications, frustration, and delay. Some of this delay is inevitable given the involvement and different interests of the mortgage lender, the homeowner, and the insurance company. However, the author’s office points to a number of ways the process of transferring a mortgage from one servicer to another has interfered with rebuild projects, to the detriment of the homeowner:

• Some new mortgage companies have added additional terms to existing rebuild agreements such as requiring more inspections, significantly delaying the rebuild for months, even when the previous company had agreed to terms.
• An underinsured homeowner and their original mortgage company signed off on the rebuild of a smaller house, but the new mortgage company wouldn’t honor the agreement. The new company refused to release all of the remaining funds because the rebuild was different from the lost home.

1. Support

LegalAid of Sonoma County writes in support, arguing:

Ensuring that the terms of rebuild and replacement contracts are consistent between mortgage servicers and providers will simplify and expedite the process and allow survivors to receive the insurance fund they are entitled to in a timely manner, allowing survivors to repair, rebuild, or replace their homes more efficiently and cost effectively. [We are] very aware of the struggles that disaster survivors face. SB 455 will go a long way towards helping survivors rebuild or replace their homes and focus on recover.

1. Amendments

SB 455 was substantially amended on the Senate Floor to address implementation challenges for those in the mortgage and banking industries. Following those amendments, stakeholders communicated two remaining implementation concerns:

• No definition of “total loss.” As noted above, insurers have a number of ways to calculate or determine the parameters of an insured loss. Because there is no statutory definition of “total loss” as it relates to property insurance, the California Mortgage Bankers Association and the California Bankers Association submitted feedback that they were unsure of when exactly the bill’s requirements would apply.
• Difficult to keep track of emergency declarations and geographic boundaries. According to the California Mortgage Bankers Association, it may be difficult for a servicer to keep track of proclaimed emergencies. Given that many servicers operate at a large scale, it may be easier for some to comply with the bill’s requirements for any total loss or rebuild scenario.

In response to the above concerns, the committee recommends the following amendments.

• Amend Section 2968 (b) as follows:

(b) A transferor mortgage servicer servicing a mortgage secured by property within the geographic limits of a proclaimed state of emergency or local emergency shall deliver to a transferee mortgage servicer any material written records between the borrower and the mortgage servicer relating to the repair of property that suffered a total loss due to damage borrower’s election to use insurance funds proceeds to repair or replace property caused by a natural disaster for which the state of emergency or local emergency was proclaimed.

• Add Section 2968 (d) as follows:

This article shall not be interpreted to prohibit a mortgage servicer from delivering to a transferee mortgage servicer any material written records relating to a borrower’s election to use insurance proceeds to repair or replace damaged property that was not caused by a disaster for which a state of emergency or local emergency was proclaimed.

REGISTERED SUPPORT / OPPOSITION:

Support

Legal Aid of Sonoma County

Opposition

None on file.

Analysis Prepared by: Luke Reidenbach / B. & F. / (916) 319-3081

1. Other bills include: SB 894 (Dodd), Chapter 618, Statutes of 2018, which requires an insurer to renew a policy for at least two annual renewal periods following a total loss in a declared disaster area, and AB 1772 (Aguiar-Curry), Chapter 627, Statutes of 2018, which extended the time to rebuild or replaced after a total loss. ↑

2. https://servicing-guide.fanniemae.com/THE-SERVICING-GUIDE/Part-B-Escrow-Taxes-Assessments-and-Insurance/Chapter-B-5-Property-and-Flood-Insurance-Loss-Events/B-5-01-Insured-Loss-Events/1040963581/B-5-01-Insured-Loss-Events-07-14-2021.htm ↑

 THIRD READING  

Bill No: SB 455

Author: McGuire (D)

Amended: 5/25/23

Vote: 21

SENATE BANKING & F.I. COMMITTEE: 7-0, 4/19/23

AYES: Limón, Niello, Bradford, Caballero, Min, Nguyen, Portantino

SENATE JUDICIARY COMMITTEE: 10-0, 5/2/23

AYES: Umberg, Wilk, Allen, Ashby, Caballero, Durazo, Laird, Min, Niello, Wiener

NO VOTE RECORDED: Stern

SUBJECT: State of emergency: mortgage servicers: property repair

SOURCE: Author

DIGEST:

This bill provides responsibilities for transferor and transferee mortgage servicers related to a mortgage secured by real property located within the geographic limits of a proclaimed emergency, as specified.

Senate Floor Amendments of 5/25/23 clarify the author’s intent and conform to existing law.

ANALYSIS:

Existing federal law:

Regulation X (12 CFR Part 1024), which implements the Real Estate Settlement Procedures Act (12 U.S.C. 2601 et seq.):

1. Requires mortgage servicers to provide specified disclosures to a mortgage borrower related to any assignment, sale, or transfer of the servicing of a mortgage loan. (12 CFR 1024.33)
2. Requires mortgage servicers to maintain policies and procedures that are reasonably designed to ensure that the servicer can:
   1. As a transferor servicer, timely transfer all information and documents in the possession or control of the servicer relating to a transferred mortgage loan to a transferee servicer in a form and manner that ensures the accuracy of the information and documents transferred and that enables a transferee servicer to comply with the terms of the transferee servicer's obligations to the owner or assignee of the mortgage loan and applicable law.
   2. As a transferee servicer, identify necessary documents or information that may not have been transferred by a transferor servicer and obtain such documents from the transferor servicer. (12 CFR 1024.38)

Regulation Z (12 CFR Part 1026), which implements the Truth in Lending Act (15 U.S.C. 1601 et seq.):

1. Requires any person that becomes the owner of an existing mortgage loan by acquiring legal title to the debt obligation to provide a specified disclosure to the consumer who is obligated on the mortgage loan. (12 CFR 1026.39)

Existing state law requires that any person transferring the service of indebtedness on a loan, as specified, to a different servicing agent shall provide to the new agent all existing insurance policy information that the person is responsible for maintaining, including but not limited to flood and hazard insurance policy information. (Civil Code Section 2937)

This bill:

Defines “mortgage servicer” to have the same meaning as provided by subdivision (a) of Section 2920.5 of the Civil Code.

Defines “property” to mean residential real property that is improved by four or fewer residential dwelling units, affixed mobilehomes, and manufactures homes.

1. Defines “state of emergency” and “local emergency” to have the same meanings as defined in subdivisions (b) and (c), respectively, of Section 8558 of the Government Code.

Requires a transferor mortgage servicer servicing a mortgage secured by property within the geographic limits of a proclaimed state of emergency or local emergency to deliver to a transferee mortgage servicer any material written records between the borrower and the mortgage servicer relating to the repair of property that suffered a total loss due to damage caused by a natural disaster for which the state of emergency or local emergency was proclaimed.

Prohibits a transferee mortgage servicer from dishonoring a pervious written agreement to repair property made prior to the transfer between the transferor mortgage servicer and the borrower and approved by the owner of the promissory note.

Comments

1. Purpose

According to the author:

Disaster survivors that hold an active mortgage at the time of the disaster and experience a total loss of their home or property enter into rebuild contracts with their mortgage servicer in order to begin the rebuild process. However, if a mortgage servicer sells the mortgage to another mortgage servicing company, the subsequent mortgage servicer may not be aware of any existing rebuild contracts or may have a different interpretation of what requirements the survivor must meet prior to releasing insurance rebuild funds.

By requiring that mortgage servicers must disclose any rebuild contracts or agreements to other mortgage servicers, and that those mortgage servicers are required to abide by those contracts and agreements, the rebuild process for these wildfire survivors will not be slowed down as a result of mortgage transfers. Ensuring that the terms of rebuild contracts are consistent between mortgage servicers will simplify and expedite the process for borrowers to receive their insurance funds to repair, rebuild, or replace their homes after experiencing a total loss of their property. Disaster survivors already face tremendous challenges to recover from the effects of the disaster and SB 455 will aid them to begin to rebuild their homes and their lives.

1. Background

Property insurance contracts often contain a mortgagee, loss payee, or lenders loss payable clause that is designed to protect a mortgage lender in the event that the property securing the mortgage is damaged, known as an insured loss event.^[1] In simple terms, this means that when a home is damaged or destroyed, the insurance company pays out the claim to the lender, not directly to the home owner who is the borrower on the mortgage loan. Navigating through an insured loss event requires actions of the borrower/property owner, the insurer, and the mortgage servicer.

A mortgage servicer is an entity that interacts with borrowers after a loan has been originated and the borrower begins to repay the loan. A mortgage servicer collects payments from the borrower and manages any associated escrow account. In many cases, the mortgage servicer is a different entity than the lender who initially funded the loan or the entity that is the holder and legal owner of the mortgage debt. In today’s mortgage markets, it is common for a mortgage lender to originate a loan and subsequently sell the loan to a third party, such as Fannie Mae or Freddie Mac.^[2] This third party either holds the loan as an investment or packages the loan into mortgage-backed securities that may be sold to other investors. Mortgage servicers play a critical role in interacting with borrowers, maintaining the flow of funds from borrowers to mortgage holders, and asserting mortgage holders’ rights when borrowers default on mortgage loans. The expectations or obligations of mortgage servicers who act on behalf of third-party investors are often specified in a servicing agreement or servicing guide lines provided by the investor.

1. Mortgage Servicers’ Obligations Related to Transfers

Over the life of a mortgage, a borrower may not always engage with the same mortgage servicer. In many cases, the actual mortgage does not change ownership, but the mortgage servicing rights are transferred, assigned, or sold to a new servicer. In other cases, the actual mortgage changes ownership, which often results in a change in the mortgage servicer – either the new mortgage holder services the mortgage itself or assigns the mortgage to a different third-party servicer.

Mortgage servicers have legal obligations, as cited in the Existing Federal Law section above, to notify borrowers with certain basic information when their mortgage is transferred from one servicer to another. The contents of the required notice include the effective date of the transfer, contact information for both the transferor and transferee servicers, and the date on which the transferor will cease to accept payments and the transferee will begin to accept payments relating to the mortgage loan. In addition to borrower notices, servicers are required to maintain policies and procedures that are reasonably designed to ensure the timely transfer of all information and documents related to a transferred mortgage loan from the transferor to the transferee. The official interpretation of this requirement makes clear a transferor servicer’s policies and procedures must be designed to ensure that “the transfer includes any information reflecting the current status of discussions with a borrower regarding loss mitigation options, any agreements entered into with a borrower on a loss mitigation option, and any analysis by a servicer with respect to potential recovery from a non-performing mortgage loan.”^[3] Further, the official interpretation makes clear a transferee servicer’s responsibility to have policies and procedures that “address obtaining any such missing information or documents from a transferor servicer before attempting to obtain such information from a borrower.”^[4] Neither the regulations, nor the official interpretations, however, provide any additional detail on how servicers should treat the transfer of a mortgage that is the subject of an insured loss event.

1. Mortgage Servicing Related to an Insured Loss Event

As part of their role in the mortgage financing system, a mortgage servicer plays a key role, along with the insurance company, in working with a borrower when the borrower’s property experiences an insured loss event. Mortgage servicers are expected to ensure the proof of loss claim is filed timely with the insurer and then monitor the disbursement of insurance loss proceeds. To illustrate the types of activities that mortgage servicers undertake in these scenarios, see the following bulleted list of servicers’ responsibilities that were sampled from the Fannie Mae servicing guide.^[5] Many servicers use Fannie Mae guidance to establish their policies for servicing all mortgages, not just those purchased by Fannie Mae, meaning that these activities are undertaken by nearly all mortgage servicers when dealing with an insured loss event.

• Determine if the property can be legally rebuilt.
• Obtain complete details on the damage to the property and determine the needed repairs.
• Discuss with the borrower any plans for repairing the property.
• Immediately issue the borrower a check for any amount designated for contents (for example personal property) or living expenses.
• Review and approve the final plans for repair, including obtaining the necessary bids to repair the property.
• Monitor and inspect repairs as completed to verify the repairs comply with the final repair plan.
• Conduct a final inspection to ensure all repairs are completed if the mortgage loan is 31 days or more delinquent at the time of the loss event.

The manner in which the mortgage servicer disburses insurance proceeds depends on the amount of those proceeds. Per the Fannie Mae guidelines, if the proceeds are less than or equal to $40,000, the servicer is authorized to release the proceeds in one payment. For proceeds greater than $40,000, the servicer is authorized to release the greater of $40,000, 33% of the proceeds, or the amount in excess of the unpaid principal balance, accrued interest, and advances on the mortgage loan. Any remaining funds are then disbursed based on periodic inspections of the progress of the repair work.^[6]

1. Intent of This Bill

The intent of this bill is relatively straightforward: the author intends to ensure that, in the event a mortgage is transferred, a borrower who is in the middle of a process to repair, rebuild, or replace their home due to a natural disaster does not experience delays in that process due solely to consequences stemming from the mortgage transfer. Given the prevalence of natural disasters that Californians endure, the desire to clarify public policy in this area seems sound. Furthermore, prevailing laws, policies, and practices related to mortgage servicing are generally aligned with the intent of the bill, even if the law does not specifically address this particular scenario. This bill provides clarity to mortgage servicers about their obligations when servicing a mortgage under this scenario.

FISCAL EFFECT: Appropriation: No Fiscal Com.: No Local: No

SUPPORT: (Verified 5/25/23)

Legal Aid of Sonoma County

OPPOSITION: (Verified 5/25/23)

None received

ARGUMENTS IN SUPPORT: Legal Aid of Sonoma County writes in support:

Ensuring that the terms of rebuild and replacement contracts are consistent between mortgage servicers and providers will simplify and expedite the process and allow survivors to receive the insurance fund they are entitled to in a timely manner, allowing survivors to repair, rebuild, or replace their homes more efficiently and cost effectively. [We are] very aware of the struggles that disaster survivors face. SB 455 will go a long way towards helping survivors rebuild or replace their homes and focus on recover.

Prepared by: Michael Burdick / B. & F.I. /

5/26/23 11:01:21

**** END ****

1. While there are differences between the three clauses, each is intended to protect the lender’s financial interest in the event that the property securing the mortgage is harmed. ↑

2. Fannie Mae and Freddie Mac are government-sponsored entities (GSEs) created by Congress to provide liquidity, stability, and affordability to the mortgage market. The two GSEs account for more than half of the mortgage financing activity in the nation, and their policies on mortgage underwriting and mortgage servicing influence the policies and practices of mortgage originators and servicers across the market. ↑

3. https://www.consumerfinance.gov/rules-policy/regulations/1024/interp-38/#38-b-4-i-Interp ↑

4. https://www.consumerfinance.gov/rules-policy/regulations/1024/interp-38/#38-b-4-ii-Interp ↑

5. https://servicing-guide.fanniemae.com/THE-SERVICING-GUIDE/Part-B-Escrow-Taxes-Assessments-and-Insurance/Chapter-B-5-Property-and-Flood-Insurance-Loss-Events/B-5-01-Insured-Loss-Events/1040963581/B-5-01-Insured-Loss-Events-04-10-2019.htm ↑

6. Note that these guide lines apply to mortgages that are current or no more than 30 days past due. Stricter disbursement guidelines apply for delinquent loans. ↑

SENATE JUDICIARY COMMITTEE

Senator Thomas Umberg, Chair

2023-2024 Regular Session

Bill No: SB 455 (Author:McGuire)

Version: March 20, 2023

Hearing Date: May 2, 2023

Fiscal: No

Urgency: No

Consultant: ME

SUBJECT

State of emergency: mortgage servicers: written disclosure

DIGEST

This bill requires a transferor mortgage servicer to disclose to a transferee mortgage servicer specified information related to the rebuild, repair, or replacement of a property damaged in an emergency.

EXECUTIVE SUMMARY

75 percent of the top 20 most destructive California wildfires took place in the last ten years.^[1] These fires resulted in enormous loss of human life as well as property loss. The author of this bill represents a district that was particularly hard hit by wildfires in the last decade. The trauma from loss of life and property is immeasurable. Californians are left to pick up the pieces as they try to navigate healing their trauma and rebuilding their homes. The author brings this measure to help their constituents and all Californians with their mortgage servicers as they navigate the rebuilding process. Constituents have reported problems that have arisen when their mortgage servicers change in the midst of this process. As explained by Legal Aid of Sonoma County, supporters of the bill, “[in] the event of a declared State of Emergency under Government Code, SB 455 will require mortgage servicers and providers to disclose to any subsequent mortgage servicer or provider the terms of any already agreed upon contracts to rebuild or replace a survivor’s lost homes. This will help ensure that existing rebuild or repurchase contracts are honored and that recovery can continue on an effective timeline.”

This bill is author sponsored, supported by Legal Aid of Sonoma County, and has no known opposition. The bill passed the Senate Banking and Financial Institutions Committee on a 7 to 0 vote.

PROPOSED CHANGES TO THE LAW

Existing law:

1. Pursuant to Regulation X (12 CFR Part 1024), which implements the Real Estate Settlement Procedures Act (12 U.S.C. § 2601 et seq.):
   1. Requires mortgage servicers to provide specified disclosures to a mortgage borrower related to any assignment, sale, or transfer of the servicing of a mortgage loan. (12 CFR 1024.33.)
   2. Requires mortgage servicers to maintain policies and procedures that are reasonably designed to ensure that the servicer can:
      1. As a transferor servicer, timely transfer all information and documents in the possession or control of the servicer relating to a transferred mortgage loan to a transferee servicer in a form and manner that ensures the accuracy of the information and documents transferred and that enables a transferee servicer to comply with the terms of the transferee servicer's obligations to the owner or assignee of the mortgage loan and applicable law.
      2. As a transferee servicer, identify necessary documents or information that may not have been transferred by a transferor servicer and obtain such documents from the transferor servicer. (12 CFR 1024.38)
2. Pursuant to Regulation Z (12 CFR Part 1026), which implements the Truth in Lending Act (15 § U.S.C. 1601 et seq.), requires any person that becomes the owner of an existing mortgage loan by acquiring legal title to the debt obligation to provide a specified disclosure to the consumer who is obligated on the mortgage loan. (12 CFR 1026.39.)
3. Requires that any person transferring the service of indebtedness on a loan, as specified, to a different servicing agent shall provide to the new agent all existing insurance policy information that the person is responsible for maintaining, including but not limited to flood and hazard insurance policy information. (Civil Code Section 2937.)

This bill:

1. Requires a mortgage servicer servicing a mortgage with respect to a property located within the geographic limits of an emergency, as specified, to provide a written disclosure to a transferee or purchaser mortgage servicer of all of the following:
   1. if the property at issue experiences a total loss due to the proclaimed emergency;
   2. if the borrower has conveyed an intention to rebuild, repair, or replace the home; and
   3. any contracts related to a rebuild, repair, or replacement, as specified.
2. Requires a transferee or purchaser mortgage servicer that receives a written disclosure described in (1) above to do all of the following:
   1. comply with the terms as agreed upon by the original mortgage servicer in any contract or agreement;
   2. provide to a transferee or purchaser mortgage servicer the written disclosure provided by the mortgage servicer that was the servicer at the time of the emergency proclamation described by subdivision (a) as updated, if applicable, to reflect subsequent agreements, contracts, and negotiations; and
   3. continue in good faith any negotiation disclosed pursuant to (1) above.

COMMENTS

1. Stated need for the bill

The author writes:

SB 455 is a common sense piece of legislation that will protect fire and other disaster survivors and help keep their home rebuilds on track. Tens of thousands of Californians have lost their homes and businesses to wildfires in the last eight years. Since 2015, over 42,000 homes, businesses and other structures have been damaged or destroyed by mega fires.

Not only do these survivors have to deal with the traumatic and life changing experience of losing their home, they also have to begin the challenging task of rebuilding their homes and lives. While mortgage sales and transfers are a common practice by mortgage companies, if a homeowner is in the process of a disaster rebuild, a number of issues have arisen. There have been cases where a rebuild is underway, the mortgage is sold, and the new provider refuses to release funds until additional information has been provided and an inspection has been completed, significantly delaying the payout and delaying the rebuild for months. In other cases, the insurance payout wasn’t sufficient to rebuild the same home as was lost, and the original provider had signed off on a smaller footprint. However, upon sale of the mortgage, the new provider refused to release all of the remaining funds because the rebuild was different than the lost home.

Survivors have been forced to liquidate pensions and use up their hard-earned savings in order to comply with the terms of their rebuild contracts, or default on their contracts when they entered into them in good faith after discussions with their mortgage company. Even if they eventually receive all of their insurance funds, which doesn’t always happen, survivors often aren’t made whole. SB 455 will make sure any agreements made between homeowners and their mortgage company on the rebuilding of their home after a disaster are disclosed to the new company if the mortgage is sold, and requires that the new financial institution honor the original agreement.

Ensuring that these existing rebuild agreements are honored when mortgages are sold is just common sense. Disaster survivors already face tremendous challenges to recover from the impacts of a disaster, and SB 455 will give homeowners certainty and peace of mind when they rebuild their home and lives.

Legal Aid of Sonoma County writes the following in support of the bill:

SB 455 will help our most vulnerable community members, including LASC’s clients and survivors throughout the state, maintain their rebuild timelines and prevent rebuild or replacement contracts from being abandoned as a result of funds being withheld by a mortgage servicer or provider. SB 455 is imperative because it will require rebuild or replacement funds be released in a timely manner, prevent the expenditure of additional funds on rebuild projects due to delays in release of funds, and prevent builders from cancelling contracts due to lack of timely payments or exhaustion of funds. [ . . . ]

Frequently, survivors enter rebuild or replacement contracts with the hope that their mortgage servicer will release the funds so the survivor can begin the rebuild or replacement process. However, it is also common for the survivor’s mortgage servicer or provider to sell the survivor’s mortgage to a new mortgage servicer or provider. When this occurs, the subsequent mortgage servicer or provider is often not made aware of the existing contract to rebuild or replace the lost home or the mortgage servicer or provider may simply have a different interpretation of what requirements must be met prior to releasing the survivor’s insurance funds under the terms of the existing contract.

Currently, without SB 455, the subsequent mortgage servicer or provider is not required to abide by any rebuild agreements that they were not made aware of prior to the transfer of the mortgage. This delays the rebuild process, increases the cost to rebuild, and leads to the abandonment of rebuilds. We need SB 455 to allow disaster survivors to rebuild or replace their lost homes and become permanently and safely rehoused in a timely manner. SB 455 will allow survivors to access their insurance proceeds after the total loss of their home by requiring mortgage servicers and providers to disclose the terms of any existing rebuild or replacement contract to any subsequent mortgage servicer. SB 455 will also require subsequent mortgage transferees to abide by such terms.

2. Mortgage servicers may change from time to time

A mortgage servicer is an entity that interacts with borrowers after a loan has been originated and the borrower begins to repay the loan. A mortgage servicer collects payments from the borrower, manages the associated escrow account, and asserts mortgage holder rights when the borrower defaults. The mortgage servicer is often a different entity than the lender who initially funded the loan or the legal owner of the mortgage debt. Mortgage servicer obligations are typically detailed in a servicing agreement or servicing guidelines provided by the investor. Property insurance contracts typically include a mortgagee, loss payee, or lenders loss payable clause that is designed to protect a mortgage lender in case the property that secures the mortgage is damaged or destroyed. The insurance company typically pays out the claim that arises from damage or loss to the lender and not the homeowner (borrower).

A borrower may not always engage with the same mortgage servicer over the life of a mortgage even though the actual mortgage does not change ownership. It is common for the mortgage servicing rights to be transferred, assigned, or sold to a new servicer. Sometimes the actual mortgage does change ownership and results in a change in the mortgage servicer.

Mortgage servicers have the legal obligation to notify borrows of certain basic information when their mortgage is transferred from one servicer to another. Mortgage servicers are also required to maintain policies and procedures that are reasonably designed to ensure the timely transfer of all information and documents related to a transferred mortgage loan from the mortgage servicer transferor to the mortgage servicer transferee. However, as explained in the Senate Banking and Financial Institutions analysis of this bill, “[n]either the regulations, nor the official interpretations, however, provide any additional detail on how servicers should treat the transfer of a mortgage that is the subject of an insured loss event.”

In order to ensure that homeowner borrowers are not negatively impacted by the transfer of mortgage servicing from one mortgage servicer to another when they are trying to rebuild their homes that were harmed during a declared state of emergency, this bill requires a mortgage servicer to provide a written disclosure of specified relevant information to a mortgage servicer transferee or purchaser mortgage servicer. The bill also requires a mortgage servicer transferee or purchaser mortgage servicer that receives the specified written disclosure to then comply with the terms as agreed upon by the original mortgage servicer in any contract or agreement; provide to a transferee or purchaser mortgage servicer the written disclosure, provided by the mortgage servicer that was the servicer at the time of the emergency proclamation, to reflect subsequent agreements, contracts, and negotiations; and continue in good faith any negotiation.

3. Real life experiences motivating the introduction of this bill

The author details some homeowner experiences in his district that inspired him to author this bill:

• A married couple with a special needs son filed an insurance claim and notified their mortgage company that they suffered a total loss. After negotiation with the insurance company the funds were released to the mortgage provider. The survivors identified a builder to rebuild their home and signed a rebuild contract with signoff from their mortgage company. After the rebuild contract was signed, the mortgage was sold to another provider. When that transfer occurred the survivors requested that the new mortgage provider release the remaining funds according to the contractual agreement between the contractor and the survivors. The mortgage provider refused to release such funds and requested additional information and an inspection – none of which was previously agreed to. Ultimately it took about 6 months to negotiate the release of funds from the mortgage provider even though the terms of release of funds had previously been agreed to by the initial mortgage provider.
• A married couple with two small children filed an insurance claim and notified their mortgage company that they suffered a total loss. After negotiating with the insurance company the funds were released to the mortgage provider. The survivors were significantly underinsured, so they identified an alternative rebuild project (a smaller home than the home that was lost) and a builder to build. After the rebuild contract was signed, the mortgage was sold to another provider. After that transfer occurred, the new mortgage holder would not release funds for the rebuild of a home that was different than the lost home even though this had already been agreed to by the prior mortgage holder and there was no concern about the protection of the value of the mortgage holder’s surety interest. Eventually the mortgage company released some funds but withheld additional funds – leaving the survivors in a position where they had to use their remaining personal property money to complete the rebuild.
• A married couple filed an insurance claim and notified their mortgage company after suffering a total loss. After their insurance company refused to allow them to repurchase, they were in essence forced to rebuild. They found a builder willing to build a similar home and received signoff from their insurance and mortgage company. Once the mortgage company received the funds they initially paid according to the rebuild contract as agreed; however, the mortgage was eventually sent to a new servicer. At that point, the new mortgage service provider refused to honor the payment schedule as was previously agreed to by the original mortgage provider. Eventually, the new mortgage provider released some funds but the survivors were forced to liquidate a pension at significant penalty to complete the rebuild.

SUPPORT

Legal Aid of Sonoma County

OPPOSITION

None known

RELATED LEGISLATION

Pending Legislation: None known.

Prior Legislation: None known.

PRIOR VOTES:

Senate Banking and Financial Institutions Committee (Ayes 7, Noes 0)

**************

1. See Cal Fire Top 20 Most Destructive California Wildfires, available at: https://34c031f8-c9fd-4018-8c5a-4159cdff6b0d-cdn-endpoint.azureedge.net/-/media/calfire-website/our-impact/fire-statistics/featured-items/top20_destruction.pdf?rev=479d39ded1e248faac4114bdabf49416&hash=33D35B11518F3A681BA613D8C32073FC [as of April 27, 2023]. ↑

SENATE COMMITTEE ON

BANKING AND FINANCIAL INSTITUTIONS

Senator Monique Limón, Chair

2023 - 2024 Regular

Bill No: SB 455 Hearing Date: April 19, 2023

Subject: State of emergency: mortgage servicers: written disclosure

SUMMARY

This bill requires a transferor mortgage servicer to disclose to a transferee mortgage servicer specified information related to the rebuild, repair, or replacement of a property damaged in an emergency.

EXISTING FEDERAL LAW

1. Pursuant to Regulation X (12 CFR Part 1024), which implements the Real Estate Settlement Procedures Act (12 U.S.C. 2601 et seq.):
   1. Requires mortgage servicers to provide specified disclosures to a mortgage borrower related to any assignment, sale, or transfer of the servicing of a mortgage loan. (12 CFR 1024.33)
   2. Requires mortgage servicers to maintain policies and procedures that are reasonably designed to ensure that the servicer can:
      1. As a transferor servicer, timely transfer all information and documents in the possession or control of the servicer relating to a transferred mortgage loan to a transferee servicer in a form and manner that ensures the accuracy of the information and documents transferred and that enables a transferee servicer to comply with the terms of the transferee servicer's obligations to the owner or assignee of the mortgage loan and applicable law.
      2. As a transferee servicer, identify necessary documents or information that may not have been transferred by a transferor servicer and obtain such documents from the transferor servicer. (12 CFR 1024.38)
2. Pursuant to Regulation Z (12 CFR Part 1026), which implements the Truth in Lending Act (15 U.S.C. 1601 et seq.), requires any person that becomes the owner of an existing mortgage loan by acquiring legal title to the debt obligation to provide a specified disclosure to the consumer who is obligated on the mortgage loan. (12 CFR 1026.39)

EXISTING STATE LAW

Requires that any person transferring the service of indebtedness on a loan, as specified, to a different servicing agent shall provide to the new agent all existing insurance policy information that the person is responsible for maintaining, including but not limited to flood and hazard insurance policy information. (Civil Code Section 2937)

THIS BILL

1. Requires a mortgage servicer servicing a mortgage with respect to a property located within the geographic limits of an emergency, as specified, to provide a written disclosure to a transferee or purchaser mortgage servicer of all of the following:
   1. If the property at issue experiences a total loss due to the proclaimed emergency.
   2. If the borrower has conveyed an intention to rebuild, repair, or replace the home.
   3. Any contracts related to a rebuild, repair, or replacement, as specified.
2. Requires a transferee or purchaser mortgage servicer that receives a written disclosure described in #1 above to do all of the following:
   1. Comply with the terms as agreed upon by the original mortgage servicer in any contract or agreement.
   2. Provide to a transferee or purchaser mortgage servicer the written disclosure provided by the mortgage servicer that was the servicer at the time of the emergency proclamation described by subdivision (a) as updated, if applicable, to reflect subsequent agreements, contracts, and negotiations.
   3. Continue in good faith any negotiation disclosed pursuant to #1 above.

COMMENTS

1. PURPOSE

According to the author:

Disaster survivors that hold an active mortgage at the time of the disaster and experience a total loss of their home or property enter into rebuild contracts with their mortgage servicer in order to begin the rebuild process. However, if a mortgage servicer sells the mortgage to another mortgage servicing company, the subsequent mortgage servicer may not be aware of any existing rebuild contracts or may have a different interpretation of what requirements the survivor must meet prior to releasing insurance rebuild funds.

By requiring that mortgage servicers must disclose any rebuild contracts or agreements to other mortgage servicers, and that those mortgage servicers are required to abide by those contracts and agreements, the rebuild process for these wildfire survivors will not be slowed down as a result of mortgage transfers. Ensuring that the terms of rebuild contracts are consistent between mortgage servicers will simplify and expedite the process for borrowers to receive their insurance funds to repair, rebuild, or replace their homes after experiencing a total loss of their property. Disaster survivors already face tremendous challenges to recover from the effects of the disaster and SB 455 will aid them to begin to rebuild their homes and their lives.

1. BACKGROUND

Property insurance contracts often contain a mortgagee, loss payee, or lenders loss payable clause that is designed to protect a mortgage lender in the event that the property securing the mortgage is damaged, known as an insured loss event.^[1] In simple terms, this means that when a home is damaged or destroyed, the insurance company pays out the claim to the lender, not directly to the home owner who is the borrower on the mortgage loan. Navigating through an insured loss event requires actions of the borrower/property owner, the insurer, and the mortgage servicer.

A mortgage servicer is an entity that interacts with borrowers after a loan has been originated and the borrower begins to repay the loan. A mortgage servicer collects payments from the borrower and manages any associated escrow account. In many cases, the mortgage servicer is a different entity than the lender who initially funded the loan or the entity that is the holder and legal owner of the mortgage debt. In today’s mortgage markets, it is common for a mortgage lender to originate a loan and subsequently sell the loan to a third party, such as Fannie Mae or Freddie Mac.^[2] This third party either holds the loan as an investment or packages the loan into mortgage-backed securities that may be sold to other investors. Mortgage servicers play a critical role in interacting with borrowers, maintaining the flow of funds from borrowers to mortgage holders, and asserting mortgage holders’ rights when borrowers default on mortgage loans. The expectations or obligations of mortgage servicers who act on behalf of third-party investors are often specified in a servicing agreement or servicing guide lines provided by the investor.

1. MORTGAGE SERVICERS’ OBLIGATIONS RELATED TO TRANSFERS

Over the life of a mortgage, a borrower may not always engage with the same mortgage servicer. In many cases, the actual mortgage does not change ownership, but the mortgage servicing rights are transferred, assigned, or sold to a new servicer. In other cases, the actual mortgage changes ownership, which often results in a change in the mortgage servicer – either the new mortgage holder services the mortgage itself or assigns the mortgage to a different third-party servicer.

Mortgage servicers have legal obligations, as cited in the Existing Federal Law section above, to notify borrowers with certain basic information when their mortgage is transferred from one servicer to another. The contents of the required notice include the effective date of the transfer, contact information for both the transferor and transferee servicers, and the date on which the transferor will cease to accept payments and the transferee will begin to accept payments relating to the mortgage loan. In addition to borrower notices, servicers are required to maintain policies and procedures that are reasonably designed to ensure the timely transfer of all information and documents related to a transferred mortgage loan from the transferor to the transferee. The official interpretation of this requirement makes clear a transferor servicer’s policies and procedures must be designed to ensure that “the transfer includes any information reflecting the current status of discussions with a borrower regarding loss mitigation options, any agreements entered into with a borrower on a loss mitigation option, and any analysis by a servicer with respect to potential recovery from a non-performing mortgage loan.”^[3] Further, the official interpretation makes clear a transferee servicer’s responsibility to have policies and procedures that “address obtaining any such missing information or documents from a transferor servicer before attempting to obtain such information from a borrower.”^[4] Neither the regulations, nor the official interpretations, however, provide any additional detail on how servicers should treat the transfer of a mortgage that is the subject of an insured loss event.

1. MORTGAGE SERVICING RELATED TO AN INSURED LOSS EVENT

As part of their role in the mortgage financing system, a mortgage servicer plays a key role, along with the insurance company, in working with a borrower when the borrower’s property experiences an insured loss event. Mortgage servicers are expected to ensure the proof of loss claim is filed timely with the insurer and then monitor the disbursement of insurance loss proceeds. To illustrate the types of activities that mortgage servicers undertake in these scenarios, see the following bulleted list of servicers’ responsibilities that were sampled from the Fannie Mae servicing guide.^[5] Many servicers use Fannie Mae guidance to establish their policies for servicing all mortgages, not just those purchased by Fannie Mae, meaning that these activities are undertaken by nearly all mortgage servicers when dealing with an insured loss event.

• Determine if the property can be legally rebuilt.
• Obtain complete details on the damage to the property and determine the needed repairs.
• Discuss with the borrower any plans for repairing the property.
• Immediately issue the borrower a check for any amount designated for contents (for example personal property) or living expenses.
• Review and approve the final plans for repair, including obtaining the necessary bids to repair the property.
• Monitor and inspect repairs as completed to verify the repairs comply with the final repair plan.
• Conduct a final inspection to ensure all repairs are completed if the mortgage loan is 31 days or more delinquent at the time of the loss event.

The manner in which the mortgage servicer disburses insurance proceeds depends on the amount of those proceeds. Per the Fannie Mae guidelines, if the proceeds are less than or equal to $40,000, the servicer is authorized to release the proceeds in one payment. For proceeds greater than $40,000, the servicer is authorized to release the greater of $40,000, 33% of the proceeds, or the amount in excess of the unpaid principal balance, accrued interest, and advances on the mortgage loan. Any remaining funds are then disbursed based on periodic inspections of the progress of the repair work.^[6]

1. INTENT OF THIS BILL AND CONSIDERATIONS FOR THE AUTHOR

The intent of this bill appears relatively straightforward: the author intends to ensure that, in the event a mortgage is transferred, a borrower who is in the middle of a process to repair, rebuild, or replace their home due to a natural disaster does not experience delays in that process due solely to consequences stemming from the mortgage transfer. Given the prevalence of natural disasters that Californians endure, the desire to clarify public policy in this area seems sound. Furthermore, prevailing laws, policies, and practices related to mortgage servicing are generally aligned with the intent of the bill, even if the law does not specifically address this particular scenario.

The bill before the Committee, however, needs additional refinement to better reflect the author’s intent, to provide more clarity to mortgage servicers about their obligations, and to fix drafting errors. Since this bill was amended with its current contents on March 20, 2023, the author’s office has engaged in conversations with committee staff and mortgage industry stakeholders that suggest many, if not all, concerns with the current bill can be adequately addressed while preserving the author’s intent. Due to the unaddressed issues with the bill in print, trade associations representing financial institutions that engage in mortgage servicing filed a letter of concern with the author and the Committee, raising several of the issues discussed below.

Areas of conversation that have achieved consensus include:

• Incorporating the definition of “mortgage servicer” from existing law related to the Homeowner Bill of Rights (Civil Code Section 2920.5) into this bill and focusing any obligations created by this bill on mortgage servicers.
• Narrowing the scope of properties covered by this bill to residential real property that is improved by four or fewer residential units.
• Requiring that a transferor mortgage servicer deliver to a transferee mortgage servicer any written records between the borrower and transferor mortgage servicer relating to the repair of property that suffered a total loss due to damage caused by a natural disaster resulting in a state of emergency.
• Prohibiting a transferee mortgage servicer from dishonoring written agreements between a transferor mortgage servicer and a borrower related to the repair of a property that were made prior to the transfer of the mortgage.

Issues that require additional discussion and negotiation between stakeholders include:

• Deciding on a definition of “total loss” and whether the bill should cover any property that has experienced a total loss, rather than only those properties that are in geographic areas affected by an emergency.
• Whether mobile or manufactured homes are covered by the bill.
• Whether the bill needs to specify any affirmative obligations of a mortgage servicer to document or record any particular activities related to servicing a property that has experienced an insured loss event.
• Whether the bill needs any express enforcement mechanisms.

1. ARGUMENTS IN SUPPORT

Legal Aid of Sonoma County writes in support:

Ensuring that the terms of rebuild and replacement contracts are consistent between mortgage servicers and providers will simplify and expedite the process and allow survivors to receive the insurance fund they are entitled to in a timely manner, allowing survivors to repair, rebuild, or replace their homes more efficiently and cost effectively. [We are] very aware of the struggles that disaster survivors face. SB 455 will go a long way towards helping survivors rebuild or replace their homes and focus on recover.

1. ARGUMENTS IN OPPOSITION

None received

1. DOUBLE REFERRAL

This bill is double-referred to the Committee on Judiciary.

LIST OF REGISTERED SUPPORT/OPPOSITION

Support

Legal Aid of Sonoma County

Opposition

None received

-- END --

1. While there are differences between the three clauses, each is intended to protect the lender’s financial interest in the event that the property securing the mortgage is harmed. ↑

2. Fannie Mae and Freddie Mac are government-sponsored entities (GSEs) created by Congress to provide liquidity, stability, and affordability to the mortgage market. The two GSEs account for more than half of the mortgage financing activity in the nation, and their policies on mortgage underwriting and mortgage servicing influence the policies and practices of mortgage originators and servicers across the market. ↑

3. https://www.consumerfinance.gov/rules-policy/regulations/1024/interp-38/#38-b-4-i-Interp ↑

4. https://www.consumerfinance.gov/rules-policy/regulations/1024/interp-38/#38-b-4-ii-Interp ↑

5. https://servicing-guide.fanniemae.com/THE-SERVICING-GUIDE/Part-B-Escrow-Taxes-Assessments-and-Insurance/Chapter-B-5-Property-and-Flood-Insurance-Loss-Events/B-5-01-Insured-Loss-Events/1040963581/B-5-01-Insured-Loss-Events-04-10-2019.htm ↑

6. Note that these guide lines apply to mortgages that are current or no more than 30 days past due. Stricter disbursement guidelines apply for delinquent loans. ↑