SACRAMENTO, Calif.-Both houses of the California state legislature have passed bills known as The California Foreclosure Reduction Act, but even before they hit Gov. Jerry Brown's desk concerns are being raised as to their impact on credit unions.
The legislation, also known as the "Homeowner Bill of Rights," purports to reform foreclosure practices and create what supporters term a "fairer" foreclosure process for California's homeowners.
If signed into law, the Act would end the "dual track" process in which lenders foreclose on homeowners while they are negotiating for a loan modification, and require all mortgage holders to end "robosigning" and provide a single point of contact to borrowers.
A 'Yes' Or 'No'
Instead of a dual track, lenders would be required give homeowners a "yes" or "no" answer on a loan modification application before continuing with foreclosure.
Supporters say if a loan modification is denied, homeowners would not be "blindsided" by a sale notice, because lenders would be required to send a letter to the borrower describing the reason for denial and letting the borrower know of his or her right to appeal that denial to the servicer.
Christopher Thornberg, founding partner of Los Angeles-based Beacon Economics and the lead author of a study on the effect of the legislation, told Credit Union Journal the impact of the new law on credit unions is unknown because they "do not have the same foreclosure practices" as bigger lenders.
"It means the time to foreclose on somebody will go up by some margin," he said. "Whether that means 90 days, 180 days or 360 days remains to be seen. There are several parts of this law that have yet to be written and are unclear."
Opinions Divided On What It Means
Various bills addressing the dual track process have been proposed in California for several years. Supporters, including Attorney General Kamala Harris, non-profit housing counselors, public interest lawyers, faith-based groups, and consumer and policy groups, hailed the passage as a step forward for the Golden State's homeowners.
"This legislation finally brings some accountability to the banks for harmful foreclosure practices," Kevin Stein, associate director of the California Reinvestment Coalition, said in a press release. "Homeowners will now be able to protect themselves from the commonplace violations that banks have exhibited in this foreclosure crisis."
Henry Kertman, VP of public affairs for the California and Nevada Credit Union Leagues, said the trade group has its reservations due to the uncertain impact on its member CUs.
CUs Getting Swept Up?
"Credit unions understand the intention of mortgage reform legislation is to help distressed borrowers who were negatively impacted by a devastating recession," he told Credit Union Journal. "We share the same concern, but we also believe these reforms were proposed to address the practices of other lenders. Credit unions maintain strict underwriting standards, and are wary of additional burdens that would impede their ability to help struggling Californians emerge from a lingering economic downturn. Our member credit unions' primary focus is to continue working with their members to keep them in their homes."
More Costs For Lenders
Beacon Economics' Thornberg warned the legislation is not a panacea. He said the dual track provisions almost certainly will mean more costs for lenders.
"The second aim is to combat robosigning, which credit unions are not accused of doing," he said. "Banks can be sued by homeowners who say the bank does not have all paperwork. Will this lead to frivolous lawsuits? The attorney general glibly says no, but this is a giant point of uncertainty."
Ultimately, Thornberg continued, the new legislation promises to "stretch out and increase" the cost of foreclosures.
"The attorney general says it will lead to more loan modifications and workouts, but that is not supported by data," he assessed. "Florida has the longest foreclosure process of any state, but that has not led to more loan mods. But don't bother anyone in Sacramento with data or facts."