We understand that the California State Assembly will shortly propose amendments to Assembly Bill No. 2501 to create the “COVID-19 Homeowner, Tenant, and Consumer Relief Law of 2020.” Note: The proposed legislation was available on California’s legislative service website shortly after publication of this Alert. The proposed law would provide relief to homeowners, tenants, and vehicle owners by prohibiting creditors and loan servicers from taking specified actions, including initiating foreclosures or repossessions, during the period from the date of enactment of the proposed law through the 180-day period following the date that California Governor Gavin Newsom declares the emergency related to Covid-19 has ended. Additionally, the proposed law would require servicers to place certain loans that become delinquent into automatic forbearance for a period of at least six months.
The proposed law appears similar to portions of an appropriations bill, “Take Responsibility for Workers and Families Act,” which was introduced in the U.S. House of Representatives on March 23, 2020, prior to the enactment of the federal Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and failed to pass. We understand that the proposed law is scheduled to be heard before the California State Assembly Banking Committee on May 19.
The proposed law sets forth requirements and prohibitions for residential mortgage loans, multifamily mortgage loans, vehicle-secured credit, PACE financing, and deferred deposit transactions as follows:
Mortgages
The proposed law sets forth different requirements for residential mortgage loans and multifamily mortgage loans and applies to federally-chartered and state-chartered depository institutions, California Financing Law (CFL) licensees, Residential Mortgage Lending Act licensees, and real estate broker licensees. If a mortgage servicer violates any provision of the proposed law, the servicer forfeits the right to commence a foreclosure on the borrower, subject to a right to cure by compensating the borrower a sufficient amount to return such borrower to the state that the borrower would have been in had the violation not occurred.
For residential mortgage loans:
- During the Covid-19 emergency and the 180-day period following that emergency, a mortgage servicer, mortgagee, trustee, etc., will be prohibited from (i) commencing or continuing any judicial foreclosure; (ii) recording a notice of default; and (iii) taking any action to evict a person after foreclosure. Such persons also must stay all foreclosure proceedings and time limits in a judicial or non-judicial foreclosure on property during the same time period. These requirements will not apply if the property is determined to be vacant or abandoned.
- Borrowers experiencing financial hardship during the Covid-19 emergency and the 180-day period following that emergency may request forbearance from any mortgage obligation, regardless of delinquency status, by submitting an oral or written request to the mortgage servicer affirming such hardships, without any additional documentation. The servicer must provide the forbearance for 180 days and, upon request within the 30-days prior to expiration of the initial forbearance, must extend the forbearance for an additional 180 days.
- If a borrower is or becomes 60 days or more delinquent on a mortgage obligation, the mortgage servicer must automatically grant the borrower a 180-day forbearance, which may be extended for another 180 days upon request, and provide the borrower written notification of the forbearance. The proposed law sets forth how payments made during the forbearance period must be credited.
- No additional fees or interest may be assessed or may accrue during the forbearance. In addition, if a borrower in forbearance is required to make payments to an impound account, the mortgage servicer must advance such disbursements on or before the relevant deadlines to avoid a penalty, regardless of the status of the borrower’s payments. The proposed law sets forth how a mortgage servicer may collect such amounts after the forbearance period ends.
- Before the forbearance period ends, the mortgage servicer must evaluate the borrower’s ability to return to making regular mortgage payments. If the borrower is able to return to making payments, the servicer must modify the obligation in one of two ways: (i) extending the term for the length of the forbearance; or (ii) at the election of the borrower, capitalizing the resulting impound account shortage and reamortizing the total unpaid principal balance, and extending the term of the loan sufficient to maintain regular mortgage payments. If investor guidelines or applicable law prohibit a mortgage servicer from implementing these options, the servicer may notify the commissioner of business oversight. The proposed law also sets forth requirements if the borrower is unable to return to making regular mortgage payments.
- If the borrower receives a forbearance for a mortgage secured by a dwelling that has a tenant, the borrower is required to provide the tenant with rent relief for a period of not less than the time period covered by the forbearance.
For multifamily mortgage loans:
- A multifamily borrower may submit an oral or written request for forbearance if the borrower is experiencing a hardship due to the Covid-19 emergency. In response, the mortgage servicer must request documentation of the financial hardship and provide no less than a 180-day forbearance, extendable for another 180 days upon request. A mortgage servicer that complies with Section 4023 of the CARES Act will be deemed in compliance with the proposed law’s multifamily mortgage provisions.
- During the term of the forbearance, the borrower must provide rent relief to tenants and may not evict a tenant or apply or accrue other fees or penalties for nonpayment of rent.
- A multifamily borrower must bring a loan placed in forbearance current within the earlier of 12 months after the conclusion of the forbearance or within 10 days of the receipt of any business interruption insurance proceeds.
Vehicle-secured credit
The proposed law imposes the following requirements and restrictions relating to vehicle-secured credit – which includes both motor vehicles and mobile homes – on holders of conditional sales contracts as defined in the Automobile Sales Finance Act, CFL licensees, and federally-chartered and state-chartered depository institutions. Only servicers who have complied with the proposed law will be permitted to seek a deficiency judgment for amounts due during the Covid-19 emergency or the 180-day period following the emergency.
- Servicers of vehicle-secured credit may not take any action to repossess a motor vehicle or mobile home that secures a loan, including providing a verbal or written notice of intent to repossess, during the Covid-19 emergency and the following 180-day period.
- Upon a consumer’s request, and regardless of delinquency status, servicers of vehicle-secured credit must provide consumers experiencing a Covid-19-related hardship forbearance from any vehicle-secured credit obligation for a period of 90 days, which may be extended upon request, made at least 30-days prior to expiration of the initial forbearance period, for additional 90 day periods until 180 days after the end of the Covid-19 emergency. No additional fees or interest may be assessed or may accrue during the forbearance, and borrowers are not required to provide any additional documentation to receive the forbearance.
- Before the end of a forbearance, the holder of a vehicle-secured credit obligation must evaluate the consumer’s ability to return to making regular payments, and if the consumer is able to return to making payments based on the holder’s analysis, the holder must modify the obligation to extend the term for the length of the forbearance, with no penalties, late fees or additional interest accrued beyond the amounts calculated as if the consumer had made all requirement payments on time and in full under the terms of the contract in effect at the time of entering the forbearance. Consumers must be alerted to the modification in writing, including the new payments schedule and maturity date, and be permitted to prepay the delayed payments at any time. If the consumer is not able to return to making regular payments, the holder may proceed with a written notice of intent to repossess the vehicle as required by law only after the expiration of the Covid-19 emergency and the following 180 day period.
PACE financing
The proposed law would add a section to the Financial Code, which would apply during the Covid-19 emergency and the following 180 day period and would provide as follows:
- Within 60 days of the enactment of the proposed law, a program administrator will be required to notify each property owner with an outstanding assessment contract that the property owner is entitled to forbearance on the next annual PACE assessment owed if the property owner is facing direct or indirect financial hardship due to the Covid-19 emergency. The notice must specify how the property owner may accept the offer of forbearance. If accepted, the program administrator must provide forbearance on the next annual assessment owed by the property owner.
- The program administrator may require the property owner to pay the amount of the outstanding assessment in the year following the scheduled end of the assessment contract. The program administrator must not charge any additional fees or interest related to the forbearance of the PACE assessment.
- The program administrator must not exercise any contractual rights of acceleration related to unpaid assessments during the COVID-19 emergency.
Deferred deposit transactions
The proposed law would add a section to the California Deferred Deposit Transaction Law, providing that during the Covid-19 emergency and the subsequent 180-day period, the following would apply:
- Fees for a deferred deposit transaction must not exceed 5% of the face amount of the check.
- A licensee under the Deferred Deposit Transaction Law must offer a customer the option to enter into a payment plan that provides an extension of time for repayment of an existing deferred deposit transaction that does not contain any additional fees or charges, and that permits the customer to repay the outstanding amount over a 60-day period in four equal installments. Further, licensees must notify customers of the option to enter into a payment plan at least three days prior to the date to which deposit has been deferred, or when a customer attempts to pay the outstanding amount of an existing deferred deposit transaction.
- A licensee must not enter into a deferred deposit transaction with a customer within 14 days of full repayment of a previous transaction.
- A licensee also must not charge any late fees for the return of a dishonored check by a depository institution in a deferred deposit transaction.
If enacted, the proposed law likely would have significant implications not just for the servicing of existing debt, which appears to be the focus of the law, but may also impact the availability of credit for Californians, as the proposed law’s forbearance provisions could be read to effectively impose a minimum three- to six-month payment-free loan depending on the credit product. In light of this, both lenders offering mortgage products, as well as mortgage and vehicle-secured credit servicers, may be impacted should the proposed law pass.
If you have any questions regarding the matters discussed in this alert, please contact an Orrick attorney with whom you have worked in the past.