California Enacts New Forbearance-Related Requirements

On August 31, 2020, California Governor Gavin Newsom signed Assembly Bill 3088 (AB 3088) enacting the Tenant, Homeowner, and Small Landlord Relief and Stabilization Act of 2020, which imposes new requirements on mortgage servicers and landlords due to the economic impact of COVID-19.  Although AB 3088 does not prohibit foreclosures or impose mandatory mortgage forbearance periods, the act establishes a wide range of protections for tenants and homeowners, including substantial new protections from eviction for California residents.  Below we summarize the measures most relevant to mortgage servicers.

Under AB 3088, mortgage servicers are subject to certain notice obligations if they deny forbearance requests made by borrowers with mortgage loans secured by a one-to-four family residential dwelling, including condo or cooperative units, if the loan was outstanding as of August 31, 2020.  Specifically, servicers that deny a borrower’s forbearance request made during the effective time period (i.e., August 31, 2020 through April 1, 2021) must provide written notice to the borrower that states the specific reasons that forbearance was not provided, if both of the following conditions are met: (1) the borrower was current as of February 1, 2020, and (2) the borrower is experiencing a financial hardship that prevents the borrower from making timely payments on the mortgage obligation due, directly or indirectly, to the COVID-19 emergency. AB 3088 provides no time period for a mortgage servicer’s response to the borrower’s forbearance request, and is silent on whether mortgage servicer’s can require forbearance requests be in writing, or request documentation verifying such financial hardship. 

Further, if the servicer issues a written notice denying a forbearance request that cites any defect in the borrower’s request that is curable (e.g., an incomplete application or missing information), the servicer must:

1. Specifically identify any curable defect in the written notice;
2. Provide 21 days from the mailing date of the written notice for the borrower to cure any identified defect;
3. Accept receipt of the borrower’s revised request for forbearance before the aforementioned 21 day period lapses; and
4. Respond to the borrower’s revised request within five business days of receipt of the revised request.

Notably, servicers of federally-backed mortgage loans that comply with the applicable provisions regarding forbearance in Section 4022 of the CARES Act or, for non-federally backed mortgage loans, offer forbearance in a manner that is consistent with such CARE Act requirements, will be deemed to be in compliance with the above notice requirement.  In contrast, however, if a servicer is servicing a non-federally backed mortgage loan that meets the two conditions identified above, the servicer is required to provide the notice if it denies a forbearance request.

Under AB 3088, servicers must also comply with applicable federal guidance regarding borrower options following a COVID-19 related forbearance.  Servicers of federally-backed mortgage loans will be considered in compliance with this requirement if the servicer complies with guidance regarding borrower options following a COVID-19 related forbearance issued by Fannie Mae, Freddie Mac, FHA, VA, or USDA.  Likewise, servicers of non-federally backed loans will be considered in compliance with the requirement to comply with applicable federal guidance if the servicer reviews a borrower for a solution that is consistent with the same applicable federal guidance.

AB 3088 also provides:

• Language Requirements – A servicer must communicate about forbearance and post-forbearance options described AB 3088 in the borrower’s preferred language when the servicer regularly communicates with any borrower in that language.
• Notice of Default – If a servicer denies a forbearance request, the notice of default recorded pursuant to California Civil Code Section 2924 must include a statement as to whether forbearance was or was not subsequently provided.
• Post-Forbearance Loss Mitigation Options – It is the intent of the California Legislature that a servicer offer a borrower a post-forbearance loss mitigation option that is consistent with the servicer’s contractual or other authority.

Finally, AB 3088 states that borrowers harmed by a material violation of the forbearance requirements may bring an action to obtain injunctive relief, damages, restitution, and any other remedy to redress the violation.  A prevailing borrower is entitled to reasonable attorneys’ fees and costs in any action based on a violation of AB 3088, and waiver by the borrower of any provision of AB 3088 is contrary to public policy and deemed void.  This means that a failure to comply with the CARES Act forbearance provisions and applicable federal guidance for post-forbearance loss mitigation options would be a violation of California law, for which AB 3088 provides harmed borrowers with a private right of action for material violations.