Subject: Off Again, On Again, HOBR Provisions Can Lead to Potential Confusion on Denial of Loan Modifications. New Case Highlights the Issue.

Note: The following is a general discussion on the specified topic or issue and may not be relied on as legal advice in any specific case or matter you encounter. You should review any applicable case, or matter with counsel experienced in this area of law and should not generally rely on the discussion in this Alert.

Date:  October 2, 2018
Client Alert:
To: All Scheer Law Group Clients and Affiliates:
Subject: Off Again, On Again, HOBR Provisions Can Lead to Potential Confusion on Denial of Loan Modifications. New Case Highlights the Issue.

For those keeping score, the California Homeowners Bill of Rights (“HOBR”), enacted in 2012, was significantly scaled back in 2018, and is now set to be largely reinstated to its original form on January 1, 2019.  The impact will be confusing to Lender/Servicers seeking not only to comply with the statutory provisions, but also having to defend against borrower claims that arose at a time when the HOBR  requirements were different than the date they bring their claims.  Denial of loan modifications is a case in point and a new case illustrates the point.

In the case of BEREATHER EDGE-WILSON, Plaintiff, v. WELLS FARGO BANK, N.A., Defendant. (N.D. Cal., Sept. 19, 2018, No. 18-CV-03302-PJH) 2018 WL 4491138, at *2,  the court denied  HOBR claims under the 2018 version of  Cal. Civ. Code §2924.11(b) holding that a denial letter that specified that “{Wells Fargo} was unable to create an affordable mortgage payment for plaintiff” was sufficient. More specificity was not needed.   Borrowers generally want more detail so they can attack the denial and continue the review process.

Note: the Court also cited pre-2018 HOBR authority in which another court reviewed a servicer’s denial based on the “result of their net-present-value evaluation”, without providing the figures used to reach the conclusion. The Court  in Bereather found that the requirement to provide a net present value (“NPV”) analysis in a denial letter was a pre-2018 HOBR requirement, obviated by the repeal of § 2923.6(f)(3) via the post-2018 HOBR changes. The Court found that the successor statutory provision (§2924.11 (b)) is more general in nature and does not require NPV calculations to be provided. Bereather, supra at *3, citing Jacobik v. Wells Fargo Bank, N.A., No. 17-CV-05121-LB, 2018 WL 1184812, at *4 n.17 (N.D. Cal. Mar. 7, 2018).While the Bereather case is unpublished and not binding, there are valuable lessons to be learned.

The good news:

While the present HOBR (Cal. Civ. Code §2924.11(b)) requires that the lender identify with specificity, the reasons for denial of a loan modification application. The Bereather case shows that the  degree of specificity required  does not include a detailed review of the facts and application of the facts used by the lender/servicer in coming to the decision.  The conclusion that the lender/servicer could not create a scenario under which an affordable payment could be provided to the borrower was sufficient.

The Court in Bereather further confirmed that prior statutory requirements to show NPV calculations were no longer applicable to the post 2018 HOBR, giving further strength to the argument that the lender does not need to provide a detailed analysis to justify a denial.  Note: This should not in any way be taken to encourage bad faith denials where no review of appropriate  and available loss options has occurred. If you have available loss mitigation options, the borrower must be considered for them.

The bad news:

is that many prior HOBR provisions that were removed with the 2018 sunset provisions are due to be reinstated in January of 2019, including Civ Code § 2923.6(f), which requires that:

1. A lender/servicer  generally identify the reasons for the denial and information about appearing the denial (§ 2923.6(f)(1),
2. A a lender/servicer denying based on investor disallowance, provide specific reasons for the investor disallowance ( (§ 2923.6(f)(2), Note: This presupposes that an investor has guidelines and that the servicer applies them.
3. A lender/servicer denying based on NPV calculations provide the monthly income and property values used  to calculate, and upon request  to provide all the inputs used in the NPV calculations  (§ 2923.6(f)(1),

This means that you have the potential for multiple interpretations of the HOBR provisions, depending on whether a claim arose before the amendments on January 1, 2018, during 2018, or after the reinstated provisions on January 1, 2019. The  legislature has attempted to address this by providing that any amendment, addition or repeal of the HOBR which took effect on January 1, 2018, does not release, extinguish or change liability that may have occurred prior to January 1, 2018, unless the amendment or provision or addition specifically provides for it (See  MORTGAGES—FORECLOSURE, 2018 Cal. Legis. Serv. Ch. 404 (S.B. 818) (WEST).

What is the take away? It goes without saying that lender/servicers must act in good faith to properly review loss mitigation applications on covered loans and review for any applicable loss mitigation alternatives.  However, you now have a moving target under the HOBR as to how much detail must be provided to a borrower when denying a loan modification application.

It is well recognized that borrowers use the loss mitigation process to delay the foreclosure process. Providing a detailed analysis of the reasons for denial in some instances may just encourage further arguments and lawsuits by borrowers who assert that either the analysis was wrong or incomplete or both.

Under the HOBR in effect prior to 2018, and to be reinstated in large part in 2019, the degree of specificity required to be disclosed when denying a loan modification application is heightened by the  requirements for specificity when the denial is based on investor disallowance and even more specificity when the denial is based on NPV calculations. However, under the holding of cases such as Bereather (excluding denials based on NPV) denials can be based on specific conclusions without having to include the specific detail e.g.  “unable to create an affordable mortgage payment for plaintiff”, as long as supported by a good faith review.

SLG will be providing continuing updates on the upcoming HOBR changes, which will be very similar but not exactly the same as the Pre 2018 HOBR. Lender/servicers should ensure that they are aware of the changes, well prior to January 1, 2019.

Please call or email if you would like to discuss.

Spencer Scheer